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Parsing the Political Debate on Dodd-Frank

By Rory Eakin

NEW YORK ( TheStreet) -- Dodd-Frank has been touted as the most sweeping financial regulatory reform since the Great Depression. But its impact on small business lending should be negligible.

The Dodd-Frank Wall Street Reform and Consumer Protection Act began as an 848-page document, and the rules and regulations stemming from the initial framework now fill nearly 9,000 pages.

Therefore, it shouldn't be surprising that Dodd-Frank has generated a firestorm of controversy (with plenty of fodder for politicians in both parties) and provided lively discussion during the recent presidential debates. Most relevant to our business at CircleUp , much of the controversy has centered on Dodd-Frank's impact on small banks and the small businesses to which they lend.

The criticism is typically two-fold: Dodd-Frank (1) provides an implicit taxpayer-funded subsidy to large banks by endorsing "too big to fail" (TBTF) institutions and (2) overburdens small community banks with costly regulations.

If small businesses were to experience tighter access to credit as a result of this legislation, this would be a boon for crowdfunding platforms such as CircleUp. Facing higher interest rates from their customary lenders, small businesses might turn to crowdfunding investors rather than to community banks for growth capital.

The reality, however, is that Dodd-Frank's impact on small banks and hence small businesses should be negligible. Here's why:


The lynchpin in the debate over Dodd-Frank's apparent endorsement of TBTF is the infrequently-discussed Orderly Liquidation Authority, or OLA. Dodd-Frank gives the federal government so-called "resolution authority," which empowers the government to unwind failing financial institutions -- including those that have been labeled "systemically important financial institutions" (SIFIs) -- without resorting to ad-hoc taxpayer bailouts.

Let's just hope that the world's brightest financiers, lawyers and politicians can give the OLA some teeth by establishing a systematic way to unwind an institution the size of, say, Citigroup (C), which has total assets of nearly $2,000,000,000,000 (yes, 12 zeroes). Higher capital standards, more aggressive regulatory oversight and a credible way to be liquidated are by no means a favor to Wall Street banks.
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