Rolling Back with the Dodd-Frank Act: Impacts to Corporate Lending
Mid-Market Lending Insights
The Dodd-Frank Act rollback, which took place in May 2018, was intended to boost M&A deals among lower-tier banks, such as community banks and regional banks. With the ease on regulations, non-SIFI (systemically important financial institution) banks can now scale up without being handicapped by costly regulatory requirements, such as being obliged to undergo stress tests, prepare resolution plans, and meet leverage and liquidity requirements, according to an article put out by White & Case.
Before the rollback, banks with $50 billion or more in AUM was labeled SIFI. Now, with the new threshold raised to $250B or more, the rollback gives the most relief to banks with assets between $50 and $100 billion.
Nine months into the rollback, corporate borrowers are benefiting.
Less documentation for lenders to have to perform means it easier for small to medium sized lenders to expand their loan offerings. Additionally, banks do not have to reserve as much capital for riskier loans resulting in lower pricing, larger investments, and a bigger appetite to lend.
However, not all banks respond to the relaxation in regulations at the same speed because lending institutions are conservative by nature. Certain banks proceed much more slowly than others, and there is no correlation between the size of the bank and speed of adoption of the new rule.
Generally speaking, lenders are hesitant to make immediate changes to bank underwriting policies because it may put banks in a vulnerable position if regulations were to tighten again.
And that hesitancy comes from historical cycles.
In late October, Jason Furman, former chairman of the Council of Economic Advisers, tweeted that “Banking regulation has an automatic bias of getting laxer in booms. Congress and now the Fed is making it even laxer when instead they should be following the Dodd-Frank Act and raising countercyclical capital buffers.”
Former Federal Reserve Chair, Janet Yellen, told Financial Times late last year that post-crisis regulatory regime is unfinished and needs to be strengthened, not diminished: “Among the key vulnerabilities are lending to indebted, less creditworthy corporate borrowers, which Yellen sees as a source of potential systemic risk.
Now, corporate borrowers who are seeking business loans for expansion projects, acquisitions, working capital, are in a tough position. They need to weigh the benefits of going to market now to refinance or wait a few more months to see what happens in the market.
At Cerebro Capital, we have a data-driven platform that tracks banks’ willingness to adopt such changes based on how they are behaving with current opportunities and existing loans.
Specifically, we are able to detect banks’ willingness to take on larger loans and more flexible loan structures, which allow middle market companies to borrow at cheaper costs and in larger quantities.
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