The Impact of the Dodd-Frank Act on Small Business

41 Pages Posted: 15 Jun 2018 Last revised: 21 Feb 2019

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

John V. Duca

Oberlin College; Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-04-21

Abstract

There are concerns that the Dodd-Frank Act (DFA) has impeded small-business lending. By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of commercial and industrial (C&I) loans is generally much higher than that of larger banks. Despite an economic recovery, the small-loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks. Controlling for cyclical effects and bank size, we find that these declines in the small-loan share of C&I loans are almost all statistically attributed to the change in regulatory regime. Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small-business lending through loan supply effects. We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced. Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA. The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation.

Keywords: small-business lending, business formation, regulation, Dodd-Frank, Sarbanes-Oxley, secular stagnation

JEL Classification: E40, E50, G21

Suggested Citation

Bordo, Michael D. and Duca, John V., The Impact of the Dodd-Frank Act on Small Business (2018-04-21). FRB of Dallas Working Paper No. 1806. Available at SSRN: https://ssrn.com/abstract=3196449 or http://dx.doi.org/10.24149/wp1806

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John V. Duca

Oberlin College

Oberlin, OH 44074
United States

Federal Reserve Banks - Federal Reserve Bank of Dallas

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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