Compliance

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Bryan Yurcan
Bryan Yurcan
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Regulation: Killing Community Banks?

Smaller banks will eventually not be able to bear the regulatory burden placed upon them.

Like most enterprises, the federal government tends to be reactionary rather than anticipating a problem and solving it before a crisis happens. A prime example of this is how we continue to spend ourselves into irrevocable debt, yet no one wants to do anything about it. Yet another is in the realm of regulation.

The government typically vacillates from regulating too little to regulating too much. Unlike the wee bear's porridge, regulators never seem to get it "just right."

The failure of regulators to properly oversee the financial system was given as a prime reason for the 2008 financial crisis, and as such the government responded with weighty measures designed to prevent another such scenario. Between the 14,000-odd pages of Dodd-Frank (much of which hasn't even been implemented yet), stress testing for capital adequacy and the creation of the CFPB, there were no shortage of new regulations created to try and prevent another financial crisis.

But do they really do what they're supposed to? Certainly, it makes sense to have better oversight over the largest financial institutions, the ones whose actions can actually affect the national economy. But smaller banks have been crushed under a glut of regulations that probably shouldn't apply to them.

For example, I understand the thinking behind the "stress testing" of capital adequacy for the nation's largest banks; if one of them failed it would have a severe affect on the economy. But this year, the Federal Reserve opened up the stress tests to banks in the $10-$50 billion asset range. It is ludicrous to subject a bank of around $10 billion in assets to the same rigorous standards applied to the likes of JPMorgan Chase and Bank of America. In fact, many banks around the $10 billion threshold purposefully stayed below that level to avoid the tests and other regulations. That's a concrete example of over-regulation killing business growth.

A recent report from Continuity Control, a New Haven, Conn.-based provider of compliance management system, says that community banks grappled with the toughest regulatory year on record in 2013, with an average of 61 regulatory changes each quarter.

"Many community financial institutions continue to rely on one or two individuals and antiquated processes to manage compliance," says Pam Perdue, Executive Vice President, Regulatory Insight, at Continuity Control and former Federal Examiner, said in the report. "It's become untenable for an institution to keep up with all of these changes using current methods. For many banks, they are increasingly discovering that updating their technology can solve the problem better, faster and cheaper."

Ironically, the familiar cry of "break up the banks" made by many pro-regulation people is exactly the opposite scenario of what will happen if things continue this way. As only the biggest banks will be able to afford the resources to comply with ever-increasing regulation, smaller banks will be swallowed up and acquired by their large counterparts, and the financial system will be the worse for it.

[See Also: 3 Best Practices For Regulatory Compliance]

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio

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BankTechAsia
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BankTechAsia,
User Rank: Apprentice
1/21/2014 | 9:34:17 AM
re: Regulation: Killing Community Banks?
Excellent point, and interesting analogy about the just right porridge of regulation.

Considering community banks are mostly not considered SIFI's I can't wrap my head around why the same standards apply.

In some parts of Asia, different category of banks are subject to different LCR
Byurcan
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Byurcan,
User Rank: Author
1/21/2014 | 2:30:44 PM
re: Regulation: Killing Community Banks?
Thanks for the comment, glad you liked it! I believe some of the regulatory burden on smaller banks will be lifted in the coming years, as regulators realize that small-mid sized banks weren't the ones who largely contributed to the financial crisis.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
1/22/2014 | 7:20:48 PM
re: Regulation: Killing Community Banks?
Good points. As we have seen since the crisis, the big banks have only gotten bigger. And fewer, larger banks are more dangerous and risky than many smaller banks, as we know. It will be interesting to see how this all shakes out over the next couple of years when it comes to the smaller financial firms.
KBurger
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KBurger,
User Rank: Author
1/23/2014 | 6:56:02 PM
re: Regulation: Killing Community Banks?
Pam Perdue's comment, "Many community financial institutions continue to rely on one or two individuals and antiquated processes to manage compliance. It's become untenable for an institution to keep up with all of these changes using current methods" raises a critical point. What bank of any size in the current business & competitive (not to mention regulatory) environment thinks it can function effectively with "one or two individuals and antiquated processes" to manage any kind of function? There is absolutely no excuse for even the smallest community bank to not make some investements in automating these critical functions. Companies such as Continuity Control offer solutions specifically targeted to the needs (and budgets) of smaller FIs. Banks should be investing in these types of solutions regardless of whether or not regulation is intensifying. While I agree that much FS regulation should not be "one size fits all" and there definitely are aspects of Dodd-Frank that should be applied primarily or specifically to large banks -- I think complaining about the regulatory burden because you don't have systems to support compliance is a lame, unacceptable excuse.
DerinBluhm
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DerinBluhm,
User Rank: Apprentice
1/26/2014 | 4:59:37 PM
re: Regulation: Killing Community Banks?
As a community bank CIO, I found my days increasingly consumed with analyzing and addressing the impact of ongoing regulatory changes. We were continually reworking business processes to ensure compliance, updating notices, reviewing contracts, and expending resources to deploy yet another compliance update to a system or software package.

The value to the consumer was not particularly apparent, but the impact to operations was obvious. Resources that would have gone to improving customer service or working on strategic projects to grow sales were redirected to reactive activities related to compliance changes.

The reality is that smaller financial institutions don't have the money to simply add systems or staff to deal with the cascading impacts of the next change to a regulation. The economics of community banking don't support adding add another solution that isn't increasing revenue.

For smaller financial institutions, the best solution appears to be to move to outsourced solutions and integrated vendor hosted services, shifting as much effort and risk to the vendor as possible.

This approach would allow the FI to focus on sales and risk management, while ensuring they have best practices based solutions and needed specialized skill sets (through their vendor), but without adding personnel or just trying to make due with already stretched internal staff.

Further, the availability of skilled personnel in small markets is a challenge for many community banks. Outsourcing may be their only option to ensure they can meet their regulatory obligations.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
1/27/2014 | 12:17:06 PM
re: Regulation: Killing Community Banks?
Great insights. Thanks for sharing. Is your bank having any luck outsourcing certain processes? Are vendor solutions available that address your needs, but also meet your security and compliance requirements?
BankTechAsia
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BankTechAsia,
User Rank: Apprentice
1/28/2014 | 12:28:13 AM
re: Regulation: Killing Community Banks?
@ubm_techweb_disqus_sso_-af8da61ccde451f51f10cf37409cd754:disqus, thanks for sharing your insights. Many of the bank's CIO we've spoken to in Asia echoes your view - exorbitant compliance cost vs innovation cost is a difficult balance.

Many of the smaller financial institutions in this part of the world neglect to innovate and are still banking like it's 1980's, which makes it a major challenge for them to compete with the big boys and their big bucks.
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