John Allison on how Dodd-Frank is smothering small business lending

We have heard several prominent business leaders — such as Home Depot co-founder Bernie Marcus and Subway founder Fred Deluca — state that they could not have started their amazingly successful businesses if they had to do it in today’s regulatory environment. This is alarming, and it is important to get a concrete sense of how regulations are killing the potential Home Depots and Subways of tomorrow.

To learn more about one significant regulation in this respect, I asked John Allison — the president of the Cato Institute and the former CEO of BB&T bank — about the Dodd-Frank Act of 2010, the 2,000+ page bill of sweeping financial regulations. He was kind enough to take a few minutes of his time, at the recent annual meeting of the Academy of Management, to talk to me about one of the ways in which the Dodd-Frank Act is smothering entrepreneurial activity in America:

Dodd-Frank and the related regulatory reaction have caused a tightening of lending standards for small businesses. This is because Dodd-Frank and the regulators’ interpretation of it mean that bank loans are based totally on mathematical formulas.

Small business lending is part science and a lot of art. If banks cannot practice the art, the only thing banks can do is tighten their lending standards. Lending standards for small businesses are the tightest that they have ever been in my 40-year career.

… There are thousands and thousands of promising businesses that simply could not get a bank loan today that could have gotten one ten years ago.

Mr. Allison is drawing from decades of experience in commercial banking, nearly half of which he spent as a CEO. As CEO, he successfully grew BB&T from $4.5 billion to $152 billion in assets. We should take what he says seriously.

How many great businesses may never be started because they cannot get the initial credit that a bank would otherwise be free to lend them were it not for the Dodd-Frank Act?