ICLE White Paper

Regulatory Tripwires: How Arbitrary Thresholds Distort Financial Markets

Executive Summary

Financial regulation in the United States increasingly relies on threshold triggers—most often asset-size cutoffs—to determine when heightened obligations apply. These bright-line rules promise simplicity, administrability, and certainty. But when thresholds are poorly calibrated, they can substitute for regulatory reasoning rather than serve it. Instead of aligning oversight with actual risk, consumer harm, or market impact, rigid cutoffs can create compliance cliffs that distort firm behavior and reshape markets in unintended ways.

Dodd-Frank greatly expanded the use of threshold-based regulation. Its systemic-risk framework originally imposed enhanced prudential standards at $50 billion in assets, later revised to $100 billion and $250 billion. Title X established a $10 billion trigger for Consumer Financial Protection Bureau supervision of depository institutions and authorized “larger participant” rules for nonbanks. The Durbin Amendment added another $10 billion threshold, using asset size not to manage risk, but to impose price controls on debit-card interchange fees. In each case, Congress and regulators often failed to explain why the chosen numerical line advanced the relevant regulatory objective.

The consequences have been significant. Banks approaching thresholds slow organic growth, restructure balance sheets, fragment operations, or pursue mergers to spread fixed compliance costs across larger asset bases. These incentives accelerate consolidation, reduce competition, and divert resources from productive investment. The Durbin Amendment illustrates the problem most clearly: its price controls reduced interchange revenue, led banks to raise fees and reduce free checking, produced little evidence of meaningful pass-through savings to consumers, and encouraged fintech-bank structures designed largely to avoid the $10 billion cliff.

Thresholds also invite political rent-seeking. Once regulators draw an arbitrary line, affected firms and interest groups have strong incentives to lobby to move, preserve, or exploit it. Because many thresholds are not indexed to inflation or subject to periodic review, their reach expands over time without any deliberate policy choice. This dynamic has affected the Durbin Amendment, CFPB supervisory thresholds, systemic-risk regulation, and other financial rules. The result is a regulatory system that too often rewards regulatory arbitrage rather than consumer service, innovation, or sound risk management.

This white paper does not argue against financial regulation. Oversight remains essential to promote stability, protect consumers, preserve competition, and safeguard the deposit insurance fund. But regulation should follow risk and impact—not arbitrary cliffs. Policymakers should avoid replicating the Durbin model in credit cards, repeal or reform flawed existing thresholds, index and review thresholds that remain, clarify the objectives of CFPB supervision, and modernize regulatory tools through real-time data, advanced analytics, and risk-based supervision. A better framework would preserve administrability while aligning oversight more closely with actual risk, consumer welfare, and market realities.

I. Introduction

Financial regulation in the United States increasingly relies on measurable “threshold” triggers—most commonly, asset-size cutoffs—to determine when heightened regulatory obligations apply. Policymakers favor thresholds because they are simple, administrable, and provide bright-line distinctions between institutions subject to enhanced scrutiny and those that are not. In theory, such triggers promote regulatory certainty, conserve supervisory resources, and tailor oversight to firms thought most likely to pose systemic, prudential, or consumer risks.

In practice, threshold-based regulation often produces consequences far removed from those stated objectives. Rather than aligning regulatory intensity with risk or consumer harm, rigid cutoffs can create abrupt compliance cliffs, distort competition, encourage regulatory arbitrage, and foster political rent-seeking.^[1] When regulators adopt thresholds without clearly articulating their purpose—or without evaluating whether they actually achieve that purpose—those thresholds can become focal points for lobbying and strategic avoidance behavior rather than principled tools of governance.

This paper examines the growing reliance on threshold triggers in modern financial regulation and evaluates their economic and institutional consequences. Although threshold mechanisms appear throughout the regulatory system, their use expanded significantly after enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Dodd-Frank introduced tiered systemic-risk thresholds at $50 billion—later adjusted to $100 billion and $250 billion—established a $10 billion asset trigger for Consumer Financial Protection Bureau (CFPB) supervisory authority over depository institutions, created threshold-based rules for nonbank financial-services providers, and imposed the $10 billion cutoff embedded in the Durbin Amendment’s price controls on debit-interchange fees.

Regulators adopted these thresholds to pursue distinct policy goals. The existence of a numerical trigger, however, does not guarantee that it advances those goals. In several prominent cases, thresholds have encouraged firms to cluster just below regulatory tripwires, accelerated consolidation, distorted organizational-structure decisions, and shifted costs to consumers. The Durbin Amendment, in particular, illustrates how an asset-based compliance cliff can alter pricing in two-sided markets, reshape bank product offerings, and invite political bargaining over arbitrary numerical lines.

This paper does not argue that regulatory triggers are inherently flawed. Thresholds can serve legitimate functions when grounded in clearly articulated objectives and calibrated to measurable risks. Problems arise when thresholds substitute for regulatory reasoning, when regulators treat asset size as a proxy for complexity, harm, or systemic relevance without sufficient empirical support, and when bright-line rules create non-linear compliance burdens that unintentionally reshape market structure.

Examining systemic-risk thresholds, CFPB supervisory triggers, and the Durbin Amendment’s interchange cap demonstrates how threshold-based regulation can generate strategic behavior unrelated to consumer welfare, coherent regulatory policy, or financial stability. Institutions respond rationally to regulatory cliffs by restructuring balance sheets, fragmenting operations, delaying growth, or pursuing mergers. These responses are predictable reactions to discontinuous compliance costs. They can also undermine the very policy objectives thresholds were intended to advance, reducing credit access and weakening banking competition as institutions prioritize regulatory avoidance over delivering value to consumers.

The paper proceeds as follows. Section II outlines the theoretical justifications for regulatory triggers and situates them within the broader objectives of financial regulation. Section III analyzes how threshold mechanisms became embedded in post-2008 financial reforms. Section IV evaluates the economic and competitive distortions created by abrupt regulatory cliffs. Section v offers recommendations for avoiding new threshold-based mistakes, repairing existing frameworks, and modernizing regulatory tools to align supervision more closely with risk rather than arbitrary numerical cutoffs. Section VI concludes.

Ultimately, the question is not whether to regulate, but how to regulate in a manner consistent with the rule of law, economic efficiency, and consumer welfare. Regulation is not zero-sum—more regulation is not always better, and less regulation is not inherently more efficient. Tradeoffs among stability, competition, and consumer protection are inevitable. Regulators should make those tradeoffs consciously, based on articulated objectives and empirical evaluation, rather than embedding them in numerical thresholds whose origins and effects remain poorly examined. Regulation should follow risk and impact, not arbitrary cliffs.

II. Regulatory Triggers and Threshold-Based Financial Regulation

The financial-services industry is among the most heavily regulated sectors of the U.S. economy. Effective financial regulation advances clearly defined objectives, establishes triggers that identify when rules apply, and aligns those triggers with the regulatory goals they are intended to serve.^[2] Poorly designed regulation, by contrast, lacks clear objectives, creates uncertainty about when or to whom rules apply, or imposes costs that exceed any resulting public benefit. Although the complexity and scope of financial regulation have evolved over time, the basic requirements for sound regulation have not.

Banking regulation traditionally serves four principal purposes: promoting financial stability, protecting the Federal Deposit Insurance Fund, protecting consumers, and preserving competition.^[3] These objectives are all important, but they often conflict. Measures designed to maximize the stability of individual banks, for example, may limit competition, reduce consumer choice, or inhibit innovation.

Indeed, for many years after the Great Depression, bank regulators explicitly sought to shield incumbent banks from competition in order to preserve steady profits and institutional solvency.^[4] That approach may have contributed to financial stability, but it also produced a less dynamic financial system, fewer consumer options, and slower innovation. As the CFPB Taskforce on Federal Consumer Financial Law observed, “when regulators allow the welfare of the banks to outweigh the interests of consumers, those who are supposed to benefit from oversight instead pay its costs.”^[5] Balancing competing regulatory objectives therefore requires policymakers to articulate clear goals and establish decision-making criteria consistent with the rule of law.

One method regulators use to allocate scarce supervisory resources among competing objectives is the use of bright-line “regulatory triggers.” These triggers create presumptions about when regulators should act based on simple, objective, and clearly identifiable criteria. Under antitrust law, for example, mergers involving firms with sufficiently large market shares trigger heightened scrutiny in ways that mergers between small local businesses do not.^[6] Other events, such as data breaches, automatically trigger disclosure obligations and related compliance requirements. Similarly, entering or exiting certain lines of business may trigger additional regulatory obligations.

A common form of regulatory trigger is the measurable financial or activity-level threshold. Firms or activities that meet specified criteria become subject to heightened oversight or additional obligations, while those below the threshold do not. Employment law provides familiar examples: certain legal obligations apply only after firms exceed a specified number of employees.^[7] The Home Mortgage Disclosure Act exempts depository institutions from reporting requirements unless they exceed an inflation-adjusted asset threshold as of Dec. 31 of the prior calendar year. Casinos generating more than $1 million in annual gaming revenue must report certain currency transactions to the Financial Crimes Enforcement Network (FinCEN) under the Bank Secrecy Act (BSA). Banks likewise must report cash transactions exceeding $10,000 under the BSA. Threshold triggers—particularly asset-based thresholds—thus pervade financial regulation.

Regulators often justify threshold-based rules as administrable tools that create objective distinctions between matters presumptively worthy of regulatory attention and those that are not. As used throughout the Federal Register, a “threshold” generally refers to an objective benchmark that activates a regulatory obligation, reporting duty, compliance requirement, or supervisory standard once met or exceeded.^[8] Such triggers can provide regulated parties with greater certainty while allowing regulators to focus limited resources on matters deemed most significant.^[9]

In financial regulation, asset thresholds attempt to balance the costs of regulatory oversight against the expected public benefits of supervision. The widespread use of threshold-based regulation, however, does not necessarily mean it represents the most effective or rational regulatory approach. For thresholds and bright-line rules to serve legitimate regulatory purposes, lawmakers and regulators must clearly articulate the objectives they seek to achieve and evaluate whether the chosen thresholds reasonably advance those objectives.

Even after regulators decide to adopt a threshold-based rule, difficult design questions remain. Regulators must determine not only where to set the threshold, but also what criteria to measure. Many financial regulations rely on institutional asset size as a proxy for complexity, risk, or systemic importance. Asset size may often correlate with those concerns, but not invariably. Financial regulation generally assumes that smaller institutions, such as community banks and credit unions, pose fewer complex regulatory challenges than larger institutions. The collapse of Silicon Valley Bank nevertheless illustrates that asset size alone is an imperfect proxy for risk.

The decision to regulate through threshold triggers therefore requires at least three distinct analytical judgments. First, regulators must decide whether to rely on a bright-line rule or instead adopt a more flexible standard requiring case-by-case analysis.^[10] Second, if regulators choose a rule-based approach, they must identify both the appropriate criteria and the proper threshold level. Third, regulators must establish mechanisms to update thresholds as economic conditions evolve, whether by adjusting numerical levels, changing the relevant criteria, or indexing thresholds to inflation or other benchmarks.^[11] In practice, lawmakers and regulators rarely appear to address all three questions systematically.

The gap between theoretically optimal regulation and politically feasible regulation can be substantial. In practice, many regulatory triggers appear largely arbitrary, reflecting lobbying pressure, political compromise, and institutional convenience more than coherent regulatory design. Even where threshold-based regulation may serve a legitimate purpose, the specific threshold selected may bear little relationship to any clearly articulated public-policy objective.

Government actors themselves also possess institutional incentives that can shape threshold design. Several CFPB initiatives involving “larger market participants,” for example, appear driven at least partly by administrative convenience rather than coherent regulatory principles.

Once established, threshold-based rules can also become politically difficult to update, even when changing economic conditions render them obsolete. The BSA’s $10,000 currency-reporting threshold illustrates the problem. Congress adopted the threshold in 1970, when $10,000 represented a substantial sum. Adjusted for inflation, the equivalent threshold today would exceed $80,000. Yet despite widespread recognition that the outdated threshold generates excessive reporting and inefficient compliance costs, lawmakers have shown little political appetite for revisiting it.

Efforts to revise outdated thresholds often trigger new rounds of lobbying and political conflict. Meanwhile, stagnant thresholds may undermine the very objectives they were intended to advance. In the anti-money-laundering context, for example, the resulting flood of low-value reporting may create a “needle in a haystack” problem that obscures genuinely suspicious activity.

Crossing major regulatory thresholds can impose substantial costs on financial institutions. Adrien Alvero, Sakai Ando, and Kairong Xiao estimate that crossing the $10 billion asset threshold reduces annual bank profits by approximately 0.41%, while crossing the $50 billion threshold reduces profits by roughly 0.11%.^[12]  They estimate that crossing the $50 billion threshold alone increases annual regulatory costs by approximately $4.16 million—the equivalent of employing roughly 52 additional compliance officers.

Notably, those estimates capture only the direct costs of additional regulatory compliance. They do not include indirect costs, such as the revenue losses imposed by the Durbin Amendment’s price controls on debit-card interchange fees for banks exceeding $10 billion in assets.

III. Thresholds in Dodd-Frank and Consumer-Financial Regulation

This paper examines threshold-based financial regulation generally, but focuses most closely on thresholds as tools of consumer-financial policy. Dodd-Frank substantially expanded federal financial regulation after the 2008 crisis, with an initial emphasis on financial stability and systemic-risk mitigation. But it also created a sweeping new consumer-protection regime, centered on the Consumer Financial Protection Bureau (CFPB), and equipped that agency with substantial new regulatory and supervisory authority.^[13]

One of Dodd-Frank’s most important innovations was the expansion of supervision beyond traditional safety-and-soundness oversight. The CFPB gained authority to supervise certain institutions for compliance with federal consumer-financial law. But Congress tied that supervisory authority to thresholds. For banks, thrifts, and credit unions, CFPB supervision turns on a $10 billion asset threshold. For nonbanks, Dodd-Frank required the CFPB to define “larger participants” in particular consumer-finance markets, and the agency later pursued additional discretionary larger-participant rulemakings, including for general-use consumer-payment applications.

Dodd-Frank also embedded threshold triggers in provisions not traditionally understood as consumer-protection supervision. Most notably, Section 1075—the “Reasonable Fees and Rules for Payment Card Transactions” provision better known as the Durbin Amendment—sought to reduce debit-card interchange fees and promote competition in payments markets, on the theory that lower merchant costs would translate into lower consumer prices. In practice, it imposed price controls on debit-card interchange fees charged by banks with more than $10 billion in assets.

The Durbin Amendment illustrates many of the central problems with threshold-based regulation. By tying price controls to a fixed asset threshold, it encouraged costly avoidance behavior, distorted competition among banks, shifted costs onto consumers, and intensified consolidation pressures in retail banking—outcomes in tension with Dodd-Frank’s broader policy goals. It also created incentives for regulatory arbitrage, including efforts to structure business models around institutions that fall just below the relevant threshold or outside the amendment’s formal scope.

These dynamics are not unique to the Durbin Amendment. Across Dodd-Frank, threshold triggers often substituted administrability for careful regulatory tailoring. Section 165’s systemic-risk thresholds treated asset size as a rough proxy for systemic importance, despite the importance of complexity, interconnectedness, funding structure, and liquidity risk. The CFPB’s $10 billion supervisory threshold similarly imposed materially higher compliance burdens on midsized banks without clearly explaining why that asset level identifies greater consumer risk. And the CFPB’s larger-participant rules for nonbanks use market-specific thresholds that vary across products, often without an articulated theory for why the chosen criteria best measure consumer harm.

The Durbin Amendment remains the clearest case study of what can go wrong. Its $10 billion threshold appears to reflect not a principled judgment about risk, competition, or consumer welfare, but an ad hoc political compromise^[14] designed to secure enough votes for passage.^[15] Congress attached no sunset provision, inflation adjustment, or mandatory review mechanism, even though the amendment triggered a multibillion-dollar redistribution in the payments market without a dedicated public hearing or empirical study. The result is a fixed threshold whose reach expands over time and whose economic effects increasingly diverge from its stated purpose.

This section examines three threshold-based features of Dodd-Frank: systemic-risk thresholds for enhanced prudential supervision; CFPB supervisory thresholds and larger-participant regulation; and the Durbin Amendment’s price-control threshold. Together, they show how bright-line triggers can promote administrative simplicity while also creating compliance cliffs, rent-seeking, market distortions, and regulatory outcomes disconnected from the risks they purport to address.

A. Systemic-Risk Thresholds and Enhanced Prudential Supervision

Dodd-Frank’s preamble states that one of the statute’s central purposes is “to promote the financial stability of the United States by improving accountability and transparency in the financial system” and to end “too big to fail.^[16] In pursuit of that objective, Congress added systemic-risk mitigation to the responsibilities of prudential regulators and codified the use of asset-based thresholds to create a tiered regulatory structure for banks.

Section 165 of Dodd-Frank used asset-size thresholds as bright-line triggers for enhanced regulatory scrutiny of large financial institutions deemed capable of threatening financial stability.^[17] The statute originally imposed heightened supervision on bank holding companies with assets exceeding $50 billion. Congress later amended that framework through the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA), which established new supervisory tiers at $100 billion and $250 billion. Congress never clearly explained why $50 billion represented the appropriate threshold for identifying institutions that posed systemic risk.[18]

Debates surrounding EGRRCPA exposed many of the problems inherent in threshold-based regulation, especially when thresholds appear poorly calibrated to their stated objectives. The Senate Banking Committee report, for example, observed that the original $50 billion threshold failed to account for the actual risks posed by different institutions. A regional bank engaged primarily in traditional mortgage lending or small-business lending could become subject to enhanced supervision despite posing minimal threat to the broader financial system. The bright-line trigger ignored factors such as organizational complexity, interconnectedness, funding structure, and business activities.

Supporters of EGRRCPA also argued that the $50 billion threshold encouraged consolidation among regional banks that lacked the scale necessary to absorb the elevated compliance costs associated with crossing the regulatory cliff. Mergers among regional and community banks often reduce access to banking services in smaller and rural communities. In response, Congress not only raised the statutory thresholds, but also granted the Federal Reserve greater discretion to tailor enhanced prudential standards according to a bank’s risk profile and complexity rather than relying solely on asset size.[19]

After EGRRCPA, the $100 billion threshold became a trigger for materially heightened supervisory expectations, including more intensive examinations, stricter risk-management requirements, and preparation for stress testing. Crossing the threshold does not simply subject a bank to marginally greater oversight. It often requires institutions to build entirely new compliance, governance, data-management, and supervisory-reporting infrastructures.

These costs create rational incentives for banks to avoid crossing regulatory cliffs. Institutions may slow growth, shed assets, spin off business lines, or pursue mergers that move them sufficiently above the threshold to justify the added compliance burden.

The $250 billion threshold creates an even steeper regulatory cliff. Banks exceeding that level become subject to more formalized enhanced prudential standards under Regulation YY, including heightened liquidity requirements, capital-planning obligations, stress-testing expectations, and resolution-planning requirements. Crossing the threshold can require major investments in governance systems, liquidity-risk modeling, data-reporting infrastructure, and specialized compliance personnel.

These costs are largely fixed or semi-fixed and therefore do not scale proportionally with institutional size. As a result, the marginal cost of growing from $249 billion to $251 billion in assets can be substantial. Banks frequently pass those costs on to consumers through higher fees, tighter lending standards, or reduced product offerings.[20] Artificially constraining growth to remain below regulatory cliffs can also reduce the availability of mortgages and small-business loans in affected communities.

Dodd-Frank itself demonstrates that Congress understood alternative approaches were available. Section 113 authorized the Financial Stability Oversight Council (FSOC) to designate nonbank financial companies for Federal Reserve supervision based on qualitative assessments of systemic risk rather than fixed asset thresholds. The coexistence of these two frameworks raises an obvious question: if regulators can evaluate systemic risk through multifactor analysis for nonbanks, why not use a similar approach for banks?

That question becomes especially important because threshold-based regulation creates strong incentives for rent-seeking and political bargaining. Bright-line thresholds generate clear winners and losers, encouraging interest groups to lobby aggressively over where lines are drawn. Asset-based regimes therefore risk reflecting political compromise more than principled judgments about systemic risk. Multifactor supervisory standards, by contrast, tie regulation more closely to measurable indicators of institutional risk, complexity, and interconnectedness.

Critics of Section 165 long argued that asset-size thresholds poorly tracked the actual sources of systemic risk. Asset size alone does not capture operational complexity, liquidity risk, funding concentration, interconnectedness, or managerial competence. Proponents nevertheless defended asset-based thresholds because assets under management provide a metric that is simple, objective, transparent, and predictable.^[21] They also argued that asset size generally correlates with institutional complexity and interconnectedness.^[22]

Those defenses weakened considerably following the banking turmoil of March 2023. Silvergate Bank announced plans to wind down operations on March 8 after suffering severe deposit outflows linked to the collapse of the FTX cryptocurrency exchange. Silicon Valley Bank failed on March 10, followed by Signature Bank on March 12. Together, those failures triggered one of the most concentrated periods of banking stress since the 2008 financial crisis and required substantial government intervention to stabilize the financial system.

The failures of those institutions illustrated the limitations of relying primarily on asset size as a proxy for systemic risk. The banks failed not because they crossed particular asset thresholds, but because of concentrated depositor bases, liquidity vulnerabilities, poor risk management, and operational weaknesses. Yet despite those lessons, policymakers have shown relatively little interest in reconsidering whether threshold-based supervision remains the most effective framework for managing systemic banking risk.

B. CFPB Supervisory Thresholds and ‘Larger Participant’ Regulation

While Congress debated how best to reduce “too big to fail” risks after the financial crisis, it simultaneously sought to strengthen federal consumer-financial-protection authority. Those reforms became Title X of Dodd-Frank—the Consumer Financial Protection Act of 2010—which created the Consumer Financial Protection Bureau (CFPB).

Title X consolidated consumer-protection authority previously scattered across the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), Department of Housing and Urban Development (HUD), and other agencies. Beyond consolidating authority, Title X fundamentally changed who would be regulated, what triggers supervision, and how regulators define “size” in consumer finance.

For depository institutions, Title X established a $10 billion asset threshold as the trigger for CFPB supervisory authority over banks, thrifts, and credit unions. Federal consumer-financial-protection laws themselves, however, apply to all banks regardless of asset size. The principal change triggered by crossing the $10 billion threshold is therefore heightened CFPB supervisory oversight and the associated compliance burden.^[23]

The threshold also is not indexed to inflation. When Dodd-Frank became law, roughly 78 banks exceeded the $10 billion threshold. Today, approximately 130 institutions exceed it. Few would argue that this roughly 67% increase in supervised institutions reflects a deliberate or coherent recalibration of consumer-protection policy.^[24] Indeed, roughly 24 of the additional institutions that now exceed the threshold would remain below it if the threshold had been adjusted for inflation from its July 2010 baseline.

The threshold’s structure also creates disproportionate compliance burdens for midsized institutions. Compliance costs associated with supervision do not scale linearly with asset size. A bank barely above the $10 billion threshold may therefore face materially higher compliance costs per customer than a trillion-dollar institution with far greater economies of scale. Banks pass many of those costs on to consumers through higher fees, more limited services, or tighter credit standards. Ironically, thresholds ostensibly designed to protect consumers may instead suppress competition from midsized banks that could otherwise discipline prices and expand consumer choice.

Although supervisory regimes are common in banking, they are not universal across industries. Privacy laws, for example, apply to financial firms, health-care providers, and government entities alike, but banks remain uniquely subject to intensive ongoing supervisory review.^[25] That distinction matters because regulators should be able to justify why supervision—rather than ordinary enforcement mechanisms or judicial review—produces meaningful additional consumer-protection benefits.

General theories supporting consumer-financial-protection law typically rest on concerns about information asymmetries, consumer misunderstanding of financial products, or fears that markets may allocate credit unfairly.^[26] Those concerns may justify substantive rules such as the Truth in Lending Act, the Equal Credit Opportunity Act, or prohibitions on unfair, deceptive, or abusive acts or practices. They do not necessarily justify expansive supervisory regimes tied to arbitrary asset thresholds, particularly without meaningful cost-benefit analysis.

Dodd-Frank’s approach to nonbank financial institutions presents similar problems. The issue has become increasingly important as nonbank financial institutions now manage nearly 50% of global financial assets, with assets in advanced economies averaging roughly 400% of GDP and exceeding the size of the banking sector itself.[27]

Section 1024 of Dodd-Frank authorizes CFPB supervision of certain nonbanks through what became known as the “larger participant” rule. As with banks, the issue is not whether nonbanks remain subject to consumer-financial-protection law—they are—but rather which firms become subject to routine CFPB supervision.

Congress delegated to the CFPB authority to define who qualifies as a “larger participant” in various markets. In practice, the CFPB adopted market-specific thresholds that vary substantially across industries and products. The 2021 CFPB Taskforce on Federal Consumer Financial Law observed that Dodd-Frank provides little guidance about how the CFPB should determine what constitutes a “larger market participant.”

The CFPB has consequently used inconsistent criteria across markets. In some cases, it relies primarily on annual receipts or revenue. In others, it focuses on the number of consumer accounts serviced. Even where the agency uses the same metric, such as revenue, the threshold levels vary considerably across industries without clear explanation. The apparent objective often seems less tied to measurable consumer risk than to ensuring the CFPB supervises enough firms to cover a substantial share of the relevant market.^[28]

The absence of clearly articulated regulatory objectives creates serious problems for accountability and retrospective evaluation. Without identifying what the supervisory thresholds are intended to accomplish, policymakers cannot meaningfully evaluate whether the thresholds improve consumer welfare, enhance market functioning, or justify their costs.

As a result, depository institutions exceeding $10 billion in assets and nonbank firms classified as “larger participants” bear supervisory compliance costs that many competitors avoid. At the same time, regulators lack clear benchmarks for determining whether those thresholds produce measurable benefits or whether the thresholds themselves should change.

The absence of coherent standards also exposes regulators to political criticism and encourages strategic behavior by market participants seeking to avoid crossing regulatory cliffs. Those incentives predictably foster rent-seeking and lobbying pressure around threshold design. More broadly, evidence suggests that rent-seeking behavior can undermine public trust in regulatory institutions themselves.^[29]

Given the limited evidence that CFPB supervision generates substantial incremental consumer-protection benefits beyond existing enforcement authority and state oversight, the rationale for arbitrary supervisory thresholds remains unclear.^[30] The resulting compliance costs ultimately flow through to consumers in the form of higher prices, reduced product availability, and diminished access to financial services.

At a minimum, principles of sound governance and regulatory accountability require the CFPB and Congress to articulate clear objectives for supervisory thresholds and to evaluate whether those thresholds meaningfully advance consumer welfare relative to their economic costs.

C. The Durbin Amendment and Price-Control Thresholds

The Durbin Amendment authorized the Federal Reserve Board to issue regulations requiring debit-card interchange fees charged by issuers with at least $10 billion in assets to be “reasonable and proportional to the cost incurred.” Like the CFPB’s $10 billion supervisory threshold, the Durbin Amendment’s asset threshold is not indexed to inflation. As a result, substantially more institutions fall within the regime today than when Congress enacted Dodd-Frank.

The Durbin Amendment differed from most threshold-based financial regulations because it did not primarily address systemic risk, consumer harm, or prudential supervision. Instead, it imposed price controls on a bank revenue stream. The amendment sought to promote competition by giving merchants greater routing choice over debit-card transactions. In practice, however, it created a sharp regulatory cliff that dramatically reduced interchange revenue for covered banks.

Large-bank interchange fees fell by roughly 52% after implementation, reducing annual revenue by an estimated $6.5 billion to $9.4 billion. Although estimates vary, banks appear to have offset much of that lost revenue through higher account fees, reduced rewards, and diminished access to free checking.^[31]

Supporters of the Durbin Amendment argued that lowering merchants’ card-acceptance costs would generate consumer savings through lower retail prices.[32] Empirical evidence suggests otherwise. A 2014-2015 Federal Reserve Bank of Richmond study found that approximately 75% to 77% of merchants did not change prices after the amendment took effect.^[33] Among those that did change prices, more merchants raised prices than lowered them. Subsequent research likewise has found little evidence that retailer savings were meaningfully passed through to consumers.^[34]

Understanding why the Durbin Amendment produced these results requires understanding how payment-card systems function. Credit- and debit-card networks generally operate as either three-party or four-party systems.

In a three-party—or “closed-loop”—system, such as American Express and historically Discover, the network markets to cardholders, signs merchants, issues cards, processes transactions, and assumes much of the fraud and credit risk itself. Because the platform is vertically integrated, pricing decisions remain largely internal to the network.^[35]

In a four-party—or “open-loop”—system, such as Visa and Mastercard, the network typically does not issue cards or hold consumer deposits. Instead, it provides the infrastructure and rules connecting the issuing bank and the acquiring bank. The issuing bank provides the consumer’s debit card and deposit account, while the acquiring bank provides merchant services and processes transactions for merchants.

Figure 1 illustrates the basic fee structure within four-party payment systems.

FIGURE 1: How Card Fees Are Generated

SOURCE: Marcel van Oost (February 2025)

In a typical transaction, the consumer swipes a card, the merchant submits the transaction through the acquiring bank, the network routes the transaction to the issuing bank, and funds flow back through the system. The economics of the platform depend on how the network balances incentives among consumers, merchants, issuing banks, and acquiring banks.

Debit-card transactions do not generate costs attributable solely to either merchants or consumers. Transaction costs—including authorization, fraud prevention, settlement, customer service, account infrastructure, and dispute resolution—arise only because both parties use the platform simultaneously. If the merchant does not accept the card, or if the consumer chooses another payment method, the transaction never occurs and the costs never arise.

Economists therefore generally recognize that no uniquely “correct” way exists to allocate payment-system costs between merchants and consumers. Any allocation necessarily reflects platform-design choices. Payment networks instead attempt to structure prices to maximize participation and transaction volume across both sides of the platform.

The Supreme Court recognized this dynamic in Ohio v. American Express, emphasizing that credit-card networks function as two-sided transaction platforms in which demand on each side of the market depends on participation by the other side. Networks therefore cannot optimize merchant pricing without considering consumer behavior, or vice versa. Because costs arise from interactions across the platform as a whole, payment systems frequently rely on cross-subsidization.

That is why merchants often pay merchant-discount fees while consumers receive rewards or low direct transaction costs. Such pricing structures are not inherently irrational or unfair. They reflect the reality that merchants may have relatively inelastic demand for payment acceptance, while subsidizing consumers increases transaction volume and makes the platform more valuable to merchants themselves.

The Durbin Amendment disrupted that pricing structure by capping one component of merchant-side pricing—debit-card interchange fees for covered issuers. Once regulators constrained interchange revenue, banks predictably adjusted elsewhere in the system to recover lost income and rebalance platform incentives.

The resulting market effects were foreseeable. Critics often describe the adverse consequences of the Durbin Amendment as “unintended,”[36] but many economists and commentators predicted them before enactment.[37] Between 2001 and 2009, the percentage of bank accounts offering free checking increased dramatically, rising from approximately 7.5% to roughly 76%.^[38] By 2013, that figure had fallen to approximately 38%.^[39]

At the same time, monthly maintenance fees on non-free checking accounts rose sharply. Some estimates found that such fees doubled after enactment of Dodd-Frank.^[40] The increase did not occur gradually. Instead, fees rose abruptly in late 2010 after passage of Dodd-Frank and rose again after finalization of Regulation II in 2011.^[41] Free checking rates have remained near those lower levels ever since.^[42]

Even Robert Shapiro, an early supporter of the Durbin Amendment,[43] later reconsidered his position after examining the law’s actual effects on consumers, particularly lower-income and minority consumers.[44]

The Durbin Amendment’s legislative history further underscores its arbitrary nature. Congress added the amendment to Dodd-Frank late in the legislative process rather than including it in the original bill. Such “Christmas tree amendments”—last-minute provisions attached to politically important legislation—often reflect concentrated interest-group bargaining rather than careful regulatory design.^[45]

Retail trade groups, including the National Retail Federation, lobbied heavily for the amendment to reduce so-called “swipe fees” paid by merchants.^[46] Merchants argued that Visa, Mastercard, and large banks possessed excessive pricing power and charged interchange fees above processing costs.^[47] At the same time, reports surfaced that Sen. Richard Durbin barred a credit-card coalition from an event discussing the proposal.^[48]

Despite the amendment’s controversy, Congress never articulated a principled justification for selecting $10 billion as the relevant threshold. Early proposals reportedly would have applied the interchange cap to banks exceeding $1 billion in assets, but lawmakers later raised the threshold to secure sufficient political support for passage.^[49] Contemporary legal commentary suggests the threshold increase reflected legislative compromise rather than any coherent theory of consumer welfare, systemic risk, or market competition.^[50]

The resulting threshold thus bears the hallmarks of special-interest legislation.^[51] Nothing in the statutory framework explains why $10 billion represents the appropriate dividing line, rather than $1 billion, $20 billion, or some other figure. The legislative bargaining surrounding the threshold strongly suggests that political feasibility, rather than economic principle, determined where Congress ultimately drew the line.

The Durbin Amendment continues to distort incentives today in ways extending beyond the threshold itself. Capital One’s acquisition of Discover, for example, was driven in part by Discover’s ownership of a payment-card network exempt from the Durbin Amendment.[52] The amendment applies only to four-party systems that formally impose interchange fees, even though three-party systems such as Discover and American Express employ economically similar merchant-pricing structures.[53]

The arbitrary nature of the threshold becomes even clearer when considering inflation and industry growth. Congress established the $10 billion threshold in 2010 and never indexed it to inflation. Cumulative inflation since then has approached 50%, meaning that $10 billion in 2010 dollars equals roughly $15 billion today.

When Dodd-Frank became law, approximately 80 banks exceeded the threshold. Today, roughly 130 institutions exceed it due to inflation, industry growth, and consolidation through mergers and acquisitions. The practical reach of the Durbin Amendment therefore continues expanding even though Congress never revisited whether the threshold still reflects any meaningful economic or regulatory distinction.

IV. Regulatory Thresholds’ Economic and Competitive Distortions

Arbitrary regulatory thresholds distort business decisions by encouraging firms to manage around legal triggers rather than compete on price, quality, innovation, or consumer service. Instead of devoting resources to productive investment, institutions spend capital on legal advice, compliance planning, balance-sheet engineering, affiliate restructuring, and other strategies designed to avoid regulatory cliffs.

These distortions have real consumer consequences. In some cases, thresholds encourage firms to fragment operations across multiple entities or partners, increasing complexity without improving service. In others, they discourage organic growth, accelerate consolidation, or push firms to “leap” across regulatory thresholds through mergers and acquisitions. Thresholds can also induce banks to underinvest in modernization, preserve inefficient structures, or prioritize regulatory positioning over local lending and community service.

The Durbin Amendment illustrates the point most clearly. By tying price controls to a fixed $10 billion asset threshold, it encouraged avoidance behavior, distorted competition between banks and fintechs, reduced access to free checking, and shifted costs onto consumers. More broadly, threshold-based regulation can misallocate supervisory resources, create false positives and false negatives, foster rent-seeking, and invite political bargaining over arbitrary lines.

The result is a regulatory framework that often undermines the very goals it purports to advance. Consumers suffer when banks and financial-services providers devote attention and resources to avoiding regulatory cliffs rather than improving products, expanding access, or competing more effectively. Regulation should encourage firms to serve consumers better—not reward those best able to navigate arbitrary thresholds.

A. Fintech Arbitrage, Fragmentation, and Regulatory Distortion

The Durbin Amendment’s $10 billion asset threshold has become a major driver of the rapidly expanding nonbank fintech ecosystem.^[54] The rise of “banking as a service” illustrates how threshold-based regulation can distort competition by treating functionally similar firms differently based solely on whether they hold a banking charter.

Under current law, a fintech company can scale rapidly by offering financial services directly to consumers while relying on a partner bank to hold deposits and process transactions. Problems arise once a fintech’s success pushes its partner bank toward the $10 billion threshold. Crossing that line exposes the bank to Durbin’s interchange-fee price controls and additional compliance burdens.

To avoid those consequences, fintech firms often fragment their operations across multiple partner banks, creating many-bank-to-one-fintech structures. This arrangement allows fintechs and their partners to preserve the higher interchange fees available to banks below the Durbin threshold, even while processing enormous payment volumes for large technology firms, retailers, and nonbank partners.

These arrangements create substantial competitive distortions. Fintech firms effectively receive the economic benefits of small-bank interchange treatment while operating at a scale far beyond that of traditional community banks. At the same time, they often face less direct regulatory oversight than the banks with which they compete.

Fragmentation also creates operational inefficiencies and additional risks. As fintech firms spread deposits and payment activity across multiple partner institutions, they increase coordination costs, operational complexity, and counterparty exposure. Threshold-driven fragmentation therefore distorts the Coasean decision between internalizing services and contracting externally.^[55] Rather than selecting partners based on efficiency, scale economies, or consumer value, fintech firms instead choose banking relationships largely according to which institutions can remain below a regulatory tripwire.

To be clear, fintech innovation has delivered substantial consumer benefits. Fintech firms have expanded financial access, increased competition, and introduced new products and services. Partnerships between fintech companies and smaller banks have also softened some of the Durbin Amendment’s harmful effects by preserving access to free or low-cost checking accounts that might otherwise have disappeared.

Many fintech firms deliberately partner with banks below the $10 billion threshold specifically to avoid Durbin’s interchange caps and, potentially, the costs associated with CFPB supervision. By preserving higher interchange revenue, those arrangements have enabled many fintech platforms to continue offering low-cost banking services funded through debit-card interchange income. Larger fintech firms often maintain multiple banking partners simultaneously so they can distribute deposits strategically and ensure that no individual partner exceeds the threshold.

These arrangements have been especially important for younger and lower-income consumers who struggled to meet the higher minimum-balance requirements and increased account fees that proliferated after Durbin’s enactment.

At the same time, the current system arbitrarily disadvantages firms that hold bank charters directly. A fintech company can avoid Durbin’s restrictions by distributing deposits across several smaller partner banks, while a bank providing identical services through a single chartered institution faces the full burden of the threshold once it exceeds $10 billion in assets.

That distinction makes little economic sense. Consolidating deposits within a single institution is generally more efficient than dispersing them across multiple banks. The behavior of fintech firms themselves demonstrates the point: firms routinely consolidate deposits at one partner bank until the institution approaches the threshold, then search for additional partners to avoid crossing it.

Centralization can also improve regulatory oversight. Supervisors can evaluate operations more efficiently when activities occur within a single institution rather than across fragmented networks of fintech-bank partnerships. Consumers likewise benefit when successful firms can grow organically rather than artificially constraining growth to avoid regulatory cliffs.

Survey evidence further highlights how disconnected the legal framework has become from market reality. Most fintech users view the fintech platform itself as their “bank,” not the chartered institution technically holding their deposits.^[56] Many customers cannot identify the partner bank holding their funds, much less describe its policies or location.[57]

The resulting fragmentation therefore represents pure economic waste. Firms distribute deposits across multiple institutions not because doing so improves efficiency or consumer welfare, but because it helps avoid an arbitrary regulatory threshold. Decisions about how to organize banking services should turn on economic efficiency and consumer benefit, not regulatory arbitrage.

As threshold-based regulation proliferates, the risk of inconsistencies and unintended gaps also increases. Graham Steele, who served as assistant secretary for financial institutions during the Biden administration, argued that conflicting threshold measures contributed to Silicon Valley Bank’s failure.[58] Silicon Valley Bank exceeded $100 billion in total consolidated assets in December 2020, but did not exceed $100 billion in average total assets until June 2021. Under the applicable regulatory framework, the bank therefore would not have become subject to certain stress-testing and enhanced supervisory requirements until late 2024.

Steele’s observations also highlight a broader problem with threshold-based regulation. Much of the criticism surrounding regulatory cliffs focuses on false positives—that is, firms subjected to unnecessary regulation despite posing limited risk. Bright-line rules also create false negatives by implying that firms below a threshold necessarily warrant less scrutiny.

This problem reflects a well-known weakness of rules-based regulation. Bright-line rules are often simultaneously overinclusive and underinclusive relative to the goals they seek to achieve.[59] Rules may nevertheless remain efficient if they substantially reduce administrative costs. But when the chosen proxy poorly tracks the underlying regulatory objective, the resulting error costs can outweigh any administrative savings.

That concern becomes especially acute when firms can easily evade the threshold itself, as they often can under the Durbin framework. Regulatory avoidance not only distorts market behavior, but also dissipates resources as firms devote time, capital, and organizational effort to circumventing artificial constraints rather than improving products or serving consumers.

Threshold-based regulation can also misallocate supervisory resources. Regulators focusing heavily on firms above arbitrary thresholds may divert attention away from institutions or activities presenting genuine risks. Anti-money-laundering enforcement illustrates the danger. Because reporting thresholds remain set at very low nominal levels, compliance systems generate enormous numbers of false positives. Studies estimate that roughly 90% to 95% of anti-money-laundering alerts do not involve suspicious activity.[60] Excessive reporting volumes can make it more difficult to identify genuine threats while simultaneously encouraging bad actors to structure transactions specifically to evade threshold triggers.

B. Competitive Distortions and Regulatory Arbitrage

Regulatory thresholds that apply abruptly at arbitrary cutoff points can significantly distort competition. By imposing materially different regulatory burdens on otherwise similar institutions, threshold-based regimes effectively privilege some firms while penalizing others, often producing perverse market outcomes.

As discussed in Section III.C, empirical research and policy analysis indicate that many banks subject to the Durbin Amendment recouped lost interchange revenue by increasing fees on other retail-banking products and reducing cross-subsidized offerings such as free checking accounts. Those responses are consistent with standard economic theory regarding pricing in two-sided markets. When regulators constrain pricing on one side of a platform, market participants predictably attempt to recover costs elsewhere in the system.

Those adjustments appear to have disproportionately harmed lower-income consumers. The decline in free checking and increase in account fees following the Durbin Amendment pushed an estimated 1 million lower-income consumers out of the traditional banking system. Consumers who remained in the system often faced higher monthly fees and larger minimum-balance requirements.^[61]

Banks’ strategic responses to threshold-driven compliance costs can therefore reshape how financial services are distributed across demographic groups. Large incumbent banks subject to heightened regulatory burdens have strong incentives to focus on higher-margin customers—typically wealthier and older households—while reducing services directed toward lower-income or younger consumers.

J.P. Morgan Chase executives acknowledged this dynamic directly in 2012, stating that Dodd-Frank, and especially the Durbin Amendment, would render approximately 70% of customers with less than $100,000 in deposits unprofitable for the bank.^[62] Once compliance costs rise sharply at regulatory thresholds, banks rationally devote greater attention to customers capable of generating larger net returns.

These dynamics can reduce traditional-bank presence in underserved communities and create additional barriers to financial inclusion. Consumers may respond by relying on fragmented workarounds, shifting to fintech providers, or cobbling together financial services from specialized providers that do not offer the breadth or stability of full-service banks.

Some financial institutions have nevertheless managed to continue serving lower-income and younger consumers by developing strategies that mitigate threshold-related costs. In many cases, however, those strategies depend less on productive innovation than on exploiting structural or definitional gaps in the regulatory framework.

Threshold-based regulation encourages firms to engage in regulatory arbitrage through affiliate restructuring, off-balance-sheet arrangements, transaction engineering, and similar organizational strategies.^[63] Institutions can design corporate structures specifically to reduce reported assets or otherwise avoid triggering heightened regulation without meaningfully reducing the underlying economic activity that regulators purportedly seek to address.

Banks may, for example, create subsidiaries, special-purpose vehicles (SPVs), or affiliated entities to hold assets or conduct activities outside the regulated institution’s consolidated balance sheet. Firms can transfer loan portfolios, servicing rights, or investment holdings into separately capitalized entities while preserving revenue streams through contractual relationships. Securitization, asset sales with retained servicing rights, and restructuring of intercompany transactions likewise can shift assets into less heavily regulated affiliates.

To be sure, some of these strategies may resemble ordinary business planning or lawful tax minimization. But when firms adopt them primarily to avoid arbitrary regulatory cliffs, they represent socially wasteful activity. Resources devoted to restructuring balance sheets, redesigning corporate structures, or engineering transactions for regulatory purposes are resources not devoted to innovation, productive investment, or consumer service.

These avoidance strategies also increase institutional complexity and reduce regulatory transparency. Ironically, threshold-based systems designed to simplify supervision may instead encourage firms to adopt structures that make supervision more difficult. The resulting opacity can undermine the very proportionality and effectiveness that tiered regulatory frameworks supposedly aim to achieve.

Risk-based supervision offers a potentially superior alternative. Regulatory frameworks focused more directly on measurable indicators of complexity, interconnectedness, liquidity risk, or operational vulnerability could reduce incentives for threshold-driven arbitrage while aligning regulation more closely with underlying economic realities.

C. Growth Cliffs and Banking Consolidation

Asset-based regulatory thresholds can distort competition by imposing abrupt increases in compliance costs or sharp reductions in revenue once institutions cross designated asset levels. These discontinuities can effectively cap the organic growth of otherwise successful banks and distort incentives throughout the industry.

Crossing a regulatory threshold may subject a bank to materially heightened examination requirements, expanded supervisory obligations, or substantial revenue losses, as occurred under the Durbin Amendment’s interchange-fee price controls. Institutions approaching a threshold therefore often find it rational either to remain below the trigger or to “leap” well beyond it through mergers or acquisitions that allow them to absorb the additional regulatory burden more efficiently.

Higher compliance costs can also discourage new-bank formation altogether, reducing entry into the banking sector and weakening long-term competition.^[64] In each case, the resulting concentration reflects regulatory design rather than ordinary market competition.

Research consistently shows that compliance costs impose proportionally heavier burdens on smaller institutions.^[65] A widely cited 2013 Federal Reserve Bank of Minneapolis study estimated that regulatory-compliance costs, measured as a percentage of noninterest expenses, were approximately twice as high for smaller banks as for larger institutions.[66] The Federal Reserve likewise has acknowledged that smaller banks lack the scale economies necessary to absorb fixed compliance costs as efficiently as large incumbents.^[67]

These asymmetries can accelerate structural changes in the banking industry by making growth disproportionately costly for midsized and community institutions. The nonlinearity of compliance costs also creates powerful incentives for firms to avoid triggering higher regulatory burdens altogether.

One consequence is “clustering” behavior, in which institutions accumulate just below regulatory thresholds rather than crossing them. Clustering strongly suggests that regulatory tripwires create meaningful discontinuities in compliance costs. These effects become especially pronounced when the incremental gains from modest growth are outweighed by the sudden costs associated with crossing a threshold.

A bank growing from $10 billion to $10.1 billion in assets, for example, may suddenly become subject to CFPB supervision and the Durbin Amendment’s interchange caps. Such thresholds do not merely increase regulation gradually. They create cliffs that alter strategic decision-making and reshape market structure.

Many institutions respond by slowing growth as they approach thresholds, preparing operationally for heightened regulation, and then attempting to “leap” well beyond the trigger through mergers and acquisitions (M&A). This strategy allows firms to spread fixed compliance costs across a larger asset base more quickly.^[68]

The resulting consolidation can reduce competition in local banking markets, limit access to credit, increase consumer costs, and reduce consumer choice. In this sense, threshold-based regulation may unintentionally accelerate the concentration trends that financial regulation often claims to resist.

Empirical research strongly supports these conclusions. Christa H.S. Bouwman and coauthors examined the effects of Dodd-Frank’s original $50 billion threshold for enhanced prudential supervision.^[69] They found that banks just below the threshold experienced significantly slower growth in assets, risk-weighted assets, and lending after Dodd-Frank compared to similarly situated institutions before the law’s enactment. The effects were not merely statistically significant, but economically substantial.

Adrien Alvero, Sakai Ando, and Kairong Xiao likewise found that Dodd-Frank’s $10 billion and $50 billion thresholds induced banks to shrink or constrain assets specifically to avoid triggering heightened regulation.^[70] Importantly, this avoidance behavior emerged around actual regulatory thresholds but not around arbitrary round-number asset levels such as $20 billion or $40 billion. The evidence therefore strongly suggests that banks were responding directly to regulatory incentives rather than ordinary business considerations.

Other studies have reached similar conclusions.^[71] Hailey Ballew and coauthors examined bank behavior around Dodd-Frank’s $10 billion threshold, where CFPB supervision and the Durbin Amendment become applicable.^[72] They found that banks approaching the threshold systematically slowed growth to delay crossing it. Once banks ultimately crossed the threshold, however, they accelerated growth in an effort to absorb the resulting costs more rapidly.

Banks approaching the threshold also spent substantially more time in the $8 billion to $10 billion range than similarly situated banks before Dodd-Frank. After crossing the threshold, however, they moved through the $10 billion to $12 billion range far more quickly than before. This pattern strongly suggests deliberate strategic behavior: banks slowed growth before crossing the threshold and accelerated it afterward.

Thresholds also appear to influence acquisition behavior directly. Shradha Bindal and coauthors found that banks just below the $10 billion threshold were between 13% and 30% more likely to pursue acquisitions than banks outside that asset range.^[73] The findings support the hypothesis that institutions prefer to “jump” across regulatory cliffs rather than grow organically through them.

The study also found evidence that banks just above the threshold increased acquisition activity as well, consistent with efforts to scale quickly once they had already incurred the costs associated with crossing the threshold. Banks that crossed the threshold through acquisitions also continued growing more rapidly for at least three years afterward.

Taken together, this research demonstrates that threshold-based regulation does not merely influence compliance costs. It alters firm behavior, changes growth strategies, accelerates consolidation, and reshapes market structure in ways that may bear little relationship to the regulatory goals thresholds were intended to serve.

D. Community Banks and ‘Zombie’ Banking

Community banks historically have played a distinctive role in the U.S. banking system. Unlike many developed countries whose banking sectors are dominated by a handful of large national institutions, the United States traditionally has maintained a decentralized system composed of thousands of banks, thrifts, and credit unions of varying sizes and complexity.

Community banks have long specialized in consumer banking, mortgage lending, agricultural credit, and small-business lending within local markets.^[74] As the Federal Reserve Bank of Kansas City put it: “At the core, community banks primarily rely on relationship lending, funding local loans with local deposits.”^[75] Their comparative advantage traditionally has rested on local knowledge, close customer relationships, and familiarity with the economic conditions of the communities they serve. Community banks are typically locally owned, locally managed, and staffed by individuals with direct ties to the surrounding area, giving them incentives to support local economic development.

Partnerships with fintech firms have recently provided many community banks with valuable new sources of deposits and fee revenue. Community banks argue that fintech partnerships can subsidize local operations that otherwise might become uneconomical, particularly in rural or underserved communities.[76] Such partnerships may also allow smaller institutions to offer technological capabilities and digital services that would otherwise remain beyond their reach.

In many cases, these partnerships have benefited consumers by preserving access to low-cost accounts and expanding digital financial services. But threshold-based regulation complicates the relationship between fintech partnerships and the traditional mission of community banking.

The economic incentives created by the Durbin Amendment and related thresholds can push community banks away from local banking activities and toward business models centered primarily on maintaining profitable fintech relationships. Banks approaching the $10 billion threshold—where both Durbin’s interchange caps and CFPB supervision apply—may rationally prioritize retaining high-revenue fintech partnerships over expanding local lending or accepting additional local deposits.

As a result, the institutions deriving the greatest benefits from fintech partnerships may also face the strongest incentives to limit traditional community-banking activities as they grow. Rather than expanding services organically, banks may intentionally constrain growth to preserve threshold-related advantages. In this sense, threshold-based regulation can operate as an implicit tax on growth and modernization.

Some of the largest community-bank fintech partners reportedly remain deliberately below the $10 billion threshold specifically to avoid the Durbin Amendment’s interchange-fee price controls.^[77] That strategy may preserve short-term profitability, but it can also discourage investment in local lending, digital modernization, and long-term institutional growth.

Threshold-induced incentives can therefore produce what might be described as “zombie” community banks—not insolvent institutions, but banks that remain operational while strategically underinvesting in productivity-enhancing improvements. Unlike traditional community banks, which historically reinvested in local services and relationship banking, these institutions may increasingly function as passive platforms supporting fintech payment activity while providing relatively limited local economic value.

The problem extends beyond fintech partnerships themselves. Threshold-based regulation can distort broader investment incentives throughout the banking sector. When organic growth becomes discontinuously expensive, banks may rationally avoid long-term investments in infrastructure, technology, or operational expansion. Management may instead optimize for remaining below a threshold or positioning the institution for eventual acquisition.

These incentives can delay modernization and reduce innovation. Consumers may lose access to improved payment systems, digital-banking tools, enhanced customer-service platforms, and expanded lending capacity that growing institutions otherwise might provide. Communities served by such banks may therefore experience not merely stagnant service, but foregone development opportunities that would have accompanied organic institutional growth.

Threshold-based regulation can also accelerate acquisition pressures from both directions. Banks approaching regulatory cliffs may seek mergers to spread compliance costs across larger balance sheets, while other institutions may conclude that remaining independent no longer justifies the expense of continued growth. In either case, regulatory incentives rather than market competition increasingly shape organizational decisions.

None of this means fintech partnerships necessarily undermine community banking. In some cases, fintech relationships may genuinely strengthen local institutions and preserve banking access in underserved areas. The broader point, however, is that threshold-based regulation can alter the incentives facing community banks in ways that substitute for, rather than complement, traditional community-banking functions.

Further research is therefore needed to determine whether current threshold-based frameworks ultimately reinforce or erode the local relationship-banking model that has historically distinguished community banks within the U.S. financial system.

E. Rent-Seeking and Political Manipulation

Threshold-based regulation predictably invites special-interest rent-seeking.^[78] Because many thresholds are the product of political compromise rather than principled regulatory design, affected parties have strong incentives to lobby for changes that advantage their own interests. Bright-line thresholds create obvious winners and losers, making them especially vulnerable to political manipulation.

The evolution of Dodd-Frank’s original Section 165 threshold illustrates the point. Congress initially imposed heightened prudential regulation on bank holding companies exceeding $50 billion in assets, only to revise that framework through the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which created new thresholds at $100 billion and $250 billion. The revisions reflected growing recognition that the original threshold poorly tracked actual systemic risk.

Similar concerns persist regarding CFPB “larger participant” rules. Because Congress and regulators failed to articulate clear objectives for those thresholds, it remains difficult to evaluate whether they accomplish their intended purposes. At the same time, the arbitrary nature of the thresholds creates powerful incentives for affected firms and trade associations to lobby for exemptions, reinterpretations, delays, or revised trigger levels.

Risk-based supervisory frameworks are generally less susceptible to this form of political contestation because they tie regulation more directly to measurable indicators of institutional risk or consumer harm rather than arbitrary numerical cutoffs.

The Bank Secrecy Act’s $10,000 reporting threshold illustrates a related problem: once regulators establish a threshold, political dynamics often make updating it extremely difficult. Regulators formally adopted the $10,000 threshold in 1972 under the regulations implementing the 1970 Bank Secrecy Act. Congress never indexed the threshold to inflation. Adjusted for inflation, $10,000 in 1972 dollars would equal roughly $75,000 to $80,000 today.

Despite widespread recognition that the threshold now captures enormous volumes of routine, low-risk transactions, lawmakers have shown little willingness to revise it. Once a threshold exists, interest groups benefiting from the existing framework often mobilize to preserve the status quo.

The Durbin Amendment reflects the same dynamic. As discussed above, the amendment emerged from a political bargain designed primarily to benefit large merchants. The selection of the $10 billion exemption threshold likewise appears to have reflected political compromise rather than any coherent economic principle.

Like the Bank Secrecy Act threshold, Durbin’s $10 billion threshold was not indexed to inflation. As inflation and industry growth have expanded bank balance sheets, the number of institutions subject to the amendment has increased by more than 50%, even though the underlying economic significance of the threshold has changed substantially.

The legislative history reinforces the amendment’s arbitrary nature. Congress added the provision to Dodd-Frank late in the legislative process as a “midnight amendment.”^[79] The resulting statutory language was poorly drafted, grammatically inconsistent, and failed to account for the long-term consequences of leaving the threshold unadjusted for inflation.

More recently, Sens. Ted Cruz and Katie Britt introduced the Community Bank Relief Act, which would preserve the original intended scope of the Durbin Amendment by indexing the $10 billion threshold to inflation using the Consumer Price Index.^[80] Large retail lobbying organizations, including the Merchant Payments Coalition and National Association of Convenience Stores, predictably opposed the proposal.^[81]

Threshold politics also tend to metastasize over time. The proposed Credit Card Competition Act (CCCA), for example, would impose network-routing requirements on credit cards while exempting institutions below a new $100 billion asset threshold. Unlike the Durbin Amendment, which currently applies to roughly 130 banks, the proposed $100 billion threshold would apply to only about 30 institutions.

No coherent explanation has been offered for why credit cards should use a threshold 10 times larger than the Durbin Amendment’s debit-card threshold, or why a supposedly less restrictive regime would apply to fewer institutions. Like the Durbin Amendment, the proposal also targets only four-party payment systems while exempting vertically integrated three-party systems such as American Express and Discover, even though those systems employ economically similar merchant-pricing structures.

The same pattern appeared repeatedly in CFPB rulemaking during the Biden administration. The CFPB’s credit-card late-fee rule—later vacated by a federal court—applied only to institutions with more than 1 million credit-card accounts, despite the absence of any statutory distinction between large and small issuers.^[82] The Federal Reserve’s earlier CARD Act rulemaking had imposed no such size-based distinction.

Similarly, the CFPB’s overdraft-fee rule, which Congress later nullified, applied only to banks exceeding $10 billion in assets. Again, Congress had authorized differential supervision based on asset size, not different substantive legal obligations.^[83] In both cases, the selected thresholds appeared to reflect administrative or political judgments rather than principled consumer-protection analysis.

Threshold-based regulation therefore creates an ongoing cycle of political bargaining in which interest groups continuously seek to redefine, expand, contract, or exploit arbitrary regulatory lines. Over time, these dynamics can produce increasingly incoherent regulatory structures disconnected from the purposes they purportedly serve.

Sound regulatory policy should begin with the principle of avoiding unnecessary harm. In the context of threshold-based regulation, that caution counsels against expanding the Durbin model into additional areas such as the proposed Credit Card Competition Act. Creating yet another arbitrary threshold for payment-card regulation would likely reproduce many of the same distortions generated by the Durbin Amendment, including reduced market efficiency, increased compliance costs, diminished innovation, and reduced consumer access to valuable financial products and services.

V. Recommendations

Policymakers must account for tradeoffs among regulatory objectives when considering any reform. This paper does not attempt to identify the optimal balance among monitoring systemic risk, protecting the Federal Deposit Insurance Fund, promoting competition, and protecting consumers. As discussed above, when regulators prioritize stability, they often tend to insulate incumbents—reducing consumer choice, price competition, and innovation.

Regulation is not zero-sum. More regulation is not necessarily better, and less regulation does not necessarily improve market efficiency. Tradeoffs are inevitable, including between privacy and protection, stability and innovation, and competition and consumer protection. Policymakers should make those tradeoffs consciously, with clear objectives and empirical support.

The analysis in this paper shows that threshold-based regulation, while defensible in theory, has often been implemented in ways misaligned with stated regulatory objectives. Asset-based cliffs—particularly the $10 billion Durbin threshold, the CFPB supervisory trigger, and the $100 billion and $250 billion systemic-risk tiers—have generated clustering, arbitrage, consolidation pressure, and political rent-seeking rather than proportionate risk mitigation.

Reform should proceed along three tracks: avoiding new regulatory mistakes, repairing or re-engineering existing threshold frameworks, and modernizing regulatory tools to enable risk-based supervision without blunt regulatory cliffs.

A. Avoid New Regulatory Mistakes

1.     Do Not Replicate the Durbin Model in Credit Cards

The proposed Credit Card Competition Act (CCCA) would introduce a new asset-based threshold to regulate credit-card routing and network competition. Although framed as analogous to the Durbin Amendment, the CCCA would apply a different threshold than debit regulation, target a different layer of the payments ecosystem, and reintroduce a cliff-based intervention into a two-sided market already distorted by regulation.

Before enacting such a measure, policymakers should require a clearly articulated regulatory objective, empirical evidence that the threshold aligns with that objective, analysis of non-linear compliance costs and expected arbitrage behavior, and explicit modeling of cross-subsidy effects in two-sided markets.

Rigorous analysis is especially important because credit cards helped mitigate the Durbin Amendment’s disruptive effects. Consumers’ ability to shift toward credit-card use preserved access to payments and financial services after Durbin reduced the availability of free checking. Credit cards also proved essential during the COVID pandemic, when business closures and the shift to online commerce made electronic payments indispensable.[84]

2.     Replace Hard Cliffs with Graduated Scaling

Regulatory scaling should be continuous rather than discontinuous. Instead of imposing abrupt compliance cliffs at fixed asset levels, Congress and regulators should adopt graduated supervisory-intensity bands, phased compliance timelines, and reporting requirements scaled proportionally to risk exposure.

This approach would reduce incentives for institutions to cluster just below thresholds or leap far above them through merger activity. It would also better mitigate risk while minimizing unnecessary burdens on smaller financial institutions that often lack the scale to absorb sudden compliance costs and remain competitive.

3.     Adopt Principle-Based Rules and Risk-Based Prioritization

Thresholds should not substitute for regulatory reasoning. Asset size may remain one component of regulatory classification, but it should not be the sole determinant. Where regulatory objectives can be clearly defined, principles-based supervision can reduce gaming, decrease artificial clustering, and improve adaptability to innovation. The goal is not deregulation, but better calibration.

Bright-line rules are useful only when they provide a reasonably accurate proxy for the underlying objective. In those circumstances, they can reduce overall regulatory costs despite some over- and underinclusiveness. But when firms can evade the rule—and especially when evasion encourages economically wasteful behavior—thresholds can become counterproductive.

Supervisory intensity should reflect risk complexity, interconnectedness, operational fragility, consumer exposure, and concentration risk.[85] Where feasible, regulators should use operational-interconnectedness metrics and concentration exposure within defined product markets to identify stability or systemic-risk warning signs based on historical and theoretical models. Consumer complaints and observable indicators of competition likewise can help assess consumer-protection risks. Asset size and market-based metrics may correlate with complexity, but they are insufficient proxies for systemic or consumer risk.

Modern technology can strengthen risk-based supervision. Real-time data calls, artificial intelligence, and advanced analytics can enable regulators to build historical and theoretical risk models that were previously impractical because of resource constraints. Some regulators, including the CFPB’s Office of Supervision Policy, already use models to support risk-based supervision. Improved technology infrastructure creates an opportunity for ongoing, real-time risk monitoring.

Better tools can support remote monitoring and early corrective intervention. Remote monitoring can reduce supervisory burdens on lower-risk institutions, while early detection can reduce the need for expensive backward-looking corrective actions.

B. Repair and Re-Engineer Existing Rules

1.     Repeal the Durbin Amendment

Congress should conduct a structured ex post evaluation of the Durbin Amendment’s effects on consumer pricing, banking access, market concentration, and innovation. The evidence reviewed in this paper indicates that the amendment failed to achieve its stated competition objectives by any observable and measurable standard.

Congress should end the price-control experiment by repealing Section 1075 of Dodd-Frank. The Community Bank Relief Act would blunt some negative market effects by adjusting the threshold, but it would not solve the underlying problems. Consumers and small retailers would still suffer from regulatory arbitrage, market distortions, rent-seeking, reduced financial access, and higher prices.

2.     Assess the Effects of Fintech on Community Banks

Community-bank advocates argue that fintech partnerships made attractive by Durbin-driven regulatory arbitrage allow smaller banks to serve local communities more effectively and compete with larger banks. At the same time, those dynamics may encourage some community banks to become “zombie” institutions in which fintech activities displace traditional community-banking functions.

Congress and regulators should proceed cautiously to avoid stifling fintech growth, particularly given fintech’s important role in promoting competition and providing lower-cost financial services to consumers pushed out of large banks by higher fees after the Durbin Amendment.

The goal should be a regulatory system that preserves community banks’ distinctive role in the U.S. financial system while encouraging fair competition and reducing wasteful regulatory evasion. Policymakers should further study whether community banks’ shift toward banking as a service and fintech deposits adversely affects local access to credit. If necessary, that research should identify ways to preserve meaningful traditional community-banking activity without undermining beneficial fintech partnerships.

3.     Clarify the Objectives of CFPB Supervisory Thresholds

For both the $10 billion depository-institution trigger and larger-participant rules, policymakers should articulate the measurable supervisory objectives these thresholds are meant to accomplish. They should also explain why supervision, beyond enforcement, is necessary to achieve those objectives.

A consolidated consumer-financial-protection regulator can benefit consumers and markets. But the current framework needs clearer objectives and more disciplined evaluation.[86] Objective criteria would create opportunities to redesign consumer-financial regulation around measurable consumer benefits rather than arbitrary supervisory lines.

4.     Improve Thresholds That Remain

Where thresholds persist, regulators should explicitly evaluate whether they incentivize balance-sheet engineering, artificial fragmentation across entities, or inefficient outsourcing designed solely to avoid classification. Where such behavior is predictable, regulators should incorporate design adjustments from the outset.

Thresholds should not remain static for decades. When policymakers cannot reach consensus on better risk-based frameworks—or when thresholds remain appropriate—major asset-based triggers should include Consumer Price Index (CPI) indexing, periodic statutory review, and public reporting on effectiveness. These mechanisms would reduce political rent-seeking and prevent unintentional regulatory creep.

5.     Integrate Fintech into Risk-Based Frameworks

Fintech firms and other nonbank actors have become powerful sources of innovation and creators of consumer- and business-beneficial products and services. These firms should not remain structurally dependent on bank-charter arbitrage, whether Durbin remains in place or is repealed.

Policymakers should consider risk-calibrated access to payment rails, paired with sensible regulation. Regulators should seek an even playing field for banks and fintechs alike. Where bank-fintech relationships remain mutually beneficial, third-party risk-management rules should be modernized to recognize that fintechs may need direct supervisory and examiner-focused engagement regarding relevant confidential supervisory information.

These reforms would reduce incentives for inefficient structural complexity, diminish regulatory arbitrage, reduce regulatory opacity, and support market-beneficial innovation.

C. Modernize Regulatory Tools

1.     Improve Regulatory Infrastructure

The financial regulatory framework was largely conceived and implemented during the Industrial Age, with new rules and responsibilities bolted onto an older structure. The result is an uneven framework that creates inefficiencies and inconsistencies across products, market participants, and regulators.

Much of the existing framework dates to the New Deal, an era with very different technological, economic, regulatory, and political concerns. Later reforms were layered on piecemeal. Many foundational consumer-financial-protection laws—including the Truth in Lending Act, Electronic Funds Transfer Act, and Fair Debt Collection Practices Act—date to the 1970s, when consumers still relied on rotary phones and the U.S. Mail.

Banking regulation generally, and consumer-financial-protection regulation specifically, should be updated for the digital age. Modern financial markets require rules capable of addressing contemporary technology, consumer preferences, and the growing complexity and heterogeneity of retail-banking tools.

Modern oversight should rely on modern tools, including big-data analytics, API-enabled information sharing, artificial intelligence, and predictive analytics. These tools can reduce manual compliance burdens, identify emerging risks earlier, improve examination efficiency, and enhance regulatory consistency. Rather than continually expanding reporting mandates, regulators should invest in analytical capability.

One justification for threshold triggers is that they are transparent and easy to administer.^[87] Modern data tools can preserve those virtues while improving regulatory effectiveness and efficiency. Better tools can also help regulators adapt to resource constraints, improve data collection, expand interagency information sharing, and reduce compliance burdens on smaller institutions, particularly independent community banks and other small institutions focused on local markets.

Although not the central focus of this paper, regulatory modernization also requires institutional modernization. Agencies need a culture that embraces technological improvement, human-resources capabilities suited to the modern economy, and procurement rules that allow regulators to acquire and develop effective tools rather than entrenching incumbent vendors that profit from outdated government-procurement practices.^[88]

2.     Use Real-Time Data and Supervisory Modernization

Regulators often rely on static Call Report data submitted quarterly. Examiners spend substantial time manually reviewing documents and data during supervisory visits, sometimes requesting the same information repeatedly. Matters requiring attention may be identified manually and can vary by region or examiner. In crises such as March 2023, regulators often make urgent policy decisions using stale data and limited real-time market insight.

Near-real-time data collection, continuous liquidity monitoring, transaction-level fraud analytics, and automated anomaly detection could identify stability and systemic risks beyond what baseline regulatory rules capture. Analytics based on consumer complaints or social listening could likewise flag emerging consumer-protection risks earlier.

Policymakers can draw lessons from the Conference of State Bank Supervisors’ (CSBS) Catalyst Initiative and Data Innovation Challenges, which seek to avoid costly new reporting mandates and technology burdens while enabling monthly—or more frequent—financial-data feeds.^[89] CSBS has recognized that continuous data pipelines create challenges involving data accuracy, liability, and unaudited submissions. Some form of safe harbor may therefore be necessary to support improved continuous supervision, data-driven oversight, and risk detection independent of size thresholds.

3.     Build Adaptive Regulatory Frameworks

This paper highlights the need for policymakers to clarify regulatory objectives and conduct ex post evaluations of regulatory success. Regulatory frameworks should incorporate sunset provisions, mandatory retrospective review, and data-driven recalibration triggers. Adaptive systems can prevent poorly performing policies from becoming entrenched and help ensure that regulation remains aligned with stated objectives.

Thematic, cross-regulatory sandboxes can also reduce innovation-related risks while giving regulators better insight into mitigation strategies. Finally, Congress should update the Administrative Procedure Act to support regulatory modernization and flexibility, allowing regulations to keep pace with technological evolution and changes in business models.

VI. Conclusion

Threshold-based regulation has become a defining feature of post-Dodd-Frank financial oversight. Asset-size triggers, in particular, have proliferated as seemingly simple, objective tools for allocating supervisory resources, mitigating systemic risk, and advancing consumer protection. In practice, these bright-line cutoffs often have produced the opposite result.

Rather than aligning regulatory intensity with actual risk or consumer harm, rigid thresholds have created abrupt compliance cliffs that distort competition, encourage wasteful regulatory arbitrage, accelerate consolidation, and invite political rent-seeking. The $10 billion triggers for CFPB supervision and the Durbin Amendment, along with the $50 billion, $100 billion, and $250 billion systemic-risk tiers, illustrate how numerical lines untethered from coherent regulatory objectives can reshape markets in ways that reduce efficiency, limit credit availability, and harm the consumers regulation is meant to protect.

The empirical patterns are clear. Banks slow organic growth as they approach regulatory thresholds, then accelerate through mergers once they cross them. Fintech partnerships proliferate not only because they spur innovation, but also because they exploit loopholes that allow deposits and payments activity to remain below artificial caps. Some community banks, long pillars of local relationship lending, risk becoming pass-through entities for nonbank partners—preserving their charters while diluting their traditional economic role. Consumers face higher fees, fewer free accounts, reduced credit access, and a less competitive banking sector.

These outcomes are predictable responses to discontinuous compliance costs and revenue shocks. They persist because thresholds too often substitute for reasoned analysis of risk, complexity, interconnectedness, consumer harm, and market dynamics.

The Durbin Amendment epitomizes these failures. Adopted as a last-minute political bargain rather than after careful study, it imposed price controls on one side of a two-sided payments market, failed to index its $10 billion threshold to inflation, and ignored predictable cross-subsidy effects. The result has been higher retail-banking fees, diminished access to free checking, little evidence of meaningful pass-through savings to consumers, and persistent distortions between chartered banks and nonbank competitors.

This is not an argument against regulation. Financial markets require oversight to promote stability, protect consumers, preserve competition, and safeguard the deposit insurance fund. Thresholds can serve useful functions when they are grounded in clearly articulated objectives, calibrated to measurable risks, and subject to periodic review. But when they become proxies for analysis—when asset size stands in for complexity, systemic relevance, or consumer harm without empirical justification—they stop serving the public interest.

Policymakers should therefore pursue reform along three tracks. First, they should avoid replicating the Durbin model in new areas, including credit cards. Second, they should repair flawed existing frameworks through repeal, indexing, graduated scaling, or conversion to risk-based approaches. Third, they should modernize regulatory tools and institutions for the digital age.

That means clarifying the objectives of CFPB supervision, evaluating the effects of fintech partnerships on community banking, and investing in data infrastructure that enables continuous, risk-sensitive oversight rather than static quarterly snapshots. Advances in data analytics, artificial intelligence, real-time reporting, and risk modeling now make more nuanced, principles-based, and adaptive supervision more feasible than ever. Regulators no longer face a binary choice between light-touch neglect and blunt size-based cliffs.

Effective financial regulation must rest on the rule of law, economic reasoning, and empirical evaluation—not arbitrary numerical lines drawn through legislative horse-trading. Regulation should follow risk and impact, not create cliffs that markets expend resources to navigate around. By moving beyond threshold-driven governance toward more adaptive, transparent, and proportionate tools, Congress and regulators can better advance financial stability, competition, and consumer welfare.

The question is not whether to regulate. It is whether we regulate wisely. The evidence since Dodd-Frank shows that threshold-driven regulation has too often led policymakers astray. It is time to chart a better course.

 

[1] Anne O. Krueger, The Political Economy of the Rent-Seeking Society, 64 Am. Econ. Rev. 291 (1974) (defining political rent seeking as efforts by firms, individuals, or interest groups to secure economic gains through political or regulatory processes, rather than through productive activity).

[2] See Christopher Mufarrige & Todd Zywicki, Simple Rules for a Complex Regulatory World: The Case of Financial Regulation, 52 Eur. J.L. & Econ. 285 (2021).

[3] Jim L. Stackhouse, Why Are Banks Regulated?, Fed. Rsrv. Bank of St. Louis—On the Economy (Jan. 30, 2017), https://www.stlouisfed.org/on-the-economy/2017/january/why-federal-reserve-regulate-banks.

[4] See Todd Zywicki, Restoring the Rule of Law in Finance, Heritage Found. First Principles No. 92 (June 2023); see also Eugene N. White, Lessons from the History of Bank Examination and Supervision in the United States, 1863–2008, in Financial Market Regulation in the Wake of Financial Crises: The Historical Experience 25 (Alfredo Gigliobianco & Gianni Toniolo eds., 2009), https://www.bancaditalia.it/pubblicazioni/collana-seminari-convegni/2009-0001/1_volume_regolazione.pdf; Donato Masciandaro & Marc Quintyn, The Evolution of Financial Supervision: The Continuing Search for the Holy Grail, in 50 Years of Money and Finance: Lessons and Challenges 267 (Morten Balling & Ernest Gnan eds., 2013), https://www.suerf.org/doc/doc_8e296a067a37563370ded05f5a3bf3ec_1919_suerf.pdf.

[5] Consumer Fin. Prot. Bureau, Report of Taskforce on Federal Consumer Financial Law 353 (2021).

[6] 15 U.S.C. § 18a.

[7] See, e.g., 42 U.S.C. § 2000e(b) (defining “employer” under Title VII of the Civil Rights Act of 1964 as a firm with 15 or more employees); 29 U.S.C. § 630(b) (setting a 20-employee threshold under the Age Discrimination in Employment Act); 29 U.S.C. § 2611(4)(A) (applying the Family and Medical Leave Act only to employers with 50 or more employees).

[8] Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, 87 Fed. Reg. 9106 (Feb. 17, 2022).

[9] Falling below a regulatory threshold does not render a firm “unregulated.” Most U.S. regulatory systems preserve broad agency discretion through mechanisms such as case-by-case enforcement. State regulators and private litigants may also police misconduct even when federal regulators decline to act. See, e.g., supra note 7 (describing federal employee thresholds for employment-discrimination statutes). Many states impose substantially lower thresholds, in some cases applying employment laws to firms with as few as one to five employees. Likewise, a firm that falls below a threshold for one regulatory purpose—such as supervision by the Consumer Financial Protection Bureau—may still face enforcement actions or oversight from other regulators, including prudential regulators that impose no comparable threshold requirement.

[10] See Isaac Ehrlich & Richard A. Posner, An Economic Analysis of Legal Rulemaking, 3 J. Legal Stud. 257 (1974).

[11] Regulators may also choose whether thresholds update automatically—such as by indexing asset-based thresholds to inflation or another external benchmark—or instead require lawmakers to revise them through future affirmative action.

[12] See Adrien Alvero, Sakai Ando & Kairong Xiao, Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences, Int’l Monetary Fund Working Paper No. 22/41 (Feb. 2022).

[13] Consumer Fin. Prot. Bureau, supra note 5, at 271.

[14] See Brian Burnsed, Credit-Card Fee Reform Stays on the Back Burner, Bloomberg (Oct. 16, 2009), https://www.bloomberg.com/news/articles/2009-10-16/credit-card-fee-reform-stays-on-the-back-burner?embedded-checkout=true. Banks and credit unions, meanwhile, spent millions of dollars on counter-lobbying efforts.

[15] The original Durbin Amendment would have imposed price controls on banks with more than $1 billion in assets, but Congress raised the threshold to $10 billion to reduce the number of affected banks. Reports at the time suggested the amendment likely would not have survived had Sen. Richard Durbin retained the lower threshold. Lawmakers offered no substantive justification for the $10 billion figure beyond limiting the amendment’s reach. As discussed infra, Congress also failed to index the threshold to inflation, causing the number of covered banks to grow steadily after Dodd-Frank’s enactment without any corresponding regulatory rationale. See Late-Night Deal on “Swipe Fees”, Wall St. J. (June 25, 2010).

[16] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[17] Marc Labonte & David W. Perkins, Cong. Rsch. Serv., R45036, Bank Systemic Risk Regulation: The $50 Billion Threshold in the Dodd-Frank Act (2017).

[18] One account suggests the Senate deliberately set the Dodd-Frank systemic-risk threshold low enough to capture some bank holding companies that were not actually systemically significant. Lawmakers reportedly feared that identifying only genuinely “too big to fail” firms would worsen moral hazard by signaling implicit government support. In effect, Congress intentionally classified some non-systemic firms as “systemically risky” to obscure which institutions regulators truly considered indispensable. See Graham Steele, The Tailors of Wall Street, 93 U. Colo. L. Rev. 993 (2022). The perceived need for this sort of regulatory Kabuki theater itself illustrates the shortcomings of rigid threshold-based regulation compared with a more tailored approach.

[19] See Statement of Randal K. Quarles, Vice Chairman for Supervision, Bd. of Governors of the Fed. Rsrv. Sys., before the S. Comm. on Banking, Hous., & Urb. Affs. (Oct. 2, 2018), https://www.federalreserve.gov/newsevents/testimony/files/quarles20181002a.pdf.

[20] See Dania Cruz & Michael v. Feliberty, The Cost of Dodd-Frank Act for Commercial Banks, 13 Int’l J. Econ. & Fin. Issues 15 (2023); William C. Dunkelberg & P. De Magistris, U.S. Small Bus. Admin., Office of Advocacy, Costs of Federal Regulation on Small Business (2001).

[21] Marc Labonte & David W. Perkins, Cong. Rsch. Serv., R46779, Over the Line: Asset Thresholds in Bank Regulation (2021).

[22] Office of Fin. Rsch., U.S. Dep’t of the Treasury, Asset Management and Financial Stability (2013).

[23] Larger institutions may, in fact, possess greater resources and operational sophistication to comply with consumer-protection, data-security, and privacy requirements than smaller firms.

[24] Compare Fed. Rsrv. Stat. Release, Insured U.S. Chartered Commercial Banks That Have Consolidated Assets of $300 Million or More (Sept. 30, 2025), https://www.federalreserve.gov/releases/lbr/current, with Fed. Rsrv. Stat. Release, Insured U.S. Chartered Commercial Banks That Have Consolidated Assets of $300 Million or More (Dec. 31, 2009), https://www.federalreserve.gov/releases/lbr/20091231/default.htm.

[25] Office of Priv. & Civ. Liberties, U.S. Dep’t of Just., Overview of the Privacy Act of 1974 (2020 ed.).

[26] Jason Schmidt & Niel D. Willardson, Banking Regulation: The Focus Returns to the Consumer, Fed. Rsrv. Bank of Minneapolis, The Region, at 14 (June 2004).

[27] Ryan Niladri Banerjee et al., The Rise of Non-Bank Financial Institutions: Implications for Monetary Policy, BIS Bulletin No. 116 (2025).

[28] Consumer Fin. Prot. Bureau, supra note 5.

[29] Alberto Bitonti et al., Citizens and the Public Perception of Lobbying: Do Regulation and Trust in Political Institutions Make a Difference?, 14 Interest Groups & Advocacy (2025).

[30] Andreas Fuster et al., Analyzing the Effects of CFPB Oversight, Liberty St. Econ. (Oct. 9, 2018), https://libertystreeteconomics.newyorkfed.org/2018/10/analyzing-the-effects-of-cfpb-oversight.

[31] See Benjamin S. Kay, Mark D. Manuszak & Cindy M. Vojtech, Competition and Complementarities in Retail Banking: Evidence from Debit Card Interchange Regulation, 34 J. Fin. Intermediation 91 (Apr. 2018).

[32] See, e.g., Robert J. Shapiro, The Costs and Benefits of Half a Loaf: The Economic Effects of Recent Regulation of Debit Card Interchange Fees, Sonecon Working Paper (Oct. 2013), https://www.unfaircreditcardfees.com/SHAPIROreport.pdf.

[33] Renee Haltom & Zhu Wang, Did the Durbin Amendment Reduce Merchant Costs? Evidence from Survey Results, Fed. Rsrv. Bank of Richmond Econ. Brief No. 15-12 (2015).

[34] Vladimir Mukharlyamov & Natasha Sarin, The Impact of the Durbin Amendment on Banks, Merchants, and Consumers (Penn Carey Law Fac. Scholarship No. 2046, 2019).

[35] Consumer Fin. Prot. Bureau, supra note 5, at 590.

[36] See, e.g., Robert Shapiro with Jerome Davis, The Unanticipated Costs and Consequences of Federal Reserve Regulation of Debit Card Interchange Fees, Progressive Pol’y Inst. (Dec. 2025), https://www.progressivepolicy.org/wp-content/uploads/2025/12/PPI_The-Unanticipated-Costs-and-Consequences-of-Federal-Reserve-Regulation-of-Debit-Card-Interchange-Fees_V3.pdf.

[37] We predicted this outcome at the time in response to Robert Shapiro’s argument that consumers would benefit from the Durbin Amendment. See Todd J. Zywicki, Geoffrey A. Manne & Julian Morris, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, Int’l Ctr. for L. & Econ. (Apr. 25, 2017), https://laweconcenter.org/resources/unreasonable-and-disproportionate-how-the-durbin-amendment-harms-poorer-americans-and-small-businesses; see also id. at 25–31 (describing as “fanciful” the claim that the Durbin Amendment would benefit consumers and criticizing the assumption that merchants would pass interchange-fee savings through to shoppers).

[38] Todd J. Zywicki, Geoffrey A. Manne & Julian Morris, Price Controls on Payment Card Interchange Fees: The U.S. Experience, George Mason Univ. L. & Econ. Rsch. Paper No. 14-18 (2014).

[39] Id. at 6.

[40] Id. at 7.

[41] Zywicki, Manne & Morris, supra note 37.

[42] Zywicki, Manne & Morris, supra note 37, at 11.

[43] See Shapiro, supra note 32.

[44] See Shapiro, supra note 36. Ironically, Shapiro’s revised conclusions closely track the predictions my co-authors and I made in response to his earlier arguments. See Zywicki, Manne & Morris, supra note 37.

[45] Kirsten Matoy Carlson, Statutes and Special Interests, 119 Nw. U. L. Rev. 1367 (2025).

[46] Swipe Fees, Nat’l Retail Fed’n, https://nrf.com/advocacy/policy-issues/swipe-fees (last visited May 10, 2026).

[47] H.R. 2382, the Credit Card Interchange Fees Act of 2009; and H.R. 3639, the Expedited Card Reform for Consumers Act of 2009: Hearing Before the H. Comm. on Fin. Servs., 111th Cong. (2009).

[48] Anna Palmer, Credit Card Coalition Says Durbin Barred It from Interchange Event, Roll Call (May 13, 2010), https://rollcall.com/2010/05/13/credit-card-coalition-says-durbin-barred-it-from-interchange-event.

[49] Survey: Fed Debit Card Rule Will Harm Community Bank Customers, Indep. Cmty. Bankers of Am. (Feb. 14, 2011), https://www.pymnts.com/news/2011/survey-fed-debit-card-rule-will-harm-community-bank-customers.

[50] Maureen Kane, Durbin Amendment to the Dodd-Frank Act: Two Caps are Better than One for Debit Card Interchange Fees, 41 Fla. St. U. L. Rev. 1147 (2014).

[51] See Todd J. Zywicki, Rent-Seeking, Crony Capitalism, and the Crony Constitution, 23 S. Ct. Econ. Rev. 77 (2016); Zywicki, supra note 4.

[52] See Shahid Naeem, Capital One-Discover: A Competition Policy and Regulatory Deep Dive 8 (Am. Econ. Liberties Project Mar. 21, 2024) (quoting Capital One CEO Richard Fairbank), https://www.economicliberties.us/our-work/capital-one-discover-a-competition-policy-and-regulatory-deep-dive/#_ftnref34; see also Julian Morris, Eric Fruits, Ben Sperry & Todd J. Zywicki, The Capital One-Discover Merger: A Law and Economics Analysis, Int’l Ctr. for L. & Econ. (July 23, 2024), https://laweconcenter.org/resources/the-capital-one-discover-merger-a-law-and-economics-analysis-2.

[53] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, Int’l Ctr. for L. & Econ. (June 2, 2010), https://laweconcenter.org/images/articles/zywicki_interchange.pdf.

[54] As used here, “fintech” refers to nonbank firms that provide financial services through intermediary banks. Some broader definitions also include bank-facing technologies such as RegTech and SupTech providers.

[55] Ronald H. Coase, The Nature of the Firm, 4 Economica 386 (1937).

[56] See Fin. Servs. Intel. Rep., Customers Are Opening New Accounts and Quietly Making Them Their Primary Relationships, J.D. Power (Oct. 2025), https://www.jdpower.com/business/resources/customers-are-opening-new-accounts-and-quietly-making-them-their-primary (reporting survey evidence that 77% of fintech customers view the fintech as their primary financial institution and the underlying bank as merely a legal technicality); Steve Cocheo, Consumers Say It’s Not You, It’s Chime, The Fin. Brand (Nov. 12, 2025), https://thefinancialbrand.com/news/fintech-banking/chime-grabs-up-market-share-for-new-checking-accounts-193589.

[57] In some cases, regulators have sanctioned nonbank providers for misleadingly implying to consumers that they are “banks.” See Robert C. Azarow & Kevin M. Toomey, Arnold & Porter Kaye Scholer LLP, Regulators Crack Down on FinTechs’ Misrepresentation of Deposit Insurance (Aug. 10, 2022), https://www.arnoldporter.com/en/perspectives/advisories/2022/08/regulators-crack-down-on-fintechs.

[58] See Remarks by Assistant Secretary for Financial Institutions Graham Steele at the Americans for Financial Reform Education Fund (July 25, 2023), https://home.treasury.gov/news/press-releases/jy1648.

[59] See Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557 (1992).

[60] See, e.g., Berkan Oztas, Deniz Cetinkaya, Festus Adedoyin, Marcin Budka, Gokhan Aksu & Huseyin Dogan, Transaction Monitoring in Anti-Money Laundering: A Qualitative Analysis and Points of View From Industry, 159 Future Generation Computer Sys. 161 (2024).

[61] Zywicki, Manne & Morris, supra note 38.

[62] Dan Fitzpatrick & David Enrich, Big Bank Weighs Fee Revamp: Bank of America Considers a Revamp That Would Affect Millions of Customers, Wall St. J. (Mar. 1, 2012), https://www.wsj.com/articles/SB10001424052970204571404577253742237347180.

[63] Edward J. Kane, Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation, 36 J. Fin. 355 (1981).

[64] Commentators have frequently observed that very few de novo banks have been created in the 16 years since Dodd-Frank’s enactment.

[65] See Thomas F. Siems, Do Banking Regulations Disproportionately Impact Smaller Community Banks?, Conf. of State Bank Supervisors (July 29, 2025), https://www.csbs.org/sites/default/files/external-link-files/CSBS%20Working%20Paper%202501%20Compliance%20Costs.pdf; Thomas Hogan, Costs of Compliance with the Dodd-Frank Act, Rice Univ. Baker Inst. for Pub. Pol’y Issue Brief No. 09.06.19 (2019); Fed. Rsrv. Bank of St. Louis, Compliance Costs, Economies of Scale and Compliance Performance: Evidence From a Survey of Community Banks (Apr. 2018), https://www.communitybanking.org/-/media/files/communitybanking/compliance-costs-economies-of-scale-and-compliance-performance.pdf?sc_lang=en&hash=19C682B5EFB86B37D6A8604DE9087DA6 (finding that community banks bore compliance costs roughly twice as high, as a percentage of assets, as larger banks); David C. Wheelock & Paul W. Wilson, Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks, 44 J. Money, Credit & Banking 171 (2012); Jim DiSalvo & Ryan Johnston, Banking Trends: How Dodd-Frank Affects Small Bank Costs, Banking Trends, First Quarter 2016, at 14 (Fed. Rsrv. Bank of Philadelphia Rsch. Dep’t).

[66] See Ron J. Feldman, Ken Heinecke & Jason Schmidt, Quantifying the Costs of Additional Regulation on Community Banks, Fed. Rsrv. Bank of Minneapolis Econ. Pol’y Papers (May 30, 2013), https://www.minneapolisfed.org/article/2013/quantifying-the-costs-of-additional-regulation-on-community-banks.

[67] Patrick T. Harker, President, Fed. Rsrv. Bank of Phila., Community Banking in the 21st Century (keynote speech at the 2019 Community Banking in the 21st Century Research and Policy Conference, Oct. 2, 2019), https://www.philadelphiafed.org/-/media/frbp/assets/institutional/speeches/harker/2019/10-02-19-st-louis-community-banking.pdf.

[68] Allen N. Berger & Philip E. Strahan, The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future (Fed. Rsrv. Bank of N.Y. Staff Rep. No. 55, 1998).

[69] See Christa H.S. Bouwman, Shuting (Sophia) Hu & Shane A. Johnson, Differential Bank Behaviors Around the Dodd-Frank Act Size Thresholds, 35 J. Fin. Intermediation 47 (Apr. 2018).

[70] See Alvero, Ando & Xiao, supra note 12.

[71] See David Hou & Missaka Warusawitharana, Effects of Fixed Nominal Thresholds for Enhanced Supervision, FEDS Notes (July 19, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/effects-of-fixed-nominal-thresholds-for-enhanced-supervision-20180719.html.

[72] See Hailey Ballew, Michael Iselin & Allison Nicoletti, Accounting-Based Thresholds and Growth Decisions in the Banking Industry, 27 Rev. Acct. Stud. 232 (Mar. 2022).

[73] Shradha Bindal, Christa H.S. Bouwman, Shuting (Sophia) Hu & Shane A. Johnson, Bank Regulatory Size Thresholds, Merger and Acquisition Behavior, and Small Business Lending, 62 J. Corp. Fin. 101519 (2020).

[74] See Fed. Rsrv. Bank of Kansas City, The Critical Role of Community Banks (Aug. 20, 2024), https://www.kansascityfed.org/banking/community-banking-bulletins/the-critical-role-of-community-banks.

[75] Id.

[76] By contrast, few community banks that serve as primary fintech partners appear to operate in rural communities or other “banking desert” areas.

[77] See TBBK Leans Heavily Into Fintech Funding and Fee-Based Growth, StockTitan.net (Feb. 25, 2026), https://www.stocktitan.net/sec-filings/TBBK/10-k-bancorp-inc-files-annual-report-7514251bc81a.html#:~:text=Management%20highlights%20a%20deliberate%20balance,for%20this%20card%2Dcentric%20franchise.

[78] See Todd Zywicki, Restoring the Rule of Law in Finance, Heritage Found. First Principles No. 38 (Oct. 26, 2010), https://www.heritage.org/courts/report/restoring-the-rule-law-finance.

[79] As one federal district court recently observed, Congress “inconsistently used ‘which,’ ‘that,’ and commas throughout the Durbin Amendment.” Corner Post, Inc. v. Bd. of Governors of the Fed. Rsrv. Sys., No. 22-1008, slip op. at *21 (D.N.D. Aug. 8, 2025). The court added: “Here is where careful attention in English class regarding the use of ‘which’ versus ‘that’ and comma versus no comma might have been particularly useful.”

[80] Community Bank Relief Act, S. 11, 119th Cong. (2025).

[81] Press Release, Merch. Payments Coal., MPC Says Raising Durbin Threshold Would Cost Merchants and Consumers Billions (Mar. 12, 2024) (quoting Doug Kantor), https://merchantspaymentscoalition.com/news.

[82] See Consumer Fin. Prot. Bureau, Credit Card Penalty Fees (Regulation Z) Rule, 12 C.F.R. § 1026.52(b), vacated by Chamber of Commerce of the U.S.A. v. CFPB, No. 4:24-cv-00213-P (N.D. Tex. 2025).

[83] See Consumer Fin. Prot. Bureau, Overdraft Lending: Very Large Financial Institutions, 89 Fed. Reg. 106768 (Dec. 30, 2024), nullified by Joint Resolution Disapproving the Rule Submitted by the Bureau of Consumer Financial Protection Relating to “Overdraft Lending: Very Large Financial Institutions,” Pub. L. No. 119-019, 139 Stat. 22 (2025). Ironically, smaller institutions exempted from the overdraft-fee rule typically rely more heavily on overdraft fees and derive a larger share of revenue from them than the large banks covered by the rule. See G. Michael Flores & Todd J. Zywicki, Commentary on CFPB Report: Data Point: Checking Account Overdraft (2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2499716. From a consumer-protection perspective, the CFPB therefore had stronger reasons to target smaller banks than larger ones. See Kate Berry, CFPB’s Overdraft Proposal Exempts the Small Banks That Need It Most, Am. Banker (Jan. 23, 2024), https://www.americanbanker.com/news/cfpbs-overdraft-proposal-exempts-the-small-banks-that-need-it-most.

[84] See Julian Morris, Todd J. Zywicki & Geoffrey A. Manne, The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update, Int’l Ctr. for L. & Econ. (Mar. 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4063914.

[85] See Loretta J. Mester, Building Financial System Resilience, Fed. Rsrv. Bank of Cleveland (Feb. 29, 2024), https://www.clevelandfed.org/people/profiles/m/mester-loretta-j/sp-20240229-building-financial-system-resilience.

[86] See Alden F. Abbott & Todd J. Zywicki, How Congress Should Protect Consumers’ Finances, in Prosperity Unleashed: Smarter Financial Regulation 287 (2017).

[87] Labonte & Perkins, supra note 21.

[88] Jo Ann Barefoot & David Ehrich, Financial Regulators’ Dilemma: Administrative and Regulatory Hurdles to Innovation (Alliance for Innovative Regul., Buckley LLP & Flourish Ventures 2020).

[89] Catalyst Initiative, Conf. of State Bank Supervisors, https://www.csbs.org/catalyst-initiative (last visited Mar. 31, 2026).