Fed policies continue to batter small businesses

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Following the collapse of several regional banks earlier this year, the Biden administration immediately called for intrusive regulations over the broader swath of the U.S. banking system. Regulators launched a campaign to push for increased capital requirements. That is, how much banks must hold in reserve to protect against losses. Similar to most supersize government regulations that are hastily pushed without understanding their downstream impact, increasing capital requirements would harm millions of Americans, especially small-business owners and their employees. Not only are these regulations misplaced and inappropriate, but they also come at a horrible time for small businesses, when headwinds remain relentless, and capital and credit are becoming more difficult and expensive to access.

Federal Reserve Vice Chair Michael Barr announced the proposed plans in July, which would increase capital requirements beyond the current amount required for certain banks by up to 20%. This is even more onerous than the new global standards pushed by the Basel Committee in Switzerland through their Basel III Endgame reforms. U.S. regulators are showing that they are even more out of touch than their international rule-happy peers.

This policy would shred access to capital for American entrepreneurs by severely increasing the cost of lending, a significant blow for business owners who rely on affordable and accessible loans and credit to operate and expand.

As summarized by Congressman Dan Meuser, R-Pa., at a recent Small Business Committee hearing, "The proposal will require banks to keep more money on the sidelines, where it will not be utilized to fulfill the lending needs of particularly small businesses. …These are not theoretical concerns. They are real issues that can close the doors of our small businesses, impacting the lives and livelihoods of everyday Americans. Due to this proposal, banks will have less flexibility than ever, and again, small businesses will receive the brunt of the lending pullback."

As it stands now, small-business owners are reporting tough conditions due to higher interest rates and uncertain economic conditions. Our latest small-business checkup survey finds that 62% of small-business owners rate credit and capital availability as fair or poor, with nearly 50% saying that a lack of access to capital is hampering their operations.

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Goldman Sachs reports a similar squeeze: 61% who applied for a loan or sought capital found it challenging. This problem, along with ongoing inflationary pressures, diminishing sales for many and labor market challenges, put many firms in peril. Especially given 61% of small-business owners believe economic conditions will deteriorate for the remainder of 2023, according to our survey.

Despite these conditions, President Biden appears committed to forging ahead with the plan to increase capital requirements. Regulators, unfortunately, are not looking to change course either. The Fed is supposed to be an institution separate from politics. The Fed is also supposed to be responsive to economic conditions and realities, but their tone deafness and inability to pivot are keeping us on this perilous course. Moreover, the Fed's own shortcomings are being glossed over, as their own regulators were asleep at the wheel in calling out and acting on practices that led to several bank failures this year.

As noted by Senator Tim Scott, R-S.C., at a recent hearing on the Fed's Inspector General report on the Silicon Valley Bank failure, when the bank failed "it had 31 open supervisory findings, and that level of findings is about three times the number of other peer banks."

Why didn't regulators take action? And why should sound banks and small businesses be forced to bear the brunt of poor regulatory oversight and incompetency?

The small businesses that drive the U.S. economy and local economies throughout our nation are being hung out to dry as regulators ignore the underlying causes of recent bank failures. Lawmakers cannot stand by and allow these harmful policies to get rammed through to completion. The costs and pain will burden millions of Americans, whereas only the few banks and executives who failed their depositors and investors should be paying the price.