Small businesses are the great engine of U.S. job creation and economic growth, and that engine has been sputtering. Fortunately, a bill under consideration in the U.S. Senate can help put some gas in the tank.
In September, the Census Bureau reported that only 414,000 small businesses were founded in 2015, a 26 percent decline from the 558,000 small businesses that were founded in 2006. What explains this dramatic decline? Americans are no less driven, entrepreneurial, or creative than they were a decade ago.
The answer may lie in another set of equally obscure data: bank loan reports. According to federal banking regulators, the number of small business loans has plummeted since the recession — by some measures by as much as 41 percent. As the business community can attest, this decline does not reflect a lack of demand.
Fortunately, serious efforts are underway on Capitol Hill to enact tailored bank regulation; that is, to recognize that we need to ensure rules that are properly calibrated to the institution.
The Senate is now considering the Economic Growth, Regulatory Relief, and Consumer Protection Act, and the measure enjoys bipartisan support. It wasn’t long ago that Democratic support for changes to Dodd-Frank would be unimaginable, but on this bill, 12 Democrats and an independent have joined as co-sponsors.
Why? Passage of this bill will allow small, midsize, and regional banks to do what they do best: lend to small businesses in their communities. Main street businesses depend on financing to get started, hire employees, manage cash flow, and grow, and credit is the gas that keeps the small business engine roaring. The decline in small business loans represents startups that were never launched, jobs that were never created, and expansions that were never completed.
Small business owners and bankers around the country have identified a few underlying causes for the slump.
Following the 2008 financial crisis, policymakers focused solely on stability while forgetting that we need both stability and economic growth. One result was policies that have undermined relationship lending. In relationship lending, bankers understand the businesses to which they’re lending, and credit decisions are informed by local knowledge and expert judgment. Instead, lending decisions today are often made by regulatory compliance personnel.
Even worse, dramatically higher compliance costs have also made it more cost effective for a bank to make one larger loan rather than several smaller ones. This explains why overall lending looks strong, while small business lending has never recovered.
These factors are the product of a “one-size-fits-all” approach to bank regulation, implemented in the wake of the financial crisis. By properly tailoring regulations for community and regional banks, the Senate bill will protect financial stability while ensuring these banks can serve the small businesses in their communities. It may not be a complete solution to the arbitrary thresholds in Dodd-Frank that haven’t worked as intended, but the legislation is a good step forward to address the problem.
It’s time to get bank regulation right, and to do it in a way that promotes financial stability, yet restores lending to entrepreneurs and small businesses. For all the noise coming out of Washington these days, it’s easy to forget that serious work is happening on this vitally important topic — and on a bipartisan basis, no less.
We need to rev up America’s small business engine, and the Economic Growth, Regulatory Relief, and Consumer Protection Act is a good way to start.
David Hirschmann is president and CEO of the Chamber of Commerce's Center for Capital Markets Competitiveness.
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