Small business owners occupied with holiday sales and closing out their 2013 books likely missed the December news about the approval of the Volcker Rule. Banking regulations are pretty dry, after all, and there’s no bright line connecting this one to the concerns of the average nail salon or Internet retailer.
But even though it didn’t make big news in entrepreneurial circles, this rule could have an outsize impact on small businesses. That’s because it may prod banks back into the traditional lending arena that many of them largely abandoned more than a decade ago. And if more small business owners can get relatively low-interest bank loans—rather than relying on the high-cost alternative lenders that have sprung up to meet demand—that could free up capital that would allow them to hire and expand their companies.
“One of the consequences [of the Volcker Rule] that has been recognized is that larger banks may start to take the small business loan market seriously, which they have not for 10 years,” says Frank A. Mayer III, an attorney at Pepper Hamilton who specializes in financial institutions and banking regulations.
Let’s start with some simplified background: The Volcker Rule (named for the former Federal Reserve Chairman Paul Volcker, who dreamed it up) prohibits banks from making the kinds of risky bets with depositors’ money that led to the financial crash in 2008 and subsequent bank bailouts. The idea is that if banks are considered too big to fail, and therefore get de facto government backstops, their activities shouldn’t put them at risk of failing in the first place.
What’s this got to do with small business? Many large banks retreated from small business lending more than a decade ago, after a Depression-era prohibition on more lucrative trading activity was repealed. The Volcker Rule was passed in 2010 as part of the Dodd-Frank financial legislation but wasn’t finalized until December. The new regulation sets a deadline of July 2015 for banks to shut down their proprietary trading operations.
With trading off the table, some experts suggest, lenders may warm up to small businesses as the banks look for new ways to bring in revenue. “The bigger banks [that] have been absent [from small business lending] will be forced to start doing traditional banking again,” Rohit Arora, co-founder and chief executive of Biz2Credit, an online credit marketplace that facilitates small business lending. “There’s been a big gap in the market … and that absence has created a lot of problems.”
One of those problems, some experts say, is the growth of alternative lenders. Mark Pinsky, president and CEO of Opportunity Finance Network, an organization of more than 170 U.S. community lenders, worries about small businesses being courted by aggressive online lenders that charge high interest rates and operate largely without regulation. “Some of these guys are payday lenders for businesses,” Pinsky says. “There is a place for [alternative lending] but it should be as little a place as possible. You shouldn’t need it for everything, because you’re giving up control over your assets and putting your company at significant risk.”
Not everyone is optimistic that the Volcker Rule will improve small business lending. In fact, some worry that it could hurt by imposing compliance burdens and taking market share away from regional and community banks that do much of the traditional lending to small business now. Trade groups that represent those small lenders are already pushing back against the compliance burden and have won some concessions. “Anything that negatively impacts community banks is bad for small business lending,” says Bob Coleman, editor of the Coleman Report, an online newsletter focused on the small business banking sector.
Pinsky is also a skeptic. “It is possible that [the Volcker Rule] will push some banks to do more business lending, but they’re not going to do small business lending. They’ll use the same algorithms that they always use, which leads to larger deals with larger businesses,” he says. “Small businesses are going to have to continue to weather some tough times.”