When the Dodd-Frank Wall Street Reform and Consumer
Protection Act, commonly referred to as Dodd-Frank, was signed into law by
former President Barack Obama in 2010, many in the diamond industry worried how
it might affect them in the U.S. While most of the Act directly impacted big
banks and Wall St. firms, there were concerns,
particularly from the midstream, that the multitude of new regulations would
hurt their access to credit as lenders were pressured to limit their exposure
to risk.
President Donald Trump has since taken office and has
promised to gut the Dodd-Frank Act based on these very claims. “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,” Trump said
in February 2017 at a meeting with leading corporate CEOs, reported various
news sources. “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,” he added.
However, experts seem to think that the Dodd-Frank
contributes only a small part to the inability of small businesses — of which
many in the diamond midstream are — to obtain loans. Other macroeconomic and
systemic issues in the industry were more likely to have caused the lack of
credit. “There is evidence that small businesses have had problems accessing
credit post the Great Recession,” says Aaron Klein, fellow in Economic Studies
at Brookings Institute, research and policy organization in Washington D.C. “As
to Dodd-Frank’s role in this, that's more rhetoric than reality. What specifically
has reduced access to credit for small businesses? When I ask that question, I
tend to either get a mix of 'I don't know,' 'Everything' or something that
isn't in the law,” he adds. A repeal, which experts think is unlikely to happen, might ease access to loans but ultimately
the pressing problems plaguing the diamond industry need to be solved to
improve the lending situation.
Contrary to President Trump’s claims about the lack of
credit, lending for small businesses in general seems to have risen in the time
of Dodd-Frank. However, access to credit does not seem
equal across all industries. Klein acknowledges that some businesses do have
difficulty getting loans. “The reality is we had the biggest economic recession
of our lifetime. Banks lent way too much money to risky mortgages and assets,”
he says. “Coming out of the recession, access to capital, particularly
traditional sources of capital for small businesses such as home equity and
savings, had taken huge hits and in many cases been wiped out. Those factors
have far more to do with the problem of a lack of access to capital for new businesses
than anything in Dodd-Frank.”
According to the De Beers Diamond Insight report 2016,
the diamond midstream has faced tighter lending standards and less availability
that have placed “additional pressures particularly on midstream players with
outdated and unprofitable business models.” These stricter standards come amid
a host of new compliance pressures from banks, regulators and rough diamond
suppliers to adopt international standards of financial transparency.
“For lenders to increase their willingness to provide
capital, at least one of two outcomes will be required: higher returns or lower
risk.” Kieron Hodgson, commodity and mining analyst at Panmure Gordon &
Co., said in the De Beers Diamond Insight Report. Klein believes that
macroeconomic conditions have to improve for the capital situation to turn
around. “A stronger economy would also help all businesses, as would a
reduction in income inequality,” he says.
Another aspect that Dodd-Frank could affect in the
jewelry industry is Section 1502 on conflict minerals. The section requires
disclosure if a company uses “conflict minerals” — defined as tin, tantalum,
tungsten and gold — which can be traced back to the Democratic Republic of
Congo (DRC), related to the U.S. efforts to stem civil violence in DRC and the
region.
Walter Olson, senior fellow at Libertarian think tank in
Washington D.C. Cato Institute’s Center for Constitutional Studies, agrees that
while a Dodd-Frank repeal is unlikely, he believes that Section 1502 has not
been effective for its intended purposes. “Unemployment in the mines do not
necessarily undermine warlords,” he says, citing news reports from The
Washington Post and other publications and documentaries that show that many
mines in Congo aren’t controlled by warlords, even though human rights abuses
do occur at these mines. “Banning ‘conflict minerals’ from Congo is purely
ritual,” Olson comments. “Section 1502 has no business being wrapped into a
Securities Exchange Commission (SEC) financial bill and this was done without
thinking things through. If the government had really wanted to make a
difference, they should focus on human rights abuses at the mines rather than
the minerals, which is a byproduct of the issue.”
A repeal could also be costly for companies that have
already spent resources on strategic thinking and management practices to be
Dodd-Frank compliant, says Tiffany Stevens, president and CEO of the Jewelers
Vigilance Committee (JVC). “People have built up these systems and to dismantle
these infrastructure would be additional costs,” she points out. Stevens feels
that banks see these regulations as steps toward transparency for the diamond
and jewelry industry, which can only be a good thing toward reducing the
industry’s risk profile. “Young consumers these days are interested in where
the diamonds and gold in their jewelry are coming from, so it’s in the best
interest of companies to be a compliant as possible.” Like other experts,
Stevens doesn’t think it’s likely Dodd-Frank will be rocked much. “We have a
very rich and complex regulatory landscape. Everyone’s out to lower their risk
and increase their bottom line. At JVC, we haven’t felt any major changes but
we’re ready to take them on when it comes,” she concludes.
Article from the Rapaport Magazine - July 2017. To subscribe click here.