Could the Volcker Rule incentivize more small business loans?

New Risk Management Rules

Recently, this blog featured a post about the Volcker Rule and some of the lessons it has to teach about risk. Since the rule was approved along with the bulk of the financial regulations featured in the Dodd-Frank Act, some in the financial services industry have worried that the reform efforts will go to far and stifle growth.

However, a recent article on Bloomberg Businessweek suggests that the opposite may be the case. Contributor Karen Klein argues that the new risk management rules could actually benefit small business owners, by giving banks an additional incentive to offer more traditional business loans—and at lower rates.

Here’s how it could work: For decades, large banks have paid little attention to the small business lending market, preferring to reap larger returns elsewhere. However, the Volcker Rule limits banks’ ability to engage in many other activities, which are seen as being more risky, operating under the assumption that they increase the risk of a bank failing and requiring a taxpayer-funded bailout.

As a result, banks that are looking for new investments may see the small business market in a new light.

“One of the consequences [of the Volcker Rule] that has been recognized is that larger banks may start to take the small business loan market seriously, which they have not for 10 years,” Frank A. Mayer III, an attorney who specializes in financial institutions and banking regulations, told the news source.

Banks still need to be cautions about the market, and use credit risk software to ensure that they are lending to borrowers who have the ability to repay. Still, this market is ripe with opportunity, and many small businesses may benefit from greater access to capital, allowing them to invest and grow.

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