Problems with crisis intervention: When the government wants to restrain big banks but punishes small businesses instead

Abstract

Following the 2008 financial crisis, Congress passed the Dodd-Frank Act (DF) with the intent of reducing systemic risk posed by big banks to the country’s financial system. We empirically show that DF negatively impacted both the numbers and dollar amounts of small business loans issued by small banks. This new finding implies an unintended, counterproductive constraint on American venturing activities, particularly in rural communities. This should be of importance to academics and policymakers alike, considering that entrepreneurial activity is generally regarded as the backbone of the U.S. economy. Without adequate financing to small ventures, the ultimate health of the U.S. economy could be stunted. Our findings offer key insights into the fields of entrepreneurial finance, regulation and economic growth.