Accounting-Based Thresholds and Growth Decisions in the Banking Industry

Abstract

This paper examines the effects of accounting-based thresholds in regulation on growth decisions
in the banking industry. To investigate this relation we study changes in growth around the $10
billion asset threshold specified in the Dodd-Frank Act. We first document that in the years
after the new threshold-based regulations are announced, banks slow their asset growth as they
approach the threshold and then accelerate their asset growth as they cross the threshold. Next,
we document the primary mechanism banks use to achieve each of these changes in growth:
reduced deposit growth rates to slow growth and increased acquisition activity to accelerate
growth. Finally, we document that while banks attempt to remain below the threshold, they
reduce the growth of their investment portfolio and report a lower return on assets. Also, when
banks accelerate growth through acquisition activity, those acquisitions involve larger and riskier
target banks. These findings suggest that regulations with accounting-based thresholds can affect
growth decisions and profitability in the banking industry.

Keywords: Banks, Regulation, Accounting-Based Thresholds, Acquisitions, Deposits

JEL Classification: G21, G28, G34, M40