Minneapolis Fed Quantifies Cost Of Increased Regulation For Community Banks

The Federal Reserve Bank of Minneapolis has published a study that seeks to quantify the cost of increased regulation on community banks. It models the impact of new regulatory costs as the hiring of additional staff, resulting in higher total compensation and lower profitability. It also analyzes the changes in the distribution of community bank profitability.

The study finds that the median reduction in profitability for banks with less than $50 million in assets is 14 basis points if they have to increase staff by one half of a person; the reduction is 45 basis points if they increase staffing by two employees. The former increase in staff leads an additional 6 percent of banks this size to become unprofitable, while the latter increase leads an additional 33 percent to become unprofitable.

Table 4 is also interesting because it shows that increased regulation also has a significant impact on return on assets on larger community banks: 

Table 4