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Chapter 25: Problem 5

Following the financial crisis of \(2007-2009\), Congress passed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The act increased regulation of the banking system, and from 2010 to 2016 , regulators approved only five new banks, which was not enough to offset the closure of existing banks. According to the article, "Community bankers say the decline in the number of banks has led to fewer lending options for startups and small businesses." Why might startups and small businesses be more likely to rely on banks for funding than would large corporations?

Short Answer

Expert verified
Small businesses and startups are more likely to rely on banks for funding than large corporations because they lack alternative funding options. They usually don't have the same access to capital markets that larger corporations do, due to their size and limited resources. The decline in the number of banks, due to increased regulations from the Dodd-Frank Act, limits these small entities' lending options and thus impacts their ability to secure necessary funding.

Step by step solution

01

Understanding the Dodd-Frank Act

The Dodd-Frank act was passed following the financial crisis of 2007-2009 with an aim to increase the regulation of the banking system. The increased regulations resulted in the approval of only five new banks from 2010 to 2016.
02

Realizing the impact of fewer banks

The decrease in the number of banks reduces competition in the market. This can lead to fewer lending options available for entities seeking funds. Therefore, businesses, particularly new ones, may find it more difficult to secure funding.
03

Explaining reliance of small businesses and startups on banks

Startups and small businesses typically rely on banks for funding due to a lack of alternative funding options. These businesses might not have access to capital markets in the same way that larger corporations do. Large corporations have more resources and collateral, thus are more likely to secure financing from various sources such as issuing bonds or shares.

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Most popular questions from this chapter

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