Small Business Election Countdown: The Future of Small Banks and Access to Capital

By SBE Council at 3 November, 2016, 8:28 am

by Raymond J. Keating-

Small banks are vital to small businesses. But small banks have been hit hard in recent years. If the candidates for the White House and Congress are serious about small business and access to capital, then they need to take a close look at what’s happened to our small community banks.

Indeed, the credit and economic meltdown that hit in full fury during the latter part of 2008 was supposed to be about big bad abusive banks, according to so many politicians. The emphasis usually was on “big.” Of course, this ignored the foundational role played by bad public policy pushing mortgages that had little relationship to sound finances. The inevitable call for more banking regulation erupted.

So, increased regulation arrived courtesy of the Dodd-Frank law, signed by President Obama in July 2010. Despite the political rhetoric about the law being targeted at big banks, it was inevitable that smaller banks would get hit hardest in terms of increased costs and restrictions. As noted in an SBE Council analysis earlier this year, assorted studies show that Dodd-Frank’s costs in fact have hurt small community banks, which are major sources of loans for small businesses. For example, small banks suffered losses in assets during the 2008-09 crisis, but larger declines after the passage of Dodd-Frank. In addition, the community banking sector not only suffered due to failures, but also because of “an unprecedented collapse in new bank entry.”

Another SBE Council analysis made clear the decline in the number and value of small business loans since 2008.

The numbers in terms of the decline in commercial banks, broken down by employee size, are stunning. The following table shows the changes between 2007 and 2014 (latest Census Bureau data):

The smallest banks – with less than 20 employees – experienced by far the largest percentage drop off, that is, about twice the percentage rate decline compared to the fall in commercial banks overall. The next largest drops were among banks with fewer than 100 employees and those with less than 500 workers, respectively. Meanwhile, the number of large banks barely changed at all.

That should surprise no one, as larger businesses often possess the resources to better weather regulatory storms than do small and mid-size businesses.

Regulatory relief and reform are needed when it comes to banks and financing. Candidates would be wise to consider the proposals offered by the “Relieving Regulatory Burdens” Task Force led by U.S. House Speaker Paul Ryan (R-WI) and House Small Business Committee Chairman Steve Chabot (R-OH). SBE Council reported on these regulatory reform measures in June of this year. As noted in that piece, “Make no mistake, the ability of small businesses to get financing is directly affected by the regulatory burdens and mandates placed on financial institutions.” That includes big, medium and small banks. These reforms, as well as key changes needed across regulatory agencies (including the Securities and Exchange Commission, for example), are also included in Financial Services Chairman Jeb Hensarling’s (R-TX) CHOICE Act.

Where the Presidential Candidates Stand

The good news is that both presidential candidates recognize the burden of regulation on small banks and how it has negatively impacted their competitiveness and survival, and the availability of loans for small businesses. But who will make reform a priority? That is, will Hillary Clinton or Donald Trump address this issue in the first 100 days of their Administration? Immediate action is critical to improving capital access for small businesses, the survival of local financial institutions that are so vital to communities, and sustainable and widespread growth for our economy.

To view the positions of the presidential candidates on a range of issues important to small business and entrepreneurship, go to SBE Council’s profile pages here: