Banks are turning down loans to small businesses specifically to avoid getting too big for their own good.
April 14, 2026
Original Paper
Community Bank Lending Around Regulatory Thresholds
SSRN · 6567120
The Takeaway
To avoid strict regulatory reporting, community banks intentionally stay under certain size thresholds. This perverse incentive causes them to abandon the low-income and minority households they were designed to serve, effectively capping the growth of their communities.
From the abstract
<p><span>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