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Parsing the Political Debate on Dodd-Frank

Admittedly, if liquidation remains an empty threat, then SIFI designation ensures that large Wall Street banks are indeed TBTF -- something with which even former Federal Reserve Chairman Alan Greenspan is uncomfortable.

2. High-Cost Regulation

The criticism that Dodd-Frank increases costs for small banks by forcing them to meet cumbersome new regulatory standards is dubious. In reality, much of the new regulation imposed by Dodd-Frank is specifically targeted at bank holding companies with more than $50 billion in assets.

For community banks, it is business as usual. Federal Reserve Chairman Ben Bernanke has admitted as much. "I think it is important to emphasize that the vast majority of the provisions of the Dodd-Frank Act do not apply to community banks at all," Bernanke told reporters in September. Moreover, this message was reiterated in a recent Federal Reserve publication.

The long-term impact of Dodd-Frank on the financial system remains unclear, but its intention is to scrutinize large banks more rigorously and to create a credible threat of liquidation rather than, as critics contend, to institutionalize TBTF and to make small banks less competitive.

Regardless, the Dodd-Frank debate does add credence to the notion that even healthy businesses can benefit from access to alternative sources of capital, including equity-based crowdfunding. Financial turmoil and government regulation can have uncertain impacts on the traditional capital markets; funding diversification is, therefore, a prudent strategy for small businesses.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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