The Dodd-Frank financial reform law slowed lending to small businesses and likely constrained economic growth by overburdening small banks, according to a new economic study released Monday.
The study’s findings have clear implications for legislation pending in Congress to exempt community and regional banks from some of the law’s rules. The Senate passed the bill in 2010 on a bipartisan basis, although liberals such as Sen. Elizabeth Warren, D-Mass, opposed the measure.
The study, circulated Monday by the National Bureau of Economic Research, concludes that the Dodd-Frank law had the ”unintended consequence of impairing small business activity in the U.S.”
Lending to big businesses has recovered since the enactment of Dodd-Frank during the wake of the financial crisis, but small-business lending has not. The paper’s authors attribute that difference to the disproportionate burden that regulations place on smaller banks, which are less able to absorb the cost of the paperwork and the staffing needed to comply with the rules. Historically, community banks play a major role in lending to local businesses.
The authors, economists Michael Bordo of Rutgers and John Duca of Oberlin, also tie the reduction in small-business credit to the overall slowdown in small business formation.
Their results provide straightforward academic evidence that relief from Dodd-Frank would boost economic growth, which has been lacking so far in the debate over legislation.
The paper has not yet undergone peer review.
