No. 228: Community Bank Lending Around Regulatory Thresholds

This paper examines the consequences of community banks modifying their lending to avoid crossing asset size thresholds that trigger increases in reporting, audit, and governance requirements. Using a sample of 6,841 bank-quarter observations and over 761,000 loan-level records from 2012–2024, we document significant bunching of community banks just below these asset thresholds. Unlike large banks that adjust investment portfolios, community banks manage size by rejecting loans that are typically associated with relationship lending, in particular, small business loans and personal loans to underserved populations (such as minorities and lower income households). Consistent with reduced lending having real effects, we find that counties with community banks that are just below the threshold see a decline in new business formation and decreasing wages. Our evidence suggests that size-based regulation motivates some community banks to retreat from aspects of their traditional relationship lending role, with effects on local economic outcomes and underserved communities.