U.S. Treasury Report Points Policy in the Right Direction – Good News for Small Business

By at 15 June, 2017, 10:20 am

by Raymond J. Keating-

Small businesses always face a tough time in gaining access to credit. But it’s been particularly difficult over the past near-decade, given the recession, the poor economic recovery, and excessive and costly regulation on financial institutions.

That has been made clear in various SBE Council analyses – such as here, here and here.

In the most recent of these pieces, we noted:

“Looking ahead, recent numbers and the longer trend on small business lending fits in with the wider story on the economy, investment and entrepreneurship, all pointing to a need for pro-growth policymaking. And that most certainly includes rolling back regulatory burdens not just on small businesses, but on the financial institutions, of all sizes, that provide credit and financial capital. Critical is dealing with the misguided and costly measures included in the Dodd-Frank financial regulation law… In the end, regulatory relief and reform will incentivize entrepreneurs to startup and expand businesses, and incentivize financial institutions to provide the necessary financing.”

Therefore, the just-released first report on our financial system from the U.S. Treasury Department is very encouraging. Treasury nails many of the problems confronting banks and credit unions from a policy perspective, and points in the right direction on the necessary solutions.

The Problems

On identifying the key problems, Treasury highlighted varying ills emerging from Dodd-Frank, including the following:

Making Things Worse in a Harsh Economy. “The U.S. economy has experienced the slowest economic recovery of the post-war period. Real gross domestic product is only 13% higher than in 2007. Since 2010, total employment has risen 12%, while wages have risen only a little more than 4%. The implementation of Dodd- Frank during this period created a new set of obstacles to the recovery by imposing a series of costly regulatory requirements on banks and credit unions, most of which were either unrelated to addressing problems leading up to the financial crisis or applied in an overly prescriptive or broad manner.”

Dodd-Frank Off the Mark and Costly. “The length of Dodd-Frank fails to respect fully its expansive scope as the legislation delegated unprecedented authority to financial regulators and mandated hundreds of new regulations. In total, implementing Dodd-Frank required approximately 390 regulations, implemented by more than a dozen different regulatory agencies. Dodd-Frank failed to address many drivers of the financial crisis, while adding new regulatory burdens.”

The Fundamental Problems with Dodd-Frank. “As banking regulators are approaching the full implementation of Dodd-Frank, nearly seven years after its passage, regulation has proven to be insufficiently tailored to depository institutions based on the size and complexity of their business models. Requirements in Dodd-Frank are overseen by multiple regulatory agencies with shared or joint rule-making responsibilities and overlapping mandates. is complicated oversight structure has raised the cost of compliance for the depository sector, particularly for mid-sized and community financial institutions. Moreover, the regulatory agencies often do not engage in sufficient coordination, so financial institutions often face duplication of efforts.”

Negatives from Dodd-Frank on Banking System. “The sweeping scope of and excess costs imposed by Dodd-Frank, however, have resulted in a slow rate of bank asset and loan growth. At the same time, banking system resources dedicated to markets and market liquidity have declined, in large part due to regulatory changes. Finding the correct regulatory balance impacting market liquidity and the extension of credit to consumers and businesses is required to fuel economic growth.”

Small Business Suffering Most. “Small business lending has been one of the most anemic sectors, barely recovering to 2008 levels. By comparison, origination rates for large business loans are at record levels.” For good measure, it was noted: “Community banks and credit unions serve the needs of the nation’s small businesses and rural communities, and they play a key role in agricultural lending.”

Indeed, the costly, misguided Dodd-Frank regulations clearly fell heavily on smaller community banks, which in turn, has contributed mightily to ills in terms of the broader state of small business.

The Solutions

The Treasury report goes on to lay out an assortment of regulatory changes that are needed. From a small business perspective, a few are worth highlighting:

Reining in the Consumer Financial Protection Bureau (CFPB). “A significant restructuring in the authority and execution of regulatory responsibilities by the CFPB is necessary. The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to predictable regulatory abuses and excesses. The CFPB’s approach to rulemaking and enforcement has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions. Treasury’s recommendations include: making the Director of the CFPB removable at will by the President or, alternatively, restructuring the CFPB as an independent multi-member commission or board; funding the CFPB through the annual appropriations process; adopting reforms to ensure that regulated entities have adequate notice of CFPB interpretations of law before subjecting them to enforcement actions; and curbing abuses in investigations and enforcement actions.”

Rein in Regulatory Burdens on Small Institutions. “In order to promote the orderly operation and expansion of the community banking and credit union sector, Treasury recommends that the overall regulatory burden be significantly adjusted. This is appropriate in light of the complexity and lack of systemic risk of such financial institutions. The capital regime for community banks having total assets less than $10 billion should be simplified… Treasury recommends that regulators undertake additional efforts to streamline regulatory supervisory burden and reporting requirements for all community financial institutions, including the scale of Call Reports (i.e., each bank’s consolidated reports of condition and income). Regulators should undertake a critical review of their coordination procedures and consider forming a consolidated examination force. Further, greater accountability and clarity should be incorporated into the examination procedures and data collection requirements.”

Get Serious About Cost-Benefit Analysis of Regulations. “While Congress has imposed discrete cost-benefit analysis requirements on independent financial regulatory agencies – including the CFTC, SEC, FDIC, Federal Reserve, OCC, and CFPB – these agencies have long been exempt from Executive Order 12866 (discussed below). As a result, the financial regulators have not adopted uniform and consistent methods to analyze costs and benefits, and their cost-benefit analyses have sometimes lacked analytical rigor. Federal financial regulatory agencies should follow the principles of transparency and public accountability by conducting rigorous cost-benefit analyses and making greater use of notices of proposed rulemakings to solicit public comment. In particular, Treasury recommends that financial regulatory agencies perform and make available for public comment a cost-benefit analysis with respect to at least all ‘economically significant’ proposed regulations, as such term is used in Executive Order 12866. Such analysis should be included in the administrative record of the final rule.”

As explained later: “The current framework, set forth in Executive Order 12866, directs executive agencies to assess the cost and benefits of new rules with particular focus on evaluation and review of economically significant regulations — actions expected to have an annual economic impact of $100 million or more… Importantly, however, while Congress has imposed discrete cost-benefit analysis requirements on independent financial regulatory agencies – including the CFTC, SEC, FDIC, Federal Reserve, OCC, and CFPB – these agencies have long been exempt from Executive Order 12866… [T]here is bipartisan legislative support for broader cost-benefit analysis by these agencies…”

In fact, much of what the Treasury Department is recommended actually gets accomplished in the Financial CHOICE Act, H.R. 10, which recently passed the U.S. House of Representatives. As noted in a letter of support for H.R. 10, SBE Council President & CEO Karen Kerrigan pointed out:

“In contrast to the burdensome and restrictive rules created by Dodd-Frank, the Financial CHOICE Act will truly reform the rules governing the financial system, encourage innovation across the system, vastly improve access to capital for entrepreneurs and small businesses, and transform a regulatory structure that lacks accountability, is too secretive, and ignores its responsibilities concerning small businesses.”

In terms of getting small business creation and growth back on track, regulatory reform and relief are vital, and that very much includes the measures put forth by Treasury and included in the Financial CHOICE Act.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

News and Media Releases