Harsh banking sector regulations imposed a decade ago were touted as a means to both make the system safer and to “democratize capital” by improving consumer access to credit, thereby decreasing the wealth gap.
They’ve had the opposite effect.
In the decade since the Obama administration instituted broad banking reforms, banks have shrunken from lending activities in nearly every corner of consumer lending and have concentrated their portfolios in commercial real estate and government bonds, each posing a new set of stability concerns. Meanwhile, after many years of a self-inflicted growth slowdown from 2010 to 2017, due in part to the collapse of bank-based lending, private credit (nonbank lenders) has now effectively replaced the banking sector as America’s liquidity backstop. On the surface, this seems like a win for financial stability and consumers alike, but dig a little deeper and we see why this is not a cause to celebrate.
The first point to note is that we’ve transitioned from a relatively transparent bank-based lending system, where banks are required to report performance and risk metrics to multiple government and private counterparty agencies, to one where the lenders have little to no accountability to report timely, transparent or accurate lending performance. This makes the argument for improved financial stability null because regulators now have far less visibility into where credit cracks are emerging than they did in 2007.
The second point, that there would be a democratization of capital and reduced wealth inequality by making stricter bank regulations is also proving to be the exact opposite of what was promised. Today, the private credit/nonbank lending space has a lending foundation of somewhere between $1.5 trillion to $2 trillion, which is slightly larger than what the banking sector touted before the financial crisis in 2007. But whereas in 2007 that lending base was spread fairly evenly across households, from small-business lending and midsize to large-business lending, as well as capital markets activities for very large businesses, today’s nonbank lending activities are decidedly focused on taking market share in the large-business and capital market space (loan sizes of $250 million or more). This has left small businesses and households with relatively higher borrowing costs for car loans, home loans and especially small-business loans, and in loan sizes far lower than many need to fund operations. For small-business borrowers looking for financing of between $1 million and $50 million, there is essentially no lender willing to step up. For households looking for financing of more than $250,000 for home improvements, there are far fewer options available today compared with 2007. And what options are available are typically more expensive and less tax efficient than what larger borrowers experience.
Private credit is stepping in to take on some of the $50 million to $250 million segment of the business-lending market. But even there, an argument can be made that it’s going to be expensive financing. The bottom line is that if you’re a small, local grocery store that needs to borrow $10 million for renovations, your borrowing options have shrunken drastically since the Obama administration rolled out its Dodd-Frank reforms in 2010. This is a huge problem for places such as Rhode Island, which is dependent on small businesses for growth, including small to midsize community banks. When our local borrowers and lenders are placed at a competitive disadvantage by the regulations that our representatives in Washington, D.C., support, we as Rhode Islanders should take note.
Thomas Tzitzouris is director at New York City-based Strategas Research Partners. He lives in Rhode Island.
This commentary is a crock of crap from the banking industry lobbies trying to undue the protections granted to us tax payers when we get stuck bailing out the industry over and over again.