Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—White Paper: Arbitrary Risk Thresholds Distort Financial Markets, (May 20, 2026)

By A. Bryan Gerepka

Regulation should follow risk and impact, not create cliffs that markets expend resources to navigate around.

Threshold-based financial regulation can distort competition, encourage regulatory arbitrage, harm consumers, and result in strategic decisions that undermine policy objectives, according to a white paper issued by the International Center for Law & Economics (ICLE). The white paper, titled “Regulatory Tripwires: How Arbitrary Thresholds Distort Financial Markets”, is authored by ICLE Nonresident Scholar Todd J. Zywicki.

The paper questioned the effectiveness of systemic risk framework and triggers implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank increasingly relies on threshold triggers—most often asset-size cutoffs—to determine when financial institutions are subject to enhanced standards, the author wrote. But focusing solely on asset size as a proxy for risk ignores factors, such as interconnectedness and complexity of institutions, the author observed, citing the 2023 banking turmoil as evidence of this flawed approach.

No Clear Rationale for Thresholds. Asset-size triggers have proliferated as seemingly simple, objective tools for allocating supervisory resources, mitigating systemic risk, and advancing consumer protection. In practice, however, Zywicki noted that these bright-line cutoffs have often produced the opposite result. Rather than aligning regulatory review with actual risk or consumer harm, rigid thresholds can lead to abrupt compliance cliffs that distort competition, encourage wasteful regulatory arbitrage, accelerate consolidation, and invite political rent-seeking.

The paper found that the Dodd-Frank systemic-risk framework originally imposed enhanced prudential standards for institutions with assets of $50 billion, 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 to impose price controls on debit-card interchange fees.

The author questioned the rationale for each cutoff, noting that, in each case, Congress and regulators often failed to explain why the chosen numerical line advanced the relevant regulatory objective. “When policymakers draw lines without explaining why those lines advance a regulatory objective, firms rationally organize themselves around avoiding the cliff, rather than serving consumers better. The result is less competition, more consolidation, and higher costs for the very consumers regulation is supposed to protect.”

Durbin Amendment. The Durbin Amendment illustrates the problem most clearly: 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 author stated. The price controls reduced interchange revenue, led banks to raise fees, and reduced free checking. The amendment produced little evidence of consumer savings, he stated. At the same time, it allowed fintechs to design structures and partnerships to exploit loopholes that allow deposit and payment activity to remain below the $10 billion cap. Moreover, 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, the author observed.

“Thresholds can be useful when they are tied to measurable risks and subject to regular review,” Zywicki added. “But when they become a shortcut for analysis, they invite rent-seeking, arbitrage, and market distortions. Financial regulation needs better tools than arbitrary numerical lines, the author stated.

Recommendations. The paper called on policymakers to pursue reform along three tracks.

1. Avoid replicating the Durbin model in new areas, including credit cards.

2. Repair flawed existing frameworks through repeal, indexing to reflect inflation impact, graduated scaling, or conversion to risk-based approaches to reduce incentives for arbitrage and strategic avoidance.

3. Modernize regulatory tools and institutions for the digital age. This 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 author concluded.

Companies: International Center for Law & Economics

IndustryNews: BankingOperations CFPB ChecksElectronicTransfers ConsumerCredit CreditDebitGiftCards DoddFrankAct FinancialStability