Martin from Jackson, MS asks: Hi Mitch, I’ve heard in the news that President Trump is planning to reduce and/or eliminate a lot of these heavy-handed regulations on Wall Street, which he says has reduced small-business lending and is partly responsible for slow growth in the economy. I’m a small-business owner who has been trying to secure a loan, so this matters to me. What are your thoughts?

 Mitch’s Reply: One of the signature campaign promises from President Trump was to reverse or eliminate many aspects of Dodd-Frank regulation. I’m almost certain that’s what you mean when you say “heavy-handed regulations on Wall Street.” Indeed, the Dodd-Frank legislation sought to increase regulation on the biggest banks following the 2008 Financial Crisis. I won’t get into the semantics of the law, but the basic premise was to tighten the government’s oversight of risk-taking practices at large banks, while also setting rules for how much capital the banks would be required to keep on hand, relative to their debt and risk-assets.

Whether or not these regulations are effective and/or necessarily is largely a political issue, and also largely a subjective one depending on what point of view you have. From a stock market standpoint, and in terms of my investment outlook for banks, the Dodd-Frank regulations turned my outlook slightly negative. I saw the regulations as likely impeding banks’ desire to take risk, and the capital controls also put pressure on banks to raise capital and be sure to maintain it on their balance sheets at all times. This confluence of regulations, in my view, has caused banks to become a bit more risk averse and conservative, which is not what you want when trying to stimulate an economy. There is a healthy medium somewhere, but in my view Dodd-Frank swung the pendulum a bit too far the other way following the crisis.

So, to answer your question, I think that if the Trump administration effectively follows through on the promise to remove or rewrite many of the Dodd-Frank regulations to ease control over Wall Street, there could be tangible effects when it comes to lending activity. But, these are all big “ifs” at this point. It remains to be seen if the Trump administration can push reform through, and what the extent of the reforms will be. This could take several months or even years.

There is evidence, however, that the increased regulations under Dodd-Frank have impacted small business loan growth. Lending activity has been increasing over the last few years, but the biggest banks have notably dropped-off in the amount of loans they are originating for small businesses. Research indicates that small business loan growth at smaller banks outperformed the growth of the same type of loans at large banks over the last 5 1/2 years (according to the Small Business Credit Survey). This divergence could have its roots in the new regulations, but also in the fact that big banks have stepped away substantially from home equity lines of credit, which prior to the crisis had been a big source of capital for small business start-ups. Undoing the regulations could change all of that.

At the end of the day, this is yet another big “wait-and-see” feature of the new political landscape. The Trump administration seems committed to seeing it through, but it will be a cumbersome and complex undertaking.

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