Trump’s claim that friends ‘can’t borrow money’ because of Dodd-Frank
This comment by President Trump drew widespread critical commentary, with reporters noting that it was not supported by Federal Reserve data, which shows that commercial lending has reached records since the economic crisis of 2008. Bloomberg mischievously Noted that one of Trump’s friends, investor Carl Icahn, recently had no trouble borrowing $1.2 billion.
There was also speculation that Trump was referring to friends who engage in “leveraged loans” for buyouts and highly leveraged real estate investments, which had been the subject of pressure and criticism. scrutiny by regulators.
But White House officials insist the president wasn’t talking about all the banks. They acknowledge that the big banks are doing well, but say the president was referring to community banks, generally defined as having less than $10 billion in assets. An official said the administration was developing policies that would specifically help the community banking sector.
“Community banks have suffered unnecessarily,” the official said. “What was missing in the implementation of Dodd-Frank was adapting the rules to the banks that caused the problem.”
It is therefore through the context of the community bank that we will examine the president’s remarks.
the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, was developed in response to banking abuses and regulatory loopholes revealed by the Great Recession of 2007-2008. It has long been derided by Republicans and industry critics as too complex and burdensome for the financial community – although some experts say many large institutions have spent fortunes setting up compliance operations to satisfy to the law and may therefore be reluctant to revert to a less -regulated system.
Community banks play an important role in the US economy, but since the recession their number has declined.
A 2015 study published by Harvard’s Kennedy School of Government, “The State and Fate of Community Banking” by Marshall Lux and Robert Greene, indicates that in 2014, community banks provided 77% of agricultural loans, 46% of commercial real estate loans and 51% of small loans. business loans in the United States. But their share of those markets fell as a wave of consolidation swept through the industry.
“Since 1994, community banks’ share of the U.S. lending market has shrunk by about half, from 41% to 22%, while the share of the five largest banks has more than doubled, from 17% to 41%,” the report said. . The number of community banks increased from 10,329 in the second quarter of 1994 to 5,521 banks in the third quarter of 2016, according to FDIC data.
Dodd-Frank did not specifically target community banks, however. For example, a much-hated provision known as the Durbin Amendment, which limits credit card fees paid by merchants to banks, only applies to banks with more than $10 billion in assets.
“In reality, a lot of Dodd-Frank doesn’t apply to community banks with less than $10 billion in assets,” said Stephen M. Klein, a former banking regulator now at the Miller Nash Graham & Dunn law firm in Seattle. “It was more about the restrictive regulatory environment and the attitude that prevailed after the recession and the series of bank failures.” He said record-low interest rates after the recession have ravaged banks’ profit margins, with the improved regulatory environment being “the icing on the cake” for smaller banks.
Klein said that after the recession, there was a “trickle down” effect in regulatory oversight that affected community banks. “It wasn’t so much Dodd-Frank as the post-crisis environment,” he said, adding that in recent years he thought “regulators had backed down.”
White House officials agreed with the assessment that the regulatory environment has become more challenging for all banks, even those not specifically targeted by Dodd-Frank. “We hear that; we feel it,” an official said. “We think it’s real and we want to do something about it.”
Paul G. Merski, group executive vice president at Independent Community Bankers of America (ICBA), a trade group, acknowledged that low interest rates have played a significant role in reducing profits for small banks, but he said it meant that the impact of regulatory oversight was more profound. He noted that the new consumer rules have proven costly, as they apply equally to all banks.
Particularly burdensome regulation that limits lending is tangentially tied to Dodd-Frank, Merski said. A regulation known as United States Basel III revised capital standards for US banks and a Dodd-Frank provision known as the Collins Amendment prevents regulators from adjusting capital requirements for banks of different sizes. The ICBA is calling for the repeal of the Collins Amendment, arguing that it is more difficult for smaller banks to attract capital. Moreover, he said, it has forced smaller banks to consolidate, thereby reducing the footprint of smaller banks in communities.
“Higher capital standards have forced banks to cut lending,” Merski said.
Yet surveys by the National Federation of Independent Business indicate that in 2016only a small percentage of small business owners – 3-4% – said their borrowing needs were not met, compared to 9-11% in 2010.
White House officials pointed out FDIC data to argue that small business lending plummeted in the Dodd-Frank era. The data, which White House officials presented to us, shows that the number of commercial loans under $1 million fell 14% between 2008 and the third quarter of 2016, compared to a 51% increase for large corporate loans over the same period.
“There are lots of ways to reduce this data,” an official said. “We are confident that what the president said is supported by the data.”
Francesco D’Acuntoprofessor at the RH Smith School of Business at the University of Maryland, has documented how Dodd-Frank led to a shift in mortgage lending from middle-class to wealthier households, largely because the rising cost of origination of loans made larger loans more profitable. But he said there was no comparable data to produce a similar study of Dodd-Frank’s impact on small business lending.
“It is true that, anecdotally, credit unions and small banks seem to complain about Dodd-Frank compliance costs, which increase the costs of making loans and therefore increase the denial of credit to small businesses. But to my knowledge, there is no data currently available that can allow us to scientifically assess this claim,” he said. “If I were to assess Trump’s claim, I would say that it appears to reflect the sentiment of small businesses and local banks, but it is neither supported nor refuted by scientific evidence beyond doubt.”
White House officials said they did not ask the president for the names of the friends he was referring to in his remarks.
Trump said he had friends with “nice companies” but “the banks just won’t let them borrow because of Dodd-Frank rules and regulations.”
If Trump was only talking about all corporate loans, his statement would be wrong. Commercial loans are at record highs. The picture is murkier if he only referred to small businesses, even if The Fact Checker was unaware that he knew many small business owners.
Trump specifically mentioned Dodd-Frank’s “rules and regulations.” The law was not intended to target community banks and provided many exemptions. But regulatory oversight appears to have become tighter and some rules have ended up affecting the bottom line of community banks – which have also suffered from a period of low interest rates.
Of course, there is no rule that every business loan should be granted. There may have been good business reasons for refusing loans that had little to do with Dodd-Frank. But it could be argued that the post-Dodd-Frank regulatory environment has made it harder for community banks to lend to small businesses.
Given Trump’s imprecise language, we cannot give his claim a Geppetto. But the White House has provided ample evidence that, in the context of small business, Trump wasn’t wrong either.
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