In the banking industry, the specific regulatory configuration for a banking institution depends on the type of charter the institution chooses. Depository institution charter types include: commercial banks, which originally focused on the banking needs of businesses but over time have broadened their services; thrifts, which include savings banks, savings associations, and savings and loans, and were originally created to serve the needs— particularly the mortgage needs—of those not typically served by commercial banks; and credit unions, which are member-owned cooperatives run by member- elected boards with an historical emphasis on serving people of modest means. These charters may be obtained at the state or federal level. State regulators charter institutions and participate in their oversight, but all institutions that offer federal deposit insurance have a prudential regulator. The prudential regulators—which generally may issue regulations for and take enforcement actions against industry participants within their jurisdiction—are identified in table 1. As shown in table 2, almost 7,400 (about 99 percent) of all banks had less than $10 billion in assets in 2011 and thus fell within our definition of a community bank. The majority of community banks have $250 million or less in total assets. Although community banks comprise the vast majority of all banks, they held in aggregate about 20 percent of the industry’s total assets (about $2.8 trillion) in 2011. Similarly, table 3 shows that the vast majority of credit unions (over 99 percent) had $10 billion or less in total assets in 2011. Furthermore, around 80 percent of the credit unions had $100 million or less in total assets. The Dodd-Frank Act made important and fundamental changes to the structure of the U.S. financial system to strengthen safeguards for consumers and investors and to provide regulators with better tools for limiting risk in the major financial institutions and the financial markets. According to the Financial Stability Oversight Council, the core elements of the act are designed to build a stronger, more resilient financial system—less vulnerable to crisis, more efficient in allocating financial resources, and less vulnerable to fraud and abuse. Under the Dodd- Frank Act, federal financial regulatory agencies are directed or have the authority to issue hundreds of regulations to implement the act’s reforms. The Dodd-Frank Act directs agencies to adopt regulations to implement the act’s provisions and, in some cases, gives the agencies little or no discretion in deciding how to implement the provisions. However, other rule-making provisions in the act are discretionary in nature, stating that (1) certain agencies may issue rules to implement particular provisions or that the agencies may issue regulations that they decide are “necessary and appropriate,” or (2) agencies must issue regulations to implement particular provisions but have some level of discretion as to the substance of the regulations. As a result, the agencies may decide to promulgate rules for all, some, or none of the provisions, and often have broad discretion to decide what these rules will contain. Many of the provisions in the Dodd-Frank Act target the largest and most complex financial institutions, and regulators have noted that much of the act is not meant to apply to community banks. As such, the act directs regulators in a number of areas to consider whether to exempt small banks and credit unions. However, the act is comprehensive and far-reaching and will impact smaller institutions, specifically those that undertake activities thought to be precipitating factors in the 2007 through 2009 financial crisis. The number of community banks and credit unions has declined in recent decades, as smaller institutions have expanded, merged with, or been purchased by larger institutions. The trend of consolidation in banks and credit unions has been facilitated by statutory and regulatory changes and may have resulted, in part, from advantages in efficiency at larger institutions. However, community banks and credit unions still play an important role in the economy. Community banks and credit unions allocate more of their lending to small businesses and rural areas than large banks, which research suggests is due to their focus on relationship-based lending. The number of community banks and credit unions has continued to decline significantly since at least the mid-1980s. According to FDIC research presented in 2012, the number of banks with less than $10 billion in assets declined from 17,997 to 7,551, or by about 58 percent, between 1985 and 2010. Similarly, according to NCUA annual reports, the number of federally insured credit unions declined from 15,045 to 7,339, or by about 51 percent, between 1985 and 2010. Despite the decline in the number of credit unions, our analysis of Census data found that membership in credit unions doubled over the same period. Our analysis of SNL Financial data shows that the number of community banks and credit unions declined further in 2011, to 7,385 and 7,094, respectively. The decline in the number of community banks and credit unions has resulted largely from consolidations, in which two or more institutions generally merge into one larger institution. In their 2012 research, FDIC staff found that of the banks that exited the market between 1985 and 2010, 16 percent failed but 80 percent merged with another financial institution or consolidated within a single holding company. FDIC staff also found that the smallest banks (those with less than $100 million in assets) experienced the largest decline in number, decreasing by 81 percent. Consistent with a pattern of consolidation and expansion, the number of midsize banks (those with $250 million to $1 billion in assets) and large banks (those with over $10 billion in assets) increased by 47 percent and 197 percent, respectively. Two key statutory and regulatory changes have facilitated consolidation by removing regulatory barriers to geographic and membership expansion by banks and credit unions, respectively. First, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorized interstate mergers between banks starting in June 1997, regardless of whether the transaction would be prohibited by state law. Previously, most banks that wanted to operate across state lines had to establish a bank holding company and, with certain restrictions, acquire or charter a bank in each state in which they wanted to operate. With the advent of interstate branching, banks that previously were not permitted to expand across state lines could do so by acquiring existing banks, and some multistate bank holding companies could consolidate their operations into Second, after the passage of the a single bank with multistate branches.Credit Union Membership Access Act in 1998, NCUA revised its regulations to make it easier for federal credit unions to qualify for community charters that allowed people to qualify for membership in a credit union based on their geographic location (e.g., such as a county) rather than based on their employer or affiliation in an organization. As a result, community-chartered credit unions were able to expand, according to one expert we interviewed, by consolidating with other local credit unions, whose members resided in their geographic area. As we previously reported, the total number of federally chartered credit unions declined from 2000 through 2005, but the number of federal community- chartered credit unions more than doubled. Another factor that may have contributed to consolidation is economies of scale, which refer to how a bank’s or credit union’s scale of operations, or size, is related to its costs. Increasing returns to scale are created when an increase in size leads to a less than proportionate increase in cost and, therefore, a decline in average cost. Banks and credit unions that can take advantage of economies of scale can generate revenues at lower costs by increasing their size through expansion and consolidation. For example, a bank could reduce the average cost in its technology investment by increasing the volume of its goods and services, and thereby increase its profitability. Importantly, the existence of economies of scale in banking has been subject to debate. Studies using data from the 1980s failed to find scale economies beyond very small banks, but For later studies have found scale economies in various sized banks. example, a 2009 study covering all commercial banks from 1984 to 2006 found that banks had increasing returns to scale throughout the distribution of banks, and the authors concluded that industry consolidation had been driven, at least in part, by scale economies.Similarly, in a 2008 study of credit union consolidation presented at FDIC’s Mergers and Acquisitions of Financial Institutions Conference, researchers found that smaller and less profitable credit unions were more likely to merge with other credit unions, and that the assets of a small credit union might be used more efficiently if the credit union were acquired and its assets were absorbed into a larger institution. NCUA officials noted that while banks and credit unions often collect the same data, comparisons between the two are limited because of differences in organizational structure and regulation. Specifically, credit unions operate as not-for-profit institutions and have limited fields of membership. similar to that of returns on assets, with large bank earning higher returns on equity than small financial institutions from 2002 through 2006. Moreover, the gap in returns on equity between large and small financial institutions was greater than the gap in returns on assets before the financial crisis. In their 2004 study, FDIC staff also found that smaller institutions tend to have higher capital ratios than large banks, which also leads to lower returns on equity at a given level of earnings. Our analysis also indicates that community banks and credit unions have generated revenues at higher average costs than large banks since 2002. As of the end of 2011, large banks earned $1.71 per dollar of operating costs, while community banks earned $1.27 and credit unions earned $1.09. We also found that larger community banks and credit unions were more efficient than smaller institutions by this measure, suggesting that those institutions may have benefited from some economies of scale. As shown in figure 2, the difference in efficiency between community banks and credit unions and large banks generally remained consistent between 2002 and 2010. However, recent declines in revenue per dollar of overhead cost at large banks, along with gains in efficiency at community banks, decreased the difference in 2011.