By Tyler Mondres and Hugh Carney
ABA Viewpoint
In two previous ABA Viewpoints, we highlighted the importance of indexing asset thresholds to ensure long-term regulatory relevance and suggested the aggregate size of the banking sector as a candidate for making those adjustments. In this third article, we examine how policymakers can simplify, right-size and maintain these thresholds over time.
Tyler Mondres is senior director, prudential regulation at ABA. Hugh Carney is EVP for financial institution policy and regulatory affairs at ABA.
To improve consistency and reduce complexity, policymakers should reduce and align the total number of asset thresholds. All asset thresholds should be reviewed and updated based on a common, reasonable reference period. Finally, a process for periodically and uniformly adjusting asset thresholds, indexed to industry growth, should be established.
Simplifying and adjusting for past growth
Today’s asset thresholds are an overly complex patchwork, cobbled together over decades of legislation and rulemaking, that would benefit from simplification. Inflation-adjusting each provision based on its respective implementation date would be a straightforward approach but would produce further fragmentation. Instead, policymakers have an opportunity to establish a more streamlined regulatory framework with fewer asset thresholds and built-in escalators that make uniform adjustments across the supervisory landscape as the economy grows
Developing a more cohesive framework requires identifying common, historically grounded reference points. A logical place to begin is the Dodd-Frank Act, which established the $10 billion and $50 billion thresholds and myriad requirements. However, many asset thresholds were established or revised before or after 2010, so additional reference points need to be identified.
In the table below, we propose reasonable reference provisions across existing asset thresholds that could be used to adjust for past growth. After indexing for industry growth, we propose one-time adjustment of at least the values in the last column to provide smoother reference points where calculated values become uneven. This list is not intended to be exhaustive of all thresholds. Rather, it illustrates how policymakers could simplify and right-size the regulatory framework.
We limit ourselves to rules or regulations with effective dates within the last twenty years. For example, the $500 million corporate governance threshold was established in 1996. However, we propose referencing the Federal Reserve Board’s 2005 capital adequacy guidelines to adjust all $500 million asset thresholds. Given our recommendation to base future adjustments on aggregate industry size, we also consider the original thresholds established for provisions currently indexed to the Consumer Price Index.
As we explained in our previous Viewpoint, indexing thresholds would make it easier for banks to meet the needs of their communities over time by facilitating healthy asset growth. While further consideration is needed to determine whether these adjustments would be appropriate for all asset-based provisions, this approach offers a useful starting point for consolidating existing thresholds.
Adjusting for future growth
The few banking regulations that are indexed to inflation today are adjusted annually. For example, agencies are required to update Community Reinvestment Act thresholds each year based on the 12-month rolling average annual change in CPI. While this provides timely adjustments that account for inter-year growth, it also introduces volatility. A moving target that adjusts each year complicates medium-term planning for both banks and their supervisors.
Periodic adjustments, conducted every few years and implemented automatically, would ensure thresholds remain relevant without introducing strategic uncertainty for banks’ medium-term planning. Strategic planning is largely informed by internal models and forecasts. As Yogi Berra once said, “It’s tough to make predictions, especially about the future.” Given the limited value of forecasts beyond a 24-month horizon, indexing thresholds every three years offers a more balanced and practical framework.
The chart below shows how the $1 billion “small bank” asset threshold, established for the Community Reinvestment Act, would have evolved over time if it were indexed for the aggregate size of the banking sector. Indexing over a three-year cycle smooths out short-term volatility and offers greater predictability.
To preserve the benefits of a streamlined framework, future adjustments must be structurally embedded to ensure consistency across agencies over time. A streamlined regime of asset thresholds that are uniformly adjusted every three years for industry growth would greatly improve the current system.
Conclusion
A modernized approach to asset thresholds should aim for simplicity, consistency, and predictability. By consolidating thresholds around shared reference points and requiring uniform periodic adjustments, policymakers can reduce complexity, maintain fairness, and preserve regulatory relevance. A three-year adjustment schedule strikes a sensible balance between responsiveness and stability. Now is the time to recalibrate outdated structures to better match the realities of today’s banking landscape.
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.
