It’s pretty clear that small banks are the lifeblood for many startups and mid-market companies. They provide about half of small-business loans and more than three-quarters of agricultural loans, according to a 2015 Harvard study. Community banks are also just about the only place where a company owner can go for an old-fashioned “character loan.”
Dodd-Frank’s provisions “made bank credit both more expensive and less available,” Goldman Sachs concluded in 2015, affecting small firms disproportionately “because they largely lack alternative sources of finance, whereas large firms have been able to shift to less-expensive public market financing.”
The legislation actually reduces the number of community banks by more than 800, according to the Independent Community Bankers of America (ICBA), although low interest rates also punished small banks. “Because of all the new costs and rules and regulations imposed by Washington on the community-banking sector, the rate of new bank formation is virtually zero, where it used to average over 100 new banks a year,” says Paul Merski, ICBA’s chief economist.
Also, the consumer-minded Credit Card Accountability, Responsibility and Disclosure Act of 2009 imposed restrictions on consumer-credit card terms, including limits on what issuers can charge in late fees and higher interest. But business credit cards weren’t included in the law’s protections, giving card-issuing banks freedom to make up their consumer-card losses with business-card rate increases and fee hikes—which crimped small, capital-poor companies more than any others. Now the question is: What can CEOs do about it? Here are a few ideas.
SUPPORT BANKING-REFORM LEGISLATION: Business owners and CEOs “must pressure Congress to enact common-sense legislation exempting small community banks from the onerous requirements supposedly enacted to keep larger financial institutions in check,” says Elliot Richardson, president of the Small Business Advocacy Council in Illinois. He suggests backing a bill that would relieve banks whose assets fall under a certain threshold “from complying with costly regulations which impact their ability to efficiently operate and provide capital to businesses.”
LISTEN TO WHAT THIS YEAR’S CANDIDATES SAY: Dodd-Frank has already been a whipping boy for several presidential candidates, almost an epithet that serves as shorthand for all manner of economic woes under the Obama administration. But there’s been so much smoke created by the campaign’s big issues—terrorism, immigration and income inequality among them—that ideas for fixing the law haven’t gotten a lot of attention. That’s likely to change as the pool of presidential candidates narrows and Senate and House contests shape up, giving CEOs more clarity about all candidates’ views on this issue.
CULTIVATE LONG-TERM RELATIONSHIPS WITH LAWMAKERS: ICBA’s Merski believes that business owners should visit their congressional representatives and senators yearly in person to build on those “critical” relationships. “When a policy issue hits that may adversely impact your credit availability or business model, you want to have an established relationship to ask and not be starting from scratch,” he says. “[Otherwise] it may be too late.”
LET THE MARKET TAKE CARE OF IT: Ironically enough, rising interest rates that give banks higher profit margins may help community banks more than anything. Among other things, some banks could use their own increased capital to compete more effectively in a developing online-lending environment that has been dominated by big banks. So while business borrowers don’t like to pay higher rates, they may see it as a worthwhile price for getting back their local banker.