The Federal Reserve Bank of St. Louis just published a short summary of research by economists with the Federal Reserve Bank of Kansas City concluding that compliance costs weigh “quite a bit” more heavily on smaller banks than their larger counterparts in the community banking segment. Looking specifically at banks under $10 billion in total assets (where additional Dodd-Frank-related burdens are triggered), the study found that the ratio of compliance costs as a percentage of total noninterest expenses were inversely correlated with the size of the bank. While banks with total assets between $1 and $10 billion in total assets reported total compliance costs averaging 2.9% of their total noninterest expenses, banks between $100 million and $250 million reported total compliance costs averaging 5.9% and banks below $100 million reported average compliance costs of 8.7% of non-interest expenses.

While nominal compliance costs continued to increase as banks increased in size (from about $160 thousand in compliance expense annually for banks under $100 million to $1.8 million annually for banks between $1 and $10 billion), the banks were better able to absorb this expense in the larger banks. Looked at another way, the marginal cost of maintaining a larger asset base, at least in the context of compliance costs, decreases as the asset base grows.

With over 1,663 commercial banks with total assets of less than $100 million in the United States as of March 31, 2016 (and 3,734 banks with between $100 million and $1 billion), barring significant regulatory relief for the smallest institutions, we believe we will continue to see a natural consolidation of banks. While we continue to believe there is no minimum size that an institution must be, we also consistently hear from bankers in the industry that they could be more efficient if they are larger… and the research bears them out.