NEED A NEW reason to bone up on financial reform? If a bill passes, small businesses could face a new lending squeeze.
On first reading, the financial reform package issued by Senate Banking Chairman Sen. Chris Dodd (D., Conn.) last week would appear to benefit small businesses. After all, the intent is to rein in big financial institutions and afford new protections to consumers — changes ultimately that should also help entrepreneurs. Yet the 1,336-page proposal, which is expected to receive a full committee markup Monday, might end up harming small business, if indirectly, advocates and economists suggest.
Reduced credit availability
Among other things, small-business lending, which slowed during the downturn, could contract even more. The reason? A new consumer financial regulator will have the authority to make rules limiting or even banning practices of certain financial and non-financial institutions. The regulator will also have enforcement and examination authority over institutions with $10 billion or more in assets – putting many smaller lending institutions under its purview. And states’ attorneys generals will be empowered to pursue companies that violate the rules.
The changes could be a good thing for small businesses, as the regulator could limit an issuer’s ability to tack on creative fees and punitive policies. However, by putting further restrictions — and, in some cases, capital requirements — on lending institutions, businesses and consumers could face reduced access to credit, says Gregg S. Fisher, president and chief investment officer at New York financial advisory firm Gerstein Fisher. “All of these things are going to have a cost,” he says. In time, these expenses could ultimately reduce lending; reduce the amount of risk that banks are willing to take on and raise prices. “Sure it may prevent irresponsible lending, but it will also make an impact on the amount of money available to business owners,” Fisher says.
This scenario is even more likely given that states’ attorneys general will have wider powers under the new proposal, says Bill Dunkelberg, the chief economist for the National Federation of Independent Businesses, an advocacy group in Washington. “Historically, [attorneys general] love to be tough on credit-card issuers, which could [also] restrict credit availability for small business,” Dunkelberg says.
Allowing states’ attorneys general to enforce tougher restrictions on financial institutions could also make it harder for banks and other non-bank institutions to operate across state lines, as the rules in one state could differ from another state — and from the federal guidelines under the Dodd proposal. This part of the proposal stands in direct conflict with the Supreme Court’s 1978 decision in Marquette National Bank of Minneapolis v. First Omaha Service Corporation, which allowed credit-card issuers to export rates and terms across state lines, says Dunkelberg.
Restrictions on investment hedges
Then there’s the issue of injecting more transparency into the purchase of derivatives, securities whose values are determined by fluctuations in underlying assets. Among other things, the bill requires data collection and publication through clearing houses and introduce new margin requirements on certain trades. All trades will be reported to regulators.