Access to growth capital remains a sticking point for many entrepreneurs and small business owners. Certainly, the Tax Cut and Jobs Act has unleashed more capital that is helping small businesses better compete. Still, accessing growth capital for large-scale expansion projects presents a challenge for many entrepreneurs, which they find quite frustrating given exciting opportunities presented by the surging economy.
Significant reforms, including regulatory corrections to the Dodd Frank Act, will address this need and bring more growth and vitality within our small business sector. Thankfully, capital access and the solutions to improve, streamline and modernize federal regulation have been bipartisan ones in the Congress. That is the case, for example, on a wide variety of reform initiatives focused on updating Securities and Exchange Commission (SEC) rules and red tape that hamper capital access.
Both Democrats and Republicans are supportive of reforms that will address the sticking points in the law that prevent more entrepreneurs from using crowdfunding. Consensus has also emerged on making several changes to the Dodd Frank Act. In the years since the law went into effect, it’s clear that many of its regulations have harmed small businesses, which is why Congress is taking important steps to fix specific provisions.
These burdensome regulations are imposed on regional banks that pose little risk to the overall financial ecosystem, but are categorized and regulated in a similar manner as complex Wall Street banks. However, these financial entities operate very differently. Regional banks focus on customers by offering deposits, commercial and consumer lending, and other traditional banking services within their communities. Meanwhile, Wall Street banks have fewer loans and more assets from trading and federal funds.
Treating them in the same manner makes no sense and has exacerbated some of the growth challenges that have plagued both small businesses and the economy. It bears repeating that small businesses serve as a major source of employment, local economic growth and innovative dynamism. Therefore, fostering capital access and flow must be a priority for Congress as meeting the capital needs of small firms is central to their growth and survival.
Both sides of the political aisle have spoken out about the importance of providing regional banks with regulatory relief so they can return to more robust consumer and commercial loan projects. Many of the bipartisan proposals include promising and overdue changes that will free up more capital for Main Street businesses and high-growth firms.
Under the current imbalanced regulatory framework, regional banks are forced to focus more heavily on compliance, which siphons resources and capital away from customers. This has led to a nearly 10 percent decline in the growth rate of regional bank loans nationally. On a state-by-state basis, this has translated into uneven economic and job growth. For instance, in the District of Columbia, which is supported by six regional banks, the area has missed out on $9.1 billion in gross domestic product and 36,100 jobs on an annual basis.
This is why we need practical policy fixes that will enable regional banks to better serve local and regional communities and the small businesses that drive growth and opportunity in these communities. Tailoring the current regulations for regional banks will also allow them to more effectively compete with Wall Street.
Unfortunately, there are those who view any level of correction to Dodd-Frank as the apocalypse. In a recent Washington Post column, for example, Katrina Vanden Heuvel called the proposed reforms to the Dodd Frank Act “terrible” and “reprehensible policy” and mischaracterized the potential changes as a win for Wall Street. In reality, these potential changes, which have bipartisan support in Congress and follow years of discussion on the effect of potential reforms, are a win for Main Street, not Wall Street.
Treating regional banks and Wall Street banks the same has caused more harm than benefit, especially because these specific rules do not make the financial system safer. Tailoring regulations, not one-size-fits-all, is a sound step towards a stronger financial system and an environment that encourages lending and capital formation. Thankfully, there is solid bipartisan support in the Congress to make these rational changes. Now, they just need to get it done.