Square-Off: Are Financial Institutions Overregulated?

We ask this question because it matters, not just to banks but to the entire U.S. economy. We need a healthy banking system for the economy to thrive. But banks are in a bind. On the one hand, we have the "fintech" upstarts who are making inroads into consumer lending and wealth management, to name two areas. They are disrupting traditional business models. On the other hand, we have banking regulators, who, in the wake of the financial crisis, have really clamped down on banks. What has that ..

In 2011, RLR Management Consulting partnered with CBANK Network to survey 300 banks regarding the cost of compliance. In short, the results were surprisingly encouraging. Of the 300 respondents representing banks ranging from $20 million to $13 billion in assets, 47% reported that their compliance department budgets remained the same from year to year, and 46% reported spending less than $10,000 in funding for the compliance department.

Ruth Razook

Ruth Razook

However, last year the Federal Reserve conducted a similar survey for the 2015 Community Banking in the 21st Century Research and Policy Conference that unfortunately yielded different results. Respondents to that survey reported that regulatory compliance accounted for 11% of personnel expenses, 16% of data processing expenses, 20% of legal expenses, 38% of accounting and auditing expenses, and 48% of consulting expenses. These answers imply an annual compliance cost of $4.5 billion, representing 22% of a community bank’s net income.

Clearly, the cost of compliance is a heavy burden for community banks, and sadly there is no end in sight for new regulations. Years ago, implementing new bank regulations was a detailed process that included a proposal, edits to the proposal, a published version of the final guidance, and an implementation date. Now, it is quite common for guidance to be published and become effective at the same time, leaving banks scrambling to implement appropriate compliance procedures. And, because of the ease in which regulations can be instated, they just keep coming.

In order for banks to deal with the current overregulation and effectively anticipate what examiners will look for when conducting audits, banks must review public enforcement actions for other financial institutions. For example, last year regulators took action against RBS Citizens Financial Group for failing to credit consumers the full amounts of their deposited funds. The resulting consent order required the bank to provide approximately $11 million in refunds to consumers and pay a $7.5 million penalty. This summer, the federal banking agencies issued Interagency Guidance Regarding Deposit Reconciliation Practice. If a bank had already reviewed the RBS Citizens Financial Group consent order, they would have been fully prepared for this regulation.

Financial institutions are definitely overregulated, but that fact is not going to change any time soon. The best thing that banks can do to protect themselves is to be aware of what is happening in their industry and prepare accordingly prior to exams. Because reviewing all consent orders can be a timely process, it is also a good idea to engage a third party to help with this task and ensure compliance in all areas. With appropriate vigilance, an abundance of regulations does not have to be a death sentence.

Ruth Razook is founder and chief executive officer of RLR Management Consulting.

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