Working Paper: NBER ID: w24501
Authors: Michael D. Bordo; John V. Duca
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 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 by 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: Dodd-Frank Act; small business lending; bank regulation; business formation
JEL Codes: E40; E50; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dodd-Frank Act (DFA) (G28) | increased regulatory compliance costs (G38) |
| increased regulatory compliance costs (G38) | reduced small business lending (G21) |
| Dodd-Frank Act (DFA) (G28) | tightening of credit standards (G21) |
| tightening of credit standards (G21) | reduced small business lending (G21) |
| Dodd-Frank Act (DFA) (G28) | downshifted business formation rates (L26) |
| regulatory relief efforts in 2015 (G28) | recovery in business formation rates (L26) |
| Dodd-Frank Act (DFA) (G28) | reduced small business lending (G21) |