Capital Investment Decisions



Capital Investment Decisions

Impact of Changes in Lending Regulatory Environment, Particularly Dodd-Frank Legislation, on Bank's Lending Ability

The recent financial crisis has led many countries towards various changes in their economic and financial systems. Similarly, the lending regulatory environment of developed countries has also faced certain changes, which have impacted the ability of banks to lend money to businesses for capital and acquisition projects. In USA, the lending limits applied to banks traditionally have been tightened by the Dodd-Frank Act, as this act asks for securities and derivatives financing transactions to be incorporated in the calculation (Shearman & Sterling, 2012). Due to this requirement, the national banks' supervisor has applied the change by asking the national banks to be in conformity by the end of 2012. This change has resulted in several outcomes, one of which is that it can impose limitations on banks for lending credit to their consumers in case they are already close enough to the limit under changed requirements. Further, these new limits also applied to foreign banks' branches of United States (Shearman & Sterling, 2012).

The Dodd-Frank Act capital changes have brought USA close to convergence with the global capital standards included in Basel III (ABA, 2012). The Dodd-Frank needs federal regulators to reassess and eradicate references for credit ratings to all regulations, which has great possible impact since existing rules of capital depends hugely on external ratings. Further, regulatory capital is more narrowly defined through explicit standards for Tier 1 common equity capital, which applied to all banks of America. There are chances of increased volatility of regulatory capital measures of banks as the definition of capital bank involves unrealized gains and losses on securities that are available-for-sale (ABA, 2012). Moreover, minimum risk based capital is increased by Basel III that applies to all the banks of America, specifically because Dodd-Frank's section 616 asks that regulators 'seek to' make requirements of capital countercyclical.

According to Senator Bob Corker of Tennessee (2012), the Dodd-Frank Act was a huge overextend that has lead to uncertainty across the economy and threatens to make lending more costly and less accessible for businesses and consumers (FSR, 2012). Similarly, some future threats are also pointed out by Reginald Imamura, PNC Bank (2011) by stating that Dodd-Frank Act can negatively impact on the banks' ability to extend lending and have crucial affect on U.S. economy (FSR, 2012). Thus, these and some other statements have indicated the potential negative impacts that Dodd-Frank Act may have on banks' ability to lend money to businesses for capital and acquisition of projects. Furthermore, the Dodd-Frank Act also impacts directly the small business lending by banks. Where, about 20% of community banks lending can be categorized as small business lending, as compared to 5% of larger banks, and these community banks also plays a significant part in rural regions by using relationship-based lending for serving consumers with limited credit history (GAO, 2012).

Dodd-Frank Legislation and Future Financial Crisis

The financial crisis of 2008 that has severely hit ...