Banks burdened by excessive regulation are unable to provide the kind of support that growing small businesses in their communities need. The entire system is in dire need of an overhaul, writes Karen Kerrigan.
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Government rules and regulations quite often impose costs and unintended consequences, especially for small businesses. Asthe U.S. regulatory state continues to grow, new and costly regulatory barriers are stifling investment and innovation. That means startups and small businesses are losing their effectiveness and capacity for helping to keep the economy vibrant and competitive. Therefore,reforming and reining in the regulatory overload is essential to fostering entrepreneurship, competition and strong economic growth.
Various studies over the years have consistently established that regulatory burdens disproportionately impact small businesses. The cost of federal regulation now averages nearly $15,000 per employee at businesses with fewer than 50 employees. Businesses of this size are especially vulnerable to uncertain economic conditions and the drag caused by costly policies coming out of Washington. They simply do not have the resources or scale to absorb higher costs and be expected to effectively compete with bigger businesses.
For example, current banking regulations and new proposals, while ostensibly designed to maintain financial stability, are having a negative downstream effect on small businesses. From the embattled Federal Deposit Insurance Corporation to the Office of the Comptroller of the Currency, federal agencies with overlapping authority are weighing down banks with a host of rules that prioritize political agendas and power over efficacy.
Such regulations are limiting small businesses' access to capital and financial services. By increasing bank compliance costs and restrictions, small businesses are facing higher lending costs and reduced loan availability. According to the Small Business and Entrepreneurship Council's July 2024 "Small Business Checkup Survey," 56% of small-business owners report that the lack of affordable or available capital and credit is hampering their company's operating capacity.
Community banks play a central role in local economies and are vital to small-business startup and growth, providing well over half of all small-business loans. However, regulatory burdens are taking a heavy toll on these smaller banks. A June 2024 report by the Independent Community Bankers of America finds that the threat of future regulation and regulatory compliance are the top challenges facing community banks. Compliance costs for these institutions are especially significant due to limited resources, making it even more difficult to serve local needs under the thumb of intrusive regulations and mandates.
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Similarly, the Federal Reserve Bank of New York reports that limits on bank size increase the cost of providing banking services. Yet, regulators routinely delay mergers and acquisitions with minimal transparency and offer little recourse for the institutions that are left waiting for agencies to make up their minds. The FDIC and OCC are now, unsurprisingly, working to add even more byzantine rules when it comes to M&A, threatening to leave banks and the businesses and consumers they serve stuck in a state of uncertainty.
To make the process fair and transparent, regulators should promote healthy mergers by simplifying the process and providing more certainty rather than confusion and runarounds. To improve accountability and efficiency, the process should include the automatic approval of applications that aren't denied within 120 days of filing.
In 2022, the cost of federal regulations on the U.S. economy was estimated to total more than $3 trillion, with annual compliance costs skyrocketing by nearly $500 billion since 2012. This is unsustainable. Indeed, while the U.S. Supreme Court's recent decision overturning Chevron deference may help to quell regulatory zeal and overreach, the federal rulemaking process requires modern reforms that bring common sense and accountability into the regulatory system. Iowa Sen. Joni Ernst'sProve It Act, for example, is one legislative solution that will ensure federal agencies are considering and responding to small-business impacts during the rulemaking process.
Moreover, through executive action, and specifically related to financial rules given the importance of capital access and formation to our economy, agencies overseeing banks can be ordered to hold all pending proposals and delay the effective date of new financial regulations issued in the past year, so that they can be newly reviewed by appointees in the next administration. In other words, the "rush to regulate" must be avoided, as it drives more uncertainty and economic damage.
Common sense actions and reforms — to federal rulemaking at large and of our financial system — would begin to alleviate the harmful downstream effects that federal agencies are placing on our economy and small businesses. To keep the U.S. the most innovative and competitive in the world, regulatory transformation is an urgent priority.
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