Rachel Helm: Good intentions gone bad with Dodd-Frank
Most of us are familiar with the adage, “the road to hell is paved with good intentions.” I think it’s a pertinent one to keep in mind as another election season heats up.
Our political opinions are almost always driven by good intentions, as are the policies created by our political leadership. But good intentions do not always lead to good results.
It’s been five years since the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was enacted into law. You’d be hard-pressed to find a sadder, darker example of good intentions gone awry. Similar to the Affordable Care Act, this bloated 850-page piece of legislation was passed with no bipartisan support. According to a study by George Mason University, as of November 2013, Dodd-Franks’ new rule makings had created over 19,000 pages of regulatory text.
The intention of Dodd-Frank was to end “too-big-to-fail” scenarios, promote financial stability and lift the economy.
After five years, the results have been the opposite of what the law intended. Not only do too-big-to-fail institutions still exist, but the big banks are even bigger and small banks are rapidly disappearing. Instability in the financial system continues and we all feel the effects of sluggish growth in our economy.
So how has Dodd-Frank undermined small banks and the communities they serve? The cost of implementing Dodd-Frank’s morass of regulations impacts all banking institutions but they’re particularly onerous on small banks because they are less able to absorb the high cost of compliance.
Tighter lending standards have also made it difficult for smaller banks to remain competitive. Many have been forced to close their doors or merge with other institutions as a direct consequence. Since 2010, we have lost 1,250 federally insured credit unions, which is more than 17 percent of that industry.
Why should we care about the demise of community banks? The same George Mason study noted above used FDIC data to conclude that community banks provide 48.1 percent of small business loans, 15.7 percent of residential mortgage lending, 42.8 percent of farm lending and 34.7 percent of commercial real estate loans.
These are the banks that have traditionally been the lending institutions local businesses rely on. Because they are an integrated part of the community, they are in a vital position to gauge the risk associated with lending to any particular business and assess what unique value that business can provide the community. Large banks or even regional ones don’t have that local insight and as a result will more often than not err on the side of risk avoidance and avoid investing in small emerging businesses. Today, banks maintain an unprecedented $29 of reserves for every dollar they are required to hold.
How are existing small businesses affected? I spoke with a business owner in the southern part of the state about how shrinking access to capital has affected her business. The immediate impact was on her line of credit. Her business is well established and has an excellent credit rating and she’s had an ongoing $45,000 line of credit from her local bank for some time. Having that line of credit functioned as a bridge to cover short-term project costs as she waits for receivables to come in and has helped her mitigate her business risk. After Dodd-Frank was enacted, that line of credit was revoked. Interest rates on her business credit card also zoomed from 9 percent to 18 percent, even though her reliance on credit has not changed and her rating has remained excellent. This has a profound impact on her cost of doing business. Consequently, she must also reduce her costs to keep her business viable. She has reduced full-time staff from six to three and outsources as much of her project work as she can. This obviously results in her business providing fewer workers with full time employment. She hates that she can no longer employ additional full-time workers, but feels she has little recourse.
Dodd-Frank is a glaring example of the progressive left’s propensity to believe we can never have too many regulations or mandates. It also demonstrates the destructive consequences this mind-set can lead to. Good intentions don’t nullify bad consequences.
The path to revitalizing the middle class and lifting up the poor is through greater growth in economic opportunity and providing an environment that will enable businesses to thrive and broaden employment opportunities. That won’t be brought about by ever-expanding government regulations and mandates that choke business growth by blocking access to needed capital.
Rachel Helm, who lives in South County, is a member of The Union Editorial Board. Her opinion is her own and does not reflect the viewpoint of The Union or its editorial board. Contact her via EditBoard@TheUnion.com.
Support Local Journalism
Support Local Journalism
Your donation will help us continue to cover COVID-19 and our other vital local news.
If you don't follow the rules, your comment may be deleted.
User Legend: Moderator Trusted User