Fear of $10 Billion

Fear of $10 Billion
Donald P. Morgan and Bryan Yang
Liberty Street Economics, OCTOBER 03, 2016





Ten billion has become a big number in banking since the Dodd-Frank Act of 2010. When banks’ assets exceed that threshold, they face considerably heightened supervision and regulation, including exams by the Consumer Financial Protection Bureau, caps on interchange fees, and annual stress tests. There are plenty of anecdotes about banks avoiding the $10 billion threshold or waiting to cross with a big merger, but we’ve seen no systematic evidence of this avoidance behavior. We provide some supporting evidence below and then discuss the implications for size-based bank regulation—where compliance costs ratchet up with size—more generally.

What Changes at $10 Billion?

Quite a lot. First, banks face an entirely new regulator: the Consumer Financial Protection Bureau (CFPB). The agency enforces nineteen consumer protection regulations (such as the Truth in Lending Act) and has rule-writing authority of its own. The CFPB’s examiner manual is 924 pages, which gives some indication of the scale and scope of the exams.

Second, banks above the $10 billion mark face a cap on the interchange fees they charge merchants when shoppers use their debit cards. Imposed by the Fed in 2011, the cap limits debit fees to $0.21 plus 0.05 percent of the transaction value, about half the average fee before. The cap saves merchants and customers (presumably), but costs banks; a study by Fed economists estimated that banks above $10 billion lose about $10 billion a year in aggregate income because of the cap, even allowing for potentially offsetting increases in other fees.

Lastly, banks with assets exceeding $10 billion for four consecutive quarters must conduct annual Dodd-Frank Act stress tests, which involve forecasting revenue, losses, capital, and other key variables under alternative macroeconomic scenarios, including adverse scenarios, provided by their primary supervisor. In addition to shouldering the cost of running the tests, banks have to publicly disclose their stress results.


Fear of $10 Billion

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