In defense of mid-sized banks: a plea to reconsider regulations

The United States is blessed with banks of all sizes, each tailored to fit the needs of our diverse economy. However, policymakers have come to underappreciate the importance of mid-sized banks to the economy — banks with asset sizes ranging from $10 billion to $700 billion. 

Current laws, regulations and regulatory discussions indicate this “middle” range is significant, often further classified into smaller mid-size banks ($10 billion to $100 billion), regional banks ($100 billion to $250 billion, or “Category IV” banks) and super-regional banks ($250 billion to $700 billion, or “Category III” banks).

Mid-sized banks are vital to America’s economic landscape, promoting entrepreneurship, innovation and financial product development. Most, if not all, leading corporate innovators established their first banking relationship with a mid-sized bank or even credit union — including companies such as Apple, Microsoft, Amazon and Google.

Large banks cannot encourage the same level of entrepreneurialism. In Canada, Europe and other places where the economy relies heavily on a handful of massive financial institutions, there seems to be less room for innovation and entrepreneurship. In contrast, the United States has a more diverse banking system, and this allows for a more dynamic and innovative capital market. 

Additionally, the presence of smaller banks in the U.S. has fostered the growth of the fintech movement, which is driving innovation in the consumer lending and payment space. The access to U.S. payment systems provided by smaller banks has been crucial for the success of these innovative fintech companies. 

However, the current regulations place community- and mid-size banks at a competitive disadvantage. The complexity and volume of these rules may be suitable for institutions with massive operations and extensive resources. However, it is unreasonable to expect a bank with 10,000 employees and $100 billion in assets to comply with the same rules as financial conglomerates with 300,000 employees and $3.8 trillion in assets. And yet, too often these institutions are treated as peers through the supervisory process.

“Principle-based” rules, intended to provide flexibility for supervisors in overseeing institutions of different sizes and complexities, can also inadvertently put smaller banks at a disadvantage. The regulations typically require banks to implement controls based on the level of risk they face or to have effective control programs in place. 

For larger institutions, this means adhering to best practices that are shared through industry channels and supervision processes. However, smaller banks often struggle to determine what constitutes an appropriate risk-based approach to regulatory compliance. What may have been acceptable one year might be deemed insufficient the next due to changing market conditions, supervisory priorities or even shifts in examination staff assigned to a specific bank.

The current imbalance in the banking industry punishes mid-sized banks even further. In times of trouble, larger banks, designated as “systemically important” are likely to be rescued or have access to short-term funding, while smaller enterprises do not receive the same level of support. If we desire a diverse banking system, it is crucial to consider measures that address this inconsistency and help small- and mid-sized banks.

Addressing this concern should not result in further regulatory burdens for the largest banking organizations, nor should it imply that America does not benefit from having these large institutions. On the contrary, we have a robust regulatory framework in place for these organizations.

It is crucial to diversify supervision and regulation within our banking system while preserving the overall diversity of the American banking industry. We are approaching a critical point where further regulatory or supervisory measures may inadvertently strain mid-sized banks beyond their capacity. 

Consequently, relevant congressional committees and regulators should collaborate with banks of all sizes in developing regulations and supervisory practices that take into account the unique characteristics and size of each enterprise being supervised lest we lose one of the special strengths of the U.S. economy.

Eugene Ludwig is the former comptroller of the currency, CEO of Ludwig Advisors, and chairman of the Ludwig Institute for Shared Economic Prosperity. On X (formerly Twitter): @geneludwig.