How Financial Industry Deregulation Could Impact the Mid-Market

CEOs are watching carefully to see how any changes to the Dodd-Frank act would affect their business, either positively or negatively.

With President Trump eyeing deregulation in the financial industry and drastic changes to the Dodd-Frank Act, some companies are pondering how it could impact their bottom lines. Changes in the act could impact commercial lending and possibly the mergers and acquisitions market.

President Trump made one of the promises of his campaign that he would dismantle the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Trump told leading corporate chief executives at a meeting at the White House in early-February that many businesses can’t borrow money. “They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank,” Trump said.

Yet many sources and data indicate otherwise. Fred Canon, global director of research at the investment bank of KBW, said there hasn’t been “any solid evidence” that bank lending has been overly constrained in the past few years. “It certainly is not growing as fast as it was pre-crisis, but I’m not sure everyone wants no-doc, low-doc, non-verifiable lending again,” said Canon.


The Federal Reserve reports that since hitting a post-crisis bottom in October 2010, commercial and industrial bank loans have increased 77%. A report by the National Center for the Middle Market found that 32% of small and mid-market businesses have not raised capital in the past three years. Of those that did, 32% borrowed from a bank, while 10% borrowed from a non-bank lender.

Randy Schwimmer, head of origination and capital markets for Churchill Asset Management, said that investors also are turning to mid-market loans for higher yield and better diversification. “Senior leveraged loans to middle-market companies, in particular, are among the fastest-growing private debt alternatives as banks curtail their exposure to riskier borrowers,” said Schwimmer.

Some lenders are reporting that the regulations have caused them to be more selective about extending loans to only the most qualified customers. Larger banks must undergo annual stress tests and the Volcker Rule limits financial institutions’ ownership in risk investments and prohibits them from trading for their own profit.

A PwC report said that despite a growing list of macroeconomic uncertainties, mid-market lending remained strong in 2015 and 2016. The market lending guidelines from the Office of the Comptroller of the Currency were impacting the supply side of mid-market lending. And the report said that more of a concern than a deal’s credit quality, industry or sponsor has been whether or not specific loans will work in the new regulatory environment.

“The guidelines have essentially pushed banks into a box and prompted them to focus on more conservative deals, disrupting the high-octane lending part of the last few years,” said PwC.

A rollback of the regulations could potentially cause issues in the financial industry itself, not only in the ability to lend to mid-markets but in the means to fund mergers and acquisitions. Stephen M. Quinlivan, a Minneapolis-based partner at Stinson Leonard Street LLP, said companies are worried that if the Consumer Financial Protection Bureau is completely eliminated, states could start imposing tough new rules.

In the immediate term, the uncertainty regarding the future of the regulations are causing concern among some financial institutions. Carlyle Group, a Washington-based global asset manager, added that undoing parts of the Dodd-Frank act could significantly increase the SEC’s enforcement capabilities and penalties under the Investment Company Act and Investment Advisors Act.

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