By Tyler Mondres and Hugh Carney
ABA Viewpoint
In a previous Viewpoint on the Trump administration’s approach to inflation, we explored the overlooked issue of indexing regulatory thresholds — that is, how policymakers should adjust financial rules and standards in response to economic growth and inflation. Failing to do so can erode the original intent of thresholds, creating unintended regulatory burden.
Indexing plays a crucial role in maintaining regulatory relevance, reducing unintended constraints on market participants and the public, and ensuring that rules remain appropriately calibrated as the economy grows. While regulators have recognized the importance of revisiting asset triggers (such as for the 18-month exam cycle; see Figure 1), few regulations hardwire in regular adjustments. Those that do typically reference the Consumer Price Index.
This second article in this three-part series explores the strengths of indexing regulatory thresholds to the aggregate size of the banking sector — which would align with the dynamics of the industry more closely than CPI. This was especially clear in 2020 when bank assets surged from pandemic-driven deposits, with annual asset growth peaking two years before inflation, as measured by CPI.
The case for indexing
Asset-size triggers for enhanced (or CFPB) supervision, capital and liquidity requirements, reporting obligations, and monetary thresholds such as deposit insurance protections are often set in fixed nominal terms. When thresholds are set, they reflect the economic landscape and industry composition of that moment. Without adjustments, their real impact shifts over time due to inflation and economic growth.
For banks, this results in regulatory creep, where the heightened standards intended for larger institutions are imposed on their smaller counterparts due to economic expansion. As the banking sector has grown, institutions that would have been considered regional or midsize at the time of implementation are now subject to regulatory frameworks designed for the largest banks.
For bank customers, a lack of inflation adjustment means a gradual erosion of protections like deposit insurance and potentially more expensive credit and other services.
Static thresholds have consequences for regulators as well. Expanding the pool of covered banks beyond the originally intended scope dilutes regulatory efforts, reducing their ability to focus on the largest sources of risk.
Which indexing approach is best?
In existing laws and regulations, inflation adjustments most commonly reference CPI. This approach is effective for monetary thresholds, and would be appropriate for suspicious activity reports, currency transaction reports, or deposit insurance (see figure 2). CPI-based indexing would ensure that these thresholds remain consistent in real dollar terms and maintain purchasing power consistency. However, CPI is not the best method for adjusting asset triggers. While preferable to static thresholds, CPI adjustments focus solely on general price levels without accounting for banking-sector-specific growth patterns.
An alternative approach could be to reference economic growth as measured by gross domestic product. Financial activity often scales with economic expansion, so tying thresholds to GDP could ensure triggers remain proportionate to the size of the broader economy (see figure 3). This approach has two key weaknesses, however. Like CPI, overall economic growth can misalign with banking sector realities. GDP-based adjustments to monetary thresholds could also backfire in the event of stagflation, eroding the real value of deposit insurance protections as well as hindering banks’ ability to stimulate economic activity.
For regulatory thresholds, a more targeted approach would be to adjust asset triggers based on the aggregate size of the banking sector. This would reflect industry dynamics more accurately than CPI or GDP and prevent shifts in the sector’s composition from effectively lowering the limbo bar for regulatory scrutiny.
In 2005, for example, the FDIC set the asset threshold for enhanced audit reporting requirements at $1 billion. At the time, only 7% of banks were covered by this rule. By the end of 2024, nearly a quarter of the industry was subject to these enhanced requirements. If that threshold had been indexed for the size of the industry, only 10% of banks would meet the asset criteria today. This would more closely align with the intended segment of the industry when the threshold was set.
Policy considerations
Each approach to indexing has trade-offs. Both CPI and GDP-based adjustments are simple and reflect price level changes or economic growth, respectively. However, they do not account for industry-specific trends. Adjustments tied to changes within the banking sector ensure appropriate thresholds within the industry but fail to capture (and may even encourage) the growth of less regulated nonbanks in financial services.
While there is room for debate over the optimal indexing reference, the worst approach is no adjustment at all — continuing to use static regulatory requirements that create regulatory drift and unintended expansions of oversight and regulation. The table below highlights how regulatory drift has occurred at thresholds across the bank size spectrum and how indexing could help reverse these unintended consequences. Periodic reviews and adjustments to threshold levels should be built into the rulemaking process.
The third and final article in this series will explore how policymakers could best implement regular indexing.
Tyler Mondres is senior director for prudential regulation at ABA. Hugh Carney is EVP for financial institutions policy and regulatory affairs at ABA.
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.
