“Frankly, I have so many people, friends of mine that have nice businesses that 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.”
— President Trump, remarks at strategy and policy forum, Feb. 3, 2017

This comment by President Trump sparked a lot of critical commentary, with reporters noting it was not supported by Federal Reserve data, which shows that commercial lending has reached record highs since the economic crisis of 2008. Bloomberg archly noted that one of Trump’s friends, investor Carl Icahn, had little trouble recently borrowing $1.2 billion.

There was also speculation that Trump was referring to friends who engage in “leveraged loans” for buyouts and highly leveraged real estate investing, which had been the target of pressure and scrutiny by regulators.

But White House officials insist that the president was not talking about all banks. They acknowledge that big banks are doing well but say the president was referring to community banks, generally defined as having less than $10 billion in assets. One official said the administration was developing policies that would specifically help the community banking sector.

“Community banks have suffered needlessly,” the official said. “What was missed in the implementation of Dodd-Frank was it was tailoring the rules to the banks that caused the problem.”

So it is through the community banking context that we will examine the president’s comments.

The Facts

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, was developed in response to banking abuses and regulatory shortcomings exposed by the Great Recession of 2007-2008. It has long been derided by Republican and industry critics as overly complex and burdensome for the financial community — although some experts say that many large institutions have spent a fortune building compliance operations to satisfy the law and so may be reluctant to go back to a less-regulated system.

Community banks play an important role in the U.S. economy, but since the recession, their numbers have been shrinking.

A 2015 study published by Harvard’s Kennedy School of Government, “The State and Fate of Community Banking” by Marshall Lux and Robert Greene, says that community banks in 2014 provided 77 percent of agricultural loans, 46 percent of commercial real estate loans and 51 percent of small-business loans in the United States. But their share of these markets has fallen as a wave of consolidation has swept the industry.

“Since 1994, community banks’ share of the U.S. lending market has fallen by approximately half — from 41 percent to 22 percent — while the top five largest banks’ share has more than doubled — from 17 percent to 41 percent,” the report says. The number of community banks shrank from 10,329 in the second quarter of 1994 to 5,521 banks in the third quarter of 2016, according to FDIC data.

Dodd-Frank did not especially target community banks, however. For instance, a much-disliked provision known as the Durbin amendment, which limits credit-card fees paid by merchants to banks, applies only to banks with more than $10 billion in assets.

“Realistically much of Dodd-Frank doesn’t apply to community banks under $10 billion in assets,” said Stephen M. Klein, a former bank regulator now at the law firm of Miller Nash Graham & Dunn in Seattle. “It was more of the restrictive regulatory environment and attitude that prevailed post recession and the array of bank failures.” He said that the historically low interest rates after the recession savaged banks’ profit margins, with the enhanced regulatory environment “the icing on the cake” for small banks.

Klein said that after the recession, there was a “trickle-down” effect in regulatory oversight that affected community banks. “It was not so much Dodd-Frank as the post-crisis environment,” he said, adding that in recent years he believed that “regulators have backed off.”

White House officials agreed with the assessment that the regulatory environment became tougher for all banks, even those not specifically targeted by Dodd-Frank. “We hear that; we feel that,” one official said. “We think it is real and want to do something about that.”

Paul G. Merski, group executive vice president at the Independent Community Bankers of America (ICBA), a trade group, acknowledged that low interest rates have played a significant role in curtailing small-bank profits, but he said that meant the impact of regulatory oversight was more profound. He noted that new consumer rules have proved to be costly, since they are applied equally to all banks.

An especially burdensome regulation that limits lending is tangentially related to Dodd-Frank, Merski said. A regulation known as U.S. Basel III overhauled U.S. bank capital standards, and a provision in Dodd-Frank known as the Collins amendment prevents regulators from adjusting capital requirements for different-size banks. The ICBA is seeking a repeal of the Collins amendment, arguing that it makes it harder for small banks to attract capital. Moreover, he said, it has forced smaller banks to consolidate, reducing the footprint of small banks in communities.

“Higher capital standards has forced banks to curtail lending,” Merski said.

Still, surveys by the National Federation of Independent Businesses indicate that in 2016, only a small percentage of small business owners — 3 to 4 percent — said that their borrowing needs had not been satisfied, compared with 9 to 11 percent in 2010.

White House officials pointed to FDIC data to make the case that loans to small businesses have fallen in the era of the Dodd-Frank law. The data, which White House officials walked us through, shows that the number of commercial loans under $1 million has fallen 14 percent from 2008 to the third quarter of 2016, compared with an increase of 51 percent for large business loans in the same period.

“There are lots of ways to cut this data,” one official said. “We are confident that what the president said is supported by the data.”

Francesco D’Acunto, a professor at University of Maryland’s R.H. Smith School of Business, has documented how Dodd-Frank has resulted in a shift in mortgage lending from middle-class householders to wealthier households, largely because increased costs in originating loans made larger loans more profitable. But he said there was no comparable data to produce a similar study of the impact of Dodd-Frank on small-business loans.

“It is true that anecdotally, credit unions and small banks seem to complain about the costs of compliance to Dodd-Frank, which increase the costs of originating loans and hence increase credit denial to small businesses. But to my knowledge, there is no data currently available that can let us assess this claim scientifically,” he said. “If I had to assess Trump’s claim, I would say that it seems to reflect the sentiment of small businesses and local banks, but it is not supported or disproved by scientific evidence beyond any doubt.”

White House officials said they have not asked the president for the names of the friends to whom he referred in his remarks.

The Pinocchio Test

Trump said he had friends with “nice businesses” but “the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”

If Trump were just talking about all business loans, his statement would be wrong. Commercial lending is at record highs. The picture is murkier if he were referring only to small businesses, although The Fact Checker was unaware that he knew many small-business owners.

Trump specifically mentioned the “rules and regulations” of Dodd-Frank. The law was not intended to target community banks, and it carved out many exemptions. But regulatory oversight appears to have become tougher, and some rules ended up affecting the bottom line of community banks — which also have suffered in a period of low-interest rates.

Of course, there is no rule that every business loan needs to be granted. There may have been sound business reasons for denying loans that have little to do with Dodd-Frank. But a case could be made that the post-Dodd-Frank regulatory environment made it harder for community banks to make small-business loans.

Given Trump’s imprecise language, we can’t give his claim a Geppetto. But the White House provided sufficient evidence that, in the small-business context, Trump was not wrong, either.

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Not the Whole Story
"Friends of mine [with] nice businesses …can’t borrow money…because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”
remarks at strategy and policy forum, Washington, D.C
Friday, February 3, 2017