To Grow or Not to Grow: Regulatory burdens increase as banks get bigger

We have not seen significant analytical consideration of one of the central themes underlying the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which seeks to limit risk in the banking system by imposing escalating regulatory requirements on banking organizations based on their size.

This “growth tax” is imposed not only on large banks that may be deemed systemically important, but also on community banking organizations. As a result, all banks must now consider the regulatory implications of growing larger, either organically or through acquisitions, against the revenue growth and operational efficiencies that growth often seeks to achieve. Indeed, investors in the equity and debt of such institutions are sure to do so when making their investment and pricing decisions.

Banking organizations will experience ever escalating regulatory requirements and costs that may impact their life, death and profitability as they pass the $500 million, $1 billion, $10 billion, $50 billion and $250 billion consolidated asset thresholds. These costs will be imposed in a variety of ways, including through higher capital requirements, additional assessments and fees, and enhanced regulation and supervision, raising the question of whether it makes sense to grow or not.

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