Why Are We Still Regulating Main Street Like Wall Street?

It’s no secret that banks across America aren’t doing well under the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. Since Dodd-Frank’s enactment in 2010, the U.S. financial sector has lost more than one-in-five banks, collapsing at a rate of nearly one per business day. That means loans to small businesses and entrepreneurs nationwide have largely dried up.

Regulatory compliance costs are a big cause of the problem. Those costs now exceed 73 million paperwork hours and $36 billion dollars since 2010. Big banks can afford that, but smaller banks simply cannot and have been forced to either merge or close their doors.

That’s one reason why the Dodd-Frank approach of regulating Main Street like Wall Street is not working. A prime example is the policy of designating regional banks as “too big to fail.” Currently, institutions with over $50 billion in assets are automatically considered Systemically Important Financial Institutions (SIFIs). That threshold ropes in too many smaller banks that do not pose a system-wide risk. And if any of those banks with the SIFI designation fail, taxpayers are directly at risk of another bailout.

But the $50 billion threshold also imposes a big burden on small banks because it triggers the same burdensome compliance costs for small and medium size banks as the largest, most complex institutions. Too much time is wasted on regulatory paperwork.

Those regulatory burdens leave banks less able to focus on their core business: lending to consumers and businesses. According to a recent Federal Financial Analytics study, improper SIFI designations are reducing regional banks’ capital to lend by $20 billion. As a result, lending to small business has dwindled, with the percentage of small business and commercial loans falling more than 15 percent in the past decade. That means businesses are never formed, workers are never hired, and the economy struggles to get off the ground.

What can be done? One approach introduced this Monday by a bipartisan group of senators would raise the asset threshold from $50 billion to $250 billion. This is a good first-step reform that would potentially exempt up to 25 regional banks from inappropriate regulations. But in the long run, simply raising the threshold does not address one of the core problems with too-big-to-fail regulation: the fact that bank risk is not associated with bank size.

Even a higher threshold for triggering regulation does not really help government know whether a bank poses a risk to the entire banking system. A bank is not risky simply because it is big but because of a range of different factors, such as its activities, complexity, and connections with other banks. A simple asset threshold addresses none of this. It also distorts the growth decisions of banks, discouraging some from growing beyond the limit, while encouraging others to grow too quickly or merge with other institutions to spread out the costs of regulation. A recent report by the Office of Financial Research, a non-partisan government agency, confirmed this, concluding that “size alone is not sufficient to identify systemically important banks.”

A better approach would be to get rid of the arbitrary asset threshold altogether. Instead, regulators should at least be required to consider a bank’s entire risk profile to determine whether heavy regulation is warranted. Missouri Rep. Blaine Luetkemeyer (R) introduced just such a plan in July. His “Systemic Risk Designation Improvement Act” would include not just bank size but bank activities, complexity, and level of interconnectedness with other banks. This would force regulators to assess whether medium sized institutions pose the same threat to the financial system as complex, trillion dollar banks.

Congress should scrap the asset threshold altogether but, short of that, should at least offer smaller banks some regulatory relief by lifting the $50 billion asset threshold that’s causing so many problems. The future of millions of businesses and opportunities hinge on loans that banks now cannot make. It’s time to get rid of government rules that hold back regional banks. Congress must do its part to let banks get back to doing what they do best — grow businesses, help create jobs, and bring about a robust, prosperous economy.

Originally published to The Hill.