By Hugh Carney
ABA Viewpoint
Inflation, a persistent rise in the general price level of goods and services, affects nearly every aspect of the economy. While it is often discussed in the context of what Americans pay for things like eggs and milk as well as the Fed’s monetary policy decisions, its impact on banking regulations warrants closer attention as well. Various banking rules — including asset thresholds, transaction caps, FDIC insurance coverage limits, and other standards — are often established without mechanisms to account for inflation. While asset thresholds are a poor measure of risk, static thresholds are even worse and can have significant consequences, not only for banks but for their customers.
In a 2021 report, the Congressional Research Service identified that few regulatory thresholds are regularly adjusted for inflation. For example, banks under an inflation-adjusted asset threshold are exempt from reporting requirements under the Home Mortgage Disclosure Act, and banks below certain inflation-adjusted thresholds are classified as small banks and intermediate small banks, making them eligible for tailored evaluation frameworks under the Community Reinvestment Act. However, the report notes that many thresholds are not indexed, and as a result, “fixed thresholds are continually declining over time in terms of real asset value or institution size relative to the economy or the financial industry.”
Federal Reserve Governor Miki Bowman has also recently expressed support for reviewing supervisory thresholds, stating “it is apparent that over time economic growth and inflation will result in thresholds that are inappropriately low.”
The result can be banks with relatively limited business models becoming subject to regulations that were not intended for them. In a 2019 comment letter, ABA wrote: “thresholds are static and will, over time, improperly tag banking organizations whose risk profile may not warrant additional regulation, or reflect adjustments in the risk profiles of the banking organizations unnecessarily subject to additional regulation.” Similar unintended consequences result under other regulations that require reporting and other compliance efforts.
The case for indexing
A closer look at regulatory thresholds highlights the issue. On the community bank side, FDIC regulations impose new audit requirements once a bank surpasses the $500 million asset threshold. Assuming the industry’s 20-year average asset growth rate of five percent, 52 banks are expected to cross this threshold this year, and 292 banks will do so within five years.
This $500 million threshold was set in 1991. Had it been indexed to inflation, it would now exceed $1.14 billion — more than double its original value. Under an indexed threshold, far fewer banks would be at immediate risk of crossing it. Of the approximately 1,649 banks that have exceeded the $500 million mark since 1991, only 749 would have done so under an indexed standard.
For larger banks, the $100 billion threshold carries significant consequences, triggering heightened capital, liquidity and resolution requirements. These regulatory burdens are so substantial that banks actively manage their asset size to remain below the threshold. Rather than encouraging organic asset growth, this threshold forces some banks to merge to reach sufficient assets above the threshold over which to spread the added costs. Indexing this threshold would mitigate the effects that have artificially constrained the growth of midsize and small regional banks and distorted the M&A marketplace.
These arbitrary thresholds have not only affected individual banks but have also shaped the industry by segmenting it with artificial barriers. There are nine bank holding companies with assets between $70 billion and $85 billion, but none between $85 billion and $110 billion. Adjusting for inflation, the $100 billion threshold established in Dodd-Frank in July 2010 is equivalent to approximately $145 billion today. Indexing would provide significantly more room for organic growth for midsize and small regional banks.
Bank customers would also benefit from indexing. Removing unnecessary regulatory burdens would allow banks to pass cost savings along to customers. Additionally, certain consumer protections, such as FDIC insurance, could be indexed directly. The current $250,000 deposit insurance limit was set in August 2008. Had it been indexed for inflation, the insured amount would now be approximately $362,000, offering significantly greater protection for depositors.
Maintaining regulatory relevance over time
Inflation, even when well controlled, is a persistent economic force that cannot be ignored in the regulatory landscape. When inflation spikes for whatever reason, the impact on bank regulations can be faster and more dramatic. By indexing thresholds to economic indicators, regulators can maintain fairness, reduce unnecessary burdens and ensure that supervisory frameworks remain aligned with the intended risk profiles of institutions and other policy objectives. Adjusting for inflation is not just a technical fix — it is a necessary step to sustain the relevance and effectiveness of banking regulations in an ever-evolving financial ecosystem.
Moreover, indexing thresholds will encourage growth (and health) within the community bank sector. Community banks serve their communities best when they remain ready and able to meet their needs over time, but they often must manage to avoid crossing particular asset thresholds to avoid increases in fixed compliance costs and regulatory burdens. Indexing thresholds will preserve supervisory and other policy objectives without impairing community banks’ effectiveness.
Notably, civil money penalties imposed by banking regulators are indexed for inflation. Under the Federal Civil Penalties Inflation Adjustment Act, the banking agencies adjust penalty amounts annually to ensure they do not lose their intended impact over time. If penalties are indexed to maintain their relevance, regulatory thresholds and other dollar amounts referenced in regulation should also be indexed to prevent outdated standards from distorting compliance burdens and economic effects.
Asset thresholds are generally a bad idea, since they often fail to account for the diversity of bank business models. But with many asset thresholds seemingly here to stay, their negative effects are only amplified when they are left static in an inflationary environment. As part of its war against inflation, Congress should index legislatively mandated thresholds and direct President Trump’s banking regulators to index regulatory thresholds. This would be a win for banks, their customers and the communities they serve.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
