Regulatory Tripwires: How Arbitrary Thresholds Distort Financial Markets
- Author(s):
- Todd J. Zywicki
- Posted:
- 06-2026
- Law & Economics #:
- 26-11
- Availability:
- Full text (most recent) on SSRN
ABSTRACT:
The use of asset-size thresholds in U.S. financial regulation is widespread. The use of “thresholds” is often promoted for their simplicity, transparency, and administrability. This article examines how thresholds frequently distort firm behavior, undermine competition, and generate unintended consequences that diverge from their stated policy goals.
Dodd-Frank dramatically expanded the use of these “regulatory tripwires.” The law established systemic-risk tiers (originally at $50 billion, later revised to $100 billion and $250 billion), the CFPB’s $10 billion supervisory trigger for depository institutions and “larger participant” rules for nonbanks, and the Durbin Amendment’s $10 billion cutoff imposing price controls on debit-card interchange fees. Rather than aligning oversight with actual risk or consumer harm, these bright-line rules create sharp compliance cliffs. Banks respond rationally by slowing organic growth, fragmenting operations, restructuring balance sheets, and pursuing mergers to spread fixed compliance costs.
The article argues that poorly calibrated thresholds too often substitute for reasoned regulatory analysis, invite political rent-seeking, and expand in scope over time without deliberate policy review due to the absence of inflation indexing or periodic evaluation. It recommends repealing or reforming flawed thresholds—particularly the Durbin Amendment—replacing hard cliffs with graduated approaches, indexing remaining thresholds, and modernizing supervision through risk-based frameworks supported by real-time data analytics and advanced technology.