Post-crisis regulation only had 'modest' effect on lending volume: GAO

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WASHINGTON — A government watchdog is bucking claims by financial firms that regulatory burdens led to a decline in small-business lending.

In a report Wednesday, the Government Accountability Office said the economic environment and competition instead have driven trends in lending after the financial crisis. The GAO also noted that community bank lending to small businesses has largely recovered since the financial crisis, and has been on an uptick since 2013.

“GAO's econometric models also found that community banks' small business lending since 2010 can be explained largely by macroeconomic, local market, and bank characteristics, and that the potential effect of regulatory changes was likely modest,” the GAO said.

Republicans lawmakers have largely blamed the 2010 Dodd-Frank Act reforms for hindering community banks’ abilities to lend to small businesses, as well as the overall decline in the number of community banks.

However, after adjusting regulators' data to account for community bank mergers and other factors, GAO found that the remaining banks' small-business lending increased by 5% from 2013 through 2017, and total business lending by all community banks grew to exceed 2010 levels.

GAO noted that the number of community banks has declined by about 24% since 2010, largely due to mergers and the decline in new bank formations. While regulations may have played a small role, GAO’s report says the trend is mainly attributed to the overall economic environment.

GAO is recommending that the heads of the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency reevaluate and modify, if necessary, the data that banks report in the Consolidated Reports of Condition and Income to better reflect lending to small businesses.

The report and recommendations come after President Trump signed a bipartisan regulatory relief package in May, in response to concerns that community and regional banks have been overburdened as a result of Dodd-Frank and need relief in order to better lend to small businesses.

More than 450 community banks were included in GAO’s survey. GAO said it also interviewed staff at 18 banks and credit unions, selected to represent a range of asset sizes and regions, as well as small-business advisers, banking and consumer advocacy groups and financial regulators.

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Small business lending Community banking Dodd-Frank GAO Federal Reserve FDIC OCC
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