Further Tightening of Credit Expected

The Federal Reserve is home to the new, independent Consumer Financial Protection Bureau, which has the authority to create and enforce new rules on thousands of businesses. Photo: Ian Wagreich

Rather than streamline and modernize the U.S. financial system, the sweeping 2,300-page financial regulatory reform law adds layers of federal bureaucracy, creating new agencies and new powers for the very authorities that failed to prevent the financial crisis and siphoning off much-needed access to credit for small businesses.

“Such a broad, sweeping bill epitomizes a law with unintended consequences that creates more uncertainty for American businesses,” says U.S. Chamber President and CEO Tom Donohue. “For years, the Chamber has called for reform that modernizes our financial system. But this law is like adding new paint on an old car—it’s still not going to run at the pace and with the agility that is currently demanded.”

A Chamber review of the law discovered that it calls for 520 regulatory rulemakings, 81 studies, and 93 reports. By contrast, the Sarbanes-Oxley corporate governance legislation passed in 2002 required only 16 rulemakings and 6 studies.

There are a number of particularly troublesome provisions of the law that will adversely impact all companies—large and small, financial and nonfinancial.

Consumer Financial Protection Bureau. This newly created independent bureau within the Federal Reserve will have the power to create and enforce new rules on thousands of businesses—from banks to advertisers to retailers. Its nearly half a billion dollar annual budget is not subject to congressional oversight.

Due in large part to the Chamber’s lobbying efforts, Congress agreed to exempt auto dealers, lawyers, accountants, small banks and credit unions, and small businesses from the purview of the Consumer Financial Protection Bureau. Nevertheless, additional layers of regulations on banks and mortgage lenders will have a trickle-down effect. Financial institutions will make less credit available to small businesses and consumers and pass on the cost of additional red tape in the form of increased fees on various financial products. Free checking could disappear. ATM fees could go up.

Bank Restrictions. Banks will face burdensome restrictions on proprietary trading, ownership of hedge funds, and the operation of private equity firms. By not being able to engage in market-making activities, the financial sector will become less efficient, resulting in less capital being deployed for small and large businesses. Angel investing for small startups could be particularly impacted.

Too Big to Fail. Though the Chamber successfully lobbied against inclusion of a $150 billion bailout fund,
the Dodd-Frank bill still has provisions that keep too big to fail policies alive and increase moral hazard throughout the system. The law empowers the government to designate some firms as systemically risky and to arbitrarily break up firms. Some companies will become “safer bets” than others and receive funding and other advantages because of an implicit government guarantee, the Chamber argues, while others could be subject to crony capitalism and face the potential of a government breakup.

Derivatives. Many businesses purchase derivatives to hedge the risks—fluctuating prices for raw materials, interest rates on loans, and currency exchange rates—associated with their daily operations. Due to new, tighter regulations, these corporate end users of derivatives will likely face significantly higher costs for these transactions, diverting resources that would otherwise be used to grow the business, invest, and create jobs.

Corporate Governance. The SEC has new authority to allow activist shareholders to directly nominate and vote for board directors at the company’s expense. In addition, the law mandates several other governance “reforms” that are designed to enhance the power of activist investors and advance messaging points on behalf of unions. These provisions promote the same type of short-term management that contributed to the financial crisis. The Chamber, however, successfully fought for exemptions from many of these requirements for small businesses.

The Battle Ahead

Congress left much of the law to be interpreted by agencies tasked with devising implementing regulations. As such, the Chamber intends to continue its lobbying efforts to improve the flawed legislation. “The voices of America’s job creators are ringing loud and clear—enough is enough,” Donohue says. “Going forward, we will use all available options to correct the flaws in this bill, eliminate business uncertainty, and put Americans back to work.”