The spiraling cost of complying with an ever increasing regulatory burden is possibly the greatest challenge facing US banks and credit unions – it’s not an exaggeration to label it an existential threat for some institutions. However, this threat can be mitigated by utilizing expertise available from compliance and strategic sourcing firms as well as via software automation. It won’t make the regulations go away, but it makes the process more efficient and helps make it less likely that something is overlooked.
The Fallout From 2008
The excesses and deficiencies laid bare by 2008’s financial crisis were largely attributable to the nation’s largest banks. Most of the rules imposed to address them, however, primarily through the Dodd Frank Act, apply equally across all financial institutions regardless of size. This fact has had a material impact on smaller institutions as mentioned in this article published in the New York Times last year. This quote from the article says it all:
When regulations – not consumers – drive consolidation, banking system risk increases. Dodd-Frank’s “Wall Street” focus snares community banks in an increasingly complex web of rules designed for larger banks. As such, the law forces well-managed institutions to unnecessarily divert resources to compliance (survey data shows community banks are doing just that), or worse, to close their doors.
Banking experts have noted that the cost to comply with the current battery of regulatory measures is simply infeasible for small institutions. Although estimates of the threshold vary, I’d suggest any institution under $500 million in assets will be hard-pressed to cover regulatory expenses.
The Cost Is More Than Just Monetary
US banks began vanishing in the late 1980s, when there were more than 17,000 FIs. The trend has accelerated since 2008, however, we’re now approaching the 7,000 mark, with virtually all the decline occurring with banks and credit unions under $100 million. It’s clear that the regulatory burden is a contributing factor.
Many veteran bankers will tell you their management teams must devote so much attention to regulation that there’s no time to focus on “real business issues” such as making loans and connecting with Main Street. A fully-compliant bank or credit union that has lost touch with its market is hardly positioned for success.
Get Help From Humans and Software
Compliance cannot be ignored but, there are approaches to managing these mandates that can free up bandwidth for other mission critical duties. For one thing, compliance has an internal as well as external component. Keeping a tidy shop before the examiners pay your bank or credit union a visit is your best line of defense.
One area in particular can be time consuming: assurance that vendors working with a financial institution are in compliance. To be successful in achieving this, it is important for a bank or credit union to have a comprehensive list of questions to review with each vendor. Institutions can expedite this process utilizing one of the compliance software packages available in the market.
Another area where software can be effective in reducing the overhead of the process is in the requirement that vendor due diligence extend into the market landscape. Here a bank or credit union must demonstrate how effective they are at monitoring the price and performance of current vendors.
Software also can help with this but it must have a benchmarking component (some do not) that generates alerts when any aspect of a vendor contract relationship (price, performance) falls out of tolerance. Many community banks and credit unions still track their vendor contracts with an Excel spreadsheet or other tool. This approach, in particular, increases the time, effort and risk of overlooking something that could have been avoided.
A Constant with Some Ebbs and Flows
Even as some sort of Dodd Frank rollback winds its way through Congress, new challenges that loom on the horizon remind us that regulatory oversight is a fact of life regardless of which party owns a majority. The fact is that the development of new threats to the industry are a constant and they often require measures all institutions must follow to protect themselves and the consumer. For example, cybersecurity is the latest buzzword and every high-profile incident increases the odds that a new set of mandates, whether government led or industry driven is likely.
Throughout the ebbs and flows of the ocean of regulation in banking, there are ways to lessen some of the burden by leveraging software tools and partners with domain expertise. These steps will help banks and credit unions better manage compliance issues without compromising quality while also maintaining their focus on critical business issues. While there are material differences in the regulatory obligations of banks and credit unions, both groups stand to benefit from such an approach.