by Victor Mozambigue
Dodd-Frank makes borrowing difficult instead of making banking safer, says President Donald Trump. He suggests that the regulation has made lending too difficult and many of his friends with great businesses are unable to get a loan because of the stringent regulations. However, is it the same story on ground too? Experts say no.
What did Trump Say?
While meeting corporate executives last Friday Trump said, “We expect to be cutting a lot out of Dodd-Frank because, frankly, I have so many people, friends of mine, who have nice businesses who can’t borrow money. They just can’t get any money because the banks just won’t let them borrow, because of the rules and regulations in Dodd-Frank.” He was backed by Gary Cohn, the Director of National Economic Council, and Former Goldman Sachs President. Later, after an executive order was signed, he said, “Today banks do not lend money to companies. Banks are forced to hoard money because they’re forced to hoard capital and they can’t take any risk. We need to get banks back in the lending business. That’s our number one objective.”
The ground report
It is true that the rule has put more stringent lending regulations on the banks after the 2008 financial crisis. However, there is a growth in corporate loans after the Dodd-Frank regulations were imposed. A look at the Commercial and Industrial (C&I) data shows that corporate loan growth is higher now. The loans to the corporate sectors form a greater percentage of the economic output now. The percentage is significantly higher than the 1980s when direct bank financing was the primary lending method and capital markets remained small.
Auto lending as well as credit card lending is also peaking. Outstanding mortgage loans are also close to the pre-2008 crisis high. A Senior Loan Officer survey by the Federal Reserve has shown that policies have loosened more for C&I loans ever since Dodd-Frank came into force. The lending terms have risen steadily, which has caused a problem in the real estate sector. It is to be noted that Trump himself was a developer and his friends may also be real estate players who get loans on higher terms. In fact, many regulators have shown concerns about an impending stress caused by commercial real estate.
— Callahan&Associates (@CallahanAssoc) May 18, 2016
This may mean that the lending problem could be restricted to the real estate sector. If we look at Citigroup figures of 2016, we find that lending has increased by 6% in constant dollar terms. JP Morgan Chase has also shown similar figures as C&I loans have grown here, even though the overall lending portfolio was somewhat compromised. Large and medium companies have profited considerably because of such a growth and even smaller companies have recorded a slower, but steadier growth.
Overall, Dodd-Frank has been a healthy regulation that has made banking safer in general. The regulations have been lenient for 5 years and have tightened only recently. In fact, debt growth of the 90s is being mimicked in current times. Even though the regulations ask for higher capital retention, the lending by banks has not been affected much. For real estate sector, the story could be different.