FDIC Proposal to Raise Regulatory Thresholds: What It Means for Banks, the Economy and Regulation – KJK

In a move poised to reshape the regulatory landscape for U.S. banks, the Federal Deposit Insurance Corporation (FDIC) has signaled support for raising asset thresholds that determine the intensity of regulatory scrutiny—adjusting for inflation and rebalancing oversight priorities. Backed by FDIC Vice Chair Travis Hill, the proposal reflects a broader effort to tailor regulation to risk, not just size.

The Proposal: Raising the Bar for Compliance

Currently, banks with over $100 billion in assets are subject to stricter rules—ranging from capital and liquidity stress tests to resolution planning and recovery protocols. But that threshold hasn’t been adjusted for inflation since it was established in the wake of the 2008 crisis. “A $100 billion bank in 2018 is equivalent to about $124 billion today… keeping the threshold frozen effectively tightens regulation every year,” Hill explained in a recent speech. The FDIC’s proposal would likely raise these thresholds (e.g., to ~$125 billion), freeing banks from certain compliance requirements unless they truly pose systemic risk.

The Proposal at a Glance

• Recalibration of Static Thresholds: Many of the thresholds in FDIC regulations—especially those in Part 363 (annual audits, internal controls, committee composition, reporting)—haven’t been raised in decades.
• Automatic Inflation Indexing: Adjustments would occur every two years using the CPI-W, or sooner if inflation exceeds 8%, to preserve thresholds in “real terms”.
• Broader Scope: The plan covers asset-based triggers, audit reporting thresholds, cross-border limits, liquidation caps and more.
• Adjustments Effective Each April 1: Adopted via direct final rulemaking without lengthy notice-and-comment period.

Expected Economic Impacts

Reduced Compliance Costs: Smaller regional banks and superregionals could shift down into less burdensome supervisory categories, potentially saving tens of millions annually in legal, audit and staffing costs. Hill: “We can refocus supervision on actual financial risks… rather than procedural checklists that create a compliance industrial complex.”

More Lending Capacity: With fewer regulatory capital buffers required, eligible banks may reallocate capital toward commercial lending, tech modernization and branch expansion, particularly in underserved areas. This could increase credit availability, particularly in mid-size markets, which are often served by $50B–$150B banks.

Potential Risk Mispricing: Economists warn that lower scrutiny might allow some risky practices to re-emerge undetected—especially if inflationary pressures ease and asset sizes revert toward historical norms. Sheila Bair, former FDIC Chair, has cautioned against “regulatory dilution that doesn’t correspond with real systemic risk reduction.”

Why It Matters

Avoiding Regulatory Creep

Without adjustment, inflation slowly drags smaller banks into compliance requirements meant for larger institutions. “These thresholds have not been raised in decades and present meaningful challenges for small institutions that have been scoped into the rule,” Hill told the FDIC Board. Analysis by ABA’s Banking Journal shows an example: what once covered 7% of banks at a $1 billion asset threshold now affects approximately 24%, a classic case of “regulatory creep”.

Relief for Community Banks

Smaller institutions, especially in rural areas, often struggle to meet audit committee and reporting burdens. Hill noted that these banks “may experience difficulties attracting and retaining individuals with the requisite experience”. The higher thresholds proposed will help ease the costs of compliance for these smaller banks.

Sharper Risk-Focus Among Regulators

By tailoring thresholds, regulators can concentrate limited resources on truly larger, more complex institutions, theoretically reducing risk at the most economically significant levels.

Regulatory Clarity and Predictability

Automatic indexing reduces arbitrary shifts in scope, supporting better planning and compliance by banks. As one FDIC memo observed, this helps avoid “undesirable and unintended outcomes”.

Industry Reactions: A Divided Field

The move has been cheered by trade groups like the Bank Policy Institute and the Independent Community Bankers of America (ICBA). “Crushing compliance costs hurt community banks and consumers alike,” Hill said at an ICBA event earlier this year. These groups argue that raising the threshold would boost competition against Wall Street giants, encourage innovation in financial services and alleviate staff burden on compliance functions.

Ironically, some large banks are cautious about threshold hikes, worrying that less-regulated competitors could underprice products or take on more risk. Consumer watchdogs, like the Center for Responsible Lending, warn of potential fallout: “Rolling back supervision invites the same dynamics that led to SVB’s collapse,” one spokesperson said. Concerns about “regulatory arbitrage” are also rising, especially among fintech-bank partnerships.

Outlook: A Test for “Tailoring”

Travis Hill and other Republican-appointed regulators are pushing a philosophy that tailored regulation equals smarter regulation. “It is time to adopt a more open-minded approach,” Hill said. “Let’s focus more on capital and liquidity, and less on documenting processes to appease examiners.” If finalized, the new thresholds could be the first of several moves to simplify and modernize regulation, including:

• Revisiting Basel III Endgame capital hikes
• Reforming Bank Secrecy Act (BSA) requirements
• Clarifying rules for crypto custody and bank-fintech partnerships

Bottom Line

The FDIC’s proposal to raise regulatory thresholds is part inflation catch-up, part strategic shift. It may free up billions in compliance spending, strengthen regional lenders, and better align oversight with real risk. But whether the benefits outweigh the potential for oversight gaps remains hotly debated. The next 60 days of public comment are expected to shape the proposal’s final form. Additionally, the FDIC flagged that this is a first phase, with follow-up proposals expected to target additional thresholds like the $10 billion large bank pricing scorecard and other interagency measures, and has even hinted at collaboration with other regulators to harmonize threshold updates across the regulatory landscape.

We will continue to monitor the ongoing changes in the regulatory landscape and provide regular updates.

Contact

Questions about how these changes could affect your business or lending activity? Contact KJK Commercial Finance & Banking partner Jessica Wiedemann at 216.736.7214 or JLW@kjk.com.