ICLE White Paper Finds Arbitrary Regulatory Thresholds Distort Financial Markets, Harm Consumers
PORTLAND, Ore. (May 18, 2026) — Threshold-based financial regulation can distort competition, encourage regulatory arbitrage, and harm consumers, a new International Center for Law & Economics (ICLE) white paper finds.
Authored by ICLE Nonresident Scholar Todd J. Zywicki, “Regulatory Tripwires: How Arbitrary Thresholds Distort Financial Markets” argues that U.S. financial regulation increasingly relies on bright-line asset thresholds to determine when heightened obligations apply. While such rules promise simplicity and certainty, the paper finds that poorly calibrated thresholds often substitute for regulatory reasoning and create compliance cliffs disconnected from actual risk, consumer harm, or market impact.
The paper focuses on several post-Dodd-Frank threshold regimes, including systemic-risk thresholds, the Consumer Financial Protection Bureau’s (CFPB) $10 billion supervisory trigger, nonbank “larger participant” rules, and the Durbin Amendment’s $10 billion threshold for debit-card interchange price controls. It finds that these thresholds have encouraged banks to slow organic growth, restructure balance sheets, fragment operations, or pursue mergers to spread fixed compliance costs.
“Regulation should follow risk and impact, not arbitrary cliffs,” Zywicki said. “When policymakers draw lines without explaining why those lines advance a regulatory objective, firms rationally organize themselves around avoiding the cliff, rather than serving consumers better. The result is less competition, more consolidation, and higher costs for the very consumers regulation is supposed to protect.”
The white paper identifies the Durbin Amendment as the clearest example of threshold-driven distortion. The empirical record demonstrates that, in response to reduced interchange revenue, affected lenders raised fees and curtailed free checking. There is little evidence the change generated consumer savings, but it has encouraged fintech-bank structures designed largely to avoid the $10 billion asset threshold.
The paper recommends that policymakers avoid extending the Durbin model to credit cards, repeal or reform flawed thresholds, index and periodically review thresholds that remain, clarify CFPB supervisory objectives, and modernize oversight through real-time data, advanced analytics, and risk-based supervision.
“Thresholds can be useful when they are tied to measurable risks and subject to regular review,” Zywicki added. “But when they become a shortcut for analysis, they invite rent-seeking, arbitrage, and market distortions. Financial regulation needs better tools than arbitrary numerical lines.”
To arrange an interview with Zywicki. contact Jim Fellinger at [email protected]. Download the full white paper here.
About ICLE
The International Center for Law & Economics is a nonprofit, nonpartisan research center working with a roster of more than one hundred academic affiliates and research centers from around the globe. ICLE scholars promote the use of law and economics methodologies to inform public policy debates.