Keep the Bankers “Dancing in the Street”
Keep the Bankers “Dancing in the Street”
And let small business owners dance on Main Street, too.
(Bankers celebrate deregulation. | SOURCE: Adobe Firefly)
Banks were off to an ebullient start in 2025 after profits more than doubled at Goldman Sachs, Morgan Stanley, and Bank of America, with impressive performance at other players. That adds to the post-election euphoria which, in the words of JPMorgan Chase CEO Jamie Dimon, saw bankers “dancing in the street” at the prospect of a lighter regulatory touch under a second Trump administration.
The ball is now in Mr. Trump’s court to maintain momentum by meeting their expectations, a path made easier with the voluntary exit of Michael Barr as the Federal Reserve’s Vice Chair for Supervision. Hopefully, Mr. Trump can begin to turn the page after an era of questionable regulation that limited both banks and the broader U.S. economy.
Following the global financial crisis, traditional deposit-taking banks saw their lending ability trammeled as regulators increased capital requirements. In their wake, America’s “shadow banking” industry of non-bank financial institutions — which helped precipitate the crisis by packaging mortgage-backed securities — posted strong growth.
Before the crisis, banks’ assets, including loans, grew annually by an average of 2.4 percentage points more than assets of non-bank financial institutions (NBFIs), according to data from the Financial Stability Board. Afterward, they grew by 1.1 percentage points less.
Even with riskier activity pushed off their balance sheets, banks have increasingly helped fund NBFIs. Since the financial crisis, their lending to NBFIs grew by 256 percent, compared to 87 percent for loans overall.
Banks are, therefore, still exposed to the risky activities of the shadow banking sector. The new regulation, far from creating a more transparent financial system, made finance even more opaque.
As a result, finance has also become less geared toward America’s small businesses — Main Street.
Financial solutions beyond loans from deposit-taking banks are typically less accessible to small businesses. Even private credit, which has grown exponentially in recent years, is meant for medium-sized companies.
With credit supply constrained by higher capital requirements and other financing options largely inaccessible, small business loans posted lackluster growth during the post-crisis expansion.
Bank loans to partnerships and proprietorships, primarily small businesses, grew annually by 3.6 percent, on average, during the post-crisis expansion, while loans to corporations grew by an average of 5.3 percent. The comparable rates from the pre-crisis expansion are 9.5 and 4.8 percent, respectively.
Lending to small businesses is difficult regardless of regulation; they have little credit history, tend to be younger, and are likelier to fail than larger companies. Forced to devote resources to compliance, banks had to cut their losses and limit lending to some of their riskiest clients.
That, in turn, constrained the potential for small businesses to grow, one of the historical dynamos of broader economic prosperity. Even with restrained banks, small businesses accounted for 64 percent of jobs created after the financial crisis and 71 percent of jobs created since the pandemic-induced recession of 2020.
Banks and small businesses got the short end of the stick from the post-crisis regulatory environment. By loosening regulations and even reducing capital requirements, Mr. Trump and Republicans can bolster the role of traditional banks in funding American commerce. Doing so will ensure that more of finance remains open and provide a welcome boost to the growth opportunities of America’s smallest firms.
