Small Business Lending

Banking Deregulation's Effects on Entrepreneurship

Written by Nidhi Ann Raj for Gaebler Ventures

Banking deregulation in the US has helped the entry of start ups to a large extent. Banks are now more than eager to provide loans and other forms of capital to encourage entrepreneurial activity.

Deregulation in the banking sector in United States has affected the prospects for budding entrepreneurs in a very positive manner.

Following the state level deregulation on banks, the US economy has witnessed a pronounced growth especially in the entrepreneurship arena.

Research shows that deregulation brought along 6.1 % increase in the rate of entrepreneurial activity. It further emphasises that the increase of new start-ups were higher relative to expansion facilities backed up by existing firms.

Let us take a peek into how and why this happened. In the 1970s, there were so many constraints on lending and deposit taking, interest rate ceilings, interstate branching etc. In the 1980s, while the whole country was slowly recovering from a drastic economic fall, and the banking sector was in chaos, the government decided to lift these restrictions to allow the free flow of cash.

This speeded up the recovery phase and the US banking sector became more systematic and competitive. Interest rates on loans were lowered, thus encouraging borrowing. By allowing banks to integrate nationwide, small local companies became less sensitive to the assets of their local banks. Hence macro stability also approved.

New ventures rely heavily on bank debts to finance their operations. Deregulation reduced financial constraints on borrowing loans and interest rates, benefiting these start ups to a large extent. It also reduced concentrated entrepreneurship wherein new facilities that were started by well established firms thrived better due to better financing.

This created a democratic situation for the entry of all new ideas and firms survived or failed to last based on their efficiency. The real estate industry, in particular, witnessed a huge number of entrants. As the interest rates were low, the industry as such was in a boom.

This provided a raised platform for entrepreneurs to start their own ventures. Banks with market power are in turn, more than enthusiastic to fund fresh ideas, in pursuit of profit maximization.

They feel new entrants have the potential to increase profit sharing opportunities for banks. Hence, they tend and maintain a long term relationship with budding and successful entrepreneurs.

To ensure a vibrant economic environment, all banking regulations should be reviewed time and again and the ones that are not necessary and that hinder growth should be eliminated.

Nidhi Ann Raj is a gifted writer who is currently pursuing post-graduate studies at George Brown College in Toronto Canada, where she is specializing in Marketing and Finance.

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