The Impact of the Dodd-Frank Act on Small Business
45 Pages Posted: 15 Aug 2019
Date Written: February 28, 2019
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 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 plunged 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 8 to 9 percentage points of these declines in the small loan share of C&I loans are 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 during the initial period of the DFA before efforts to provide regulatory relief to smaller banks via modifying implementation rules.
Keywords: small business lending, business formation, regulation, Dodd-Frank, secular stagnation
JEL Classification: E40, E50, G01, G21, G28
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