Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences.

This article develops a structural revealed preference approach to estimate the regulatory costs borne by banks, focusing on distortions in the size distribution of U.S. banks around regulatory thresholds established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The model captures banks' strategic asset bunching below the $10 billion and $50 billion thresholds to avoid stricter regulations, allowing the authors to infer regulatory costs equivalent to a 0.41% tax on profits at the $10 billion threshold and an additional 0.11% at the $50 billion threshold, amounting to approximately $4.16 million annually for a $50 billion bank. The study further quantifies modest indirect costs on the broader economy, such as a 0.02% output reduction for bank-dependent firms, and finds that these regulatory costs explain only a small fraction of the postcrisis decline in bank franchise values. Comparisons with survey-based and reduced-form methods reveal that self-reported regulatory cost estimates by banks tend to be substantially higher, while difference-in-differences and regression discontinuity approaches often fail to detect significant costs due to measurement and endogeneity issues. The approach is validated through robustness checks, placebo tests, and analysis of the 2018 regulatory relief, which reduced estimated costs and altered bank entry dynamics, highlighting the method's potential for informing cost-benefit analyses of major, anticipated financial regulations.