There is no Dodd-Frank loan drought: James Saft

(Reuters) - Evidence that Dodd-Frank Act regulation is making lending conditions tighter is thin on the ground, at least for the vast majority of the U.S. economy.

President Donald Trump on Friday kicked off what he said would be a major restructuring of the post-crisis legislation governing everything from banks to capital markets to consumer financial protection, justifying the effort by arguing that Dodd-Frank made loans too hard to get.

“We expect to be cutting a lot out of Dodd-Frank because, frankly, I have so many people, friends of mine, who have nice businesses who can’t borrow money. They just can’t get any money because the banks just won’t let them borrow, because of the rules and regulations in Dodd-Frank,” Trump said Friday while meeting with corporate executives.

Former Goldman Sachs President Gary Cohn, now serving as director of the National Economic Council, stood behind Trump as he signed the executive order and later reinforced the loan argument.

“Today banks do not lend money to companies. Banks are forced to hoard money because they’re forced to hoard capital and they can’t take any risk. We need to get banks back in the lending business. That’s our number one objective,” Cohn said later on Friday.

Banks, of course, are lending money to companies, as a quick look at the statistics bears out; commercial and industrial (C&I) loans are now higher as a percentage of economic output than they’ve been since the 1980s, when the capital markets were far smaller and the economy more reliant on direct finance via banks.

Credit card and auto lending is at or near record highs and mortgage loans outstanding are in shouting distance of their pre-crisis high.

The Trump administration view also doesn’t accord with the closely watched Federal Reserve Survey of Senior Loan Officers. Banks spent most of the time since Dodd-Frank became law loosening rather than tightening standards for C&I loans to large and middle market firms. The same is true for C&I loans to small firms.

Terms on lending for commercial real estate have been getting steadily tighter, according to the Fed, which perhaps explains Trump, a developer himself, hearing about this from his friends. That tightening may be a good thing, as regulators have expressed concern over the past two years about commercial real estate as a potential source of stress.


Another outright canard is any assertion that Dodd-Frank, which was intended to address the perils of too-big-to-fail banks, has clamped down on them so tightly as to impair their ability to intermediate capital.

Lending in constant dollar terms at Citigroup was up 6 percent in 2016, a year when the overall U.S. economy only grew 1.6 percent. C&I loans growth was similarly robust at JP Morgan ChaseN>, though overall loan portfolio growth was slowed by its decision to allow its student loan portfolio to dwindle.

A look at the bank loan market also shows credit is ample, and, relatively speaking, cheap.

The average yield for issuers issuing today in the leveraged loan market, for three-year money, on first-lien institutional term loans is 4.5 percent so far in 2017, more than two whole percentage points lower than a year ago, according to data from Thomson Reuters LPC. This level has not been seen since 2004. And it isn’t just buy-out or M&A loans which are being made; lending for working capital last year was higher than in any year since 2007, according to Thomson Reuters LPC.

There is evidence that Dodd-Frank regulatory constraints may be limiting leveraged buy-out loans, but this is in part a function of high equity prices which themselves drive higher leverage to make the deals possible. It is, again, far from clear from a market or banking safety point of view that these constraints are a bad thing.

Relatedly, the volume of the riskiest loans, those with an all-in spread of 500 basis points or more above LIBOR, collapsed last year, to just $20 billion from $106 billion in 2015, according to data from S&P Global Market Intelligence.

The stated purpose of loosening lending also doesn’t accord well with House Republican preferences for tax reform, or the Trump pre-election proposals, which detailed plans to eliminate debt service cost tax deductions, in what would be a massive change.

Why worry about loan availability if you are about to make lending much, much less attractive?

If Trump does both, loosening Dodd-Frank but getting rid of the write-off for borrowing costs, banks will find loan demand sinks like a stone, while equity issuance increases.

None of this is to say that Dodd-Frank works on its own stated terms. Nor do we know what Trump and his cohorts will propose or carry out.

Company credit availability is not the problem, and solving non-existent problems has a way of creating new and worse ones.

Editing by James Dalgleish