Almost any community banker will tell you regulatory compliance has become a concern in recent years. Corporate scandals involving companies such as Enron, Tyco and WorldCom and the Bush administration’s focus on fighting terrorism have spurred a host of new regulations, including the USA PATRIOT Act and Sarbanes-Oxley Act. Increasingly, leader of smaller banks say keeping up with regulatory mandates has increased costs and strained resources.

However, the argument that the growing regulatory burden should be eased often is not backed up with hard data and the focus of such efforts should be shifted to demonstrating certain imbalances in regulatory requirements, said Stanley V. Ragalevsky, a partner at the Boston law firm of Kirkpatrick & Lockhart Nicholson Graham who represents several banks and other financial entities.

Ragalevsky says he began to intensively research the changing regulatory environment in the banking industry last year. Last week, addressing a room full of bankers and others in the financial industry, Ragalevsky said its time for the industry to take a fresh approach in seeking comprehensive changes to bank regulations.

According to Ragalevsky, who spoke at the Financial Management Society’s Boston chapter meeting last week in Waltham, bank regulation has become an industry in its own right, with an estimated $40 billion now spent each year on compliance issues. Rather than simply complain about the burden of laws, some of which bankers view as outdated or unnecessary, it is time to back up the argument with data. He said hard examples and statistics showing how much time and money banks are spending to meet federal and state guidelines will send a stronger message that change is needed.

The difficulty is that banks haven’t assembled these facts collectively as an industry in a way that will give banks a solid backing for their argument, he said.

Ragalevsky said the last reliable, empirical study on compliance costs was done in 1998. According to the eight-year-old findings by the Federal Reserve, 13 percent of non-interest expense, equating to 50 percent of net income, was spent on compliance by banks. A 1977 study by the Federal Home Loan Bank reported compliance costs were five times higher for smaller banks than for larger banks in comparison to total assets. And things haven’t improved much. Between 1989 and 2004, 801 new regulations were promulgated.

Ragalevsky said regulatory imbalance exists on two levels, existing between banks and non-bank financial institutions; and between small and large banks.

“The regulatory imbalance issue has been ignored because it hasn’t been argued as regulatory imbalance,” said Ragalevsky. “If you can’t come up with examples of how you are being disadvantaged, you are not going to get far.”

Udayan S. Kramerkar, vice president and CFO of North Brookfield Savings Bank, said he feels small banks like his are at a disadvantage. It takes time, money and staff to meet the numerous requirements that his competitors are not facing. For example, Kramerkar used to work for a credit union where it took about four hours to produce a call report. In banking, he said, the rules are much different and it takes a full week of an employee’s time to do the same task because there are different standards for banks. And being a $162 million-asset bank with four branches doesn’t relieve the bank from regulations that are more geared toward much larger institutions. On top of that, new regulations seem to be popping up all the time. “We feel like it’s [new regulatory requirements appearing] every week,” he said. “It’s challenging. Sometimes it’s frustrating. It’s not a level playing field anymore.”

He also questions why small mutual banks are subject to the Community Reinvestment Act while non-bank financial institutions don’t face to same scrutiny.

“We do take care of the community. We are a community bank,” he said. “Just as CRA doesn’t apply to them, it shouldn’t apply to us.”

Peter Conrad, executive vice president of the Boston-based Co-operative Central Bank, which is owned and operated by 69 cooperative banks as a source of cash reserves and deposit insurance, said CRA was created during a different time, and he’s not sure there is the same need to apply it to small community institutions today as there was when it was first established. Conrad also sees a regulatory imbalance within the banking industry and said it’s harder for small banks to meet the same level of compliance given their more limited resources in comparison with national and super-regional industry players.

“Regulatory burden is an issue that every bank has, but it’s a much greater burden for the smaller banks,” said Conrad.

Statistics and Survival
According to Ragalevsky, CRA and the Home Mortgage Disclosure Act carry the highest costs compared to other regulations. He said community banks should be calling for an end to “one-size-fits-all regulation.”

“This burden of course hits the smallest banks the hardest,” he said. “The more time you have to spend on this the less time you have to come up with new ideas and run your business.”

Some headway in the quest for regulatory relief has been made in recent years, including implementation of a multi-tiered system that now imposes a different set of CRA obligation for banks based on their asset size. Massachusetts Commissioner of Banks Steve L. Antonakes said he is aware of the issue and has worked to correct some of the problems. He testified on the topic before the U.S. House of Representatives in 2004, saying there is need for regulators, state legislators and Congress to pay attention to the growing compliance burden and that it is disproportionately executed within the banking community.

“The Community Reinvestment Act, the Home Mortgage Disclosure Act, Truth in Lending, Truth in Savings, the Bank Secrecy Act, the PATRIOT Act and numerous other laws are sound and were passed for good reasons. Many of these laws, in fact, have their roots in Massachusetts. However, the growing cumulative weight of these and other laws and regulations is crushing small banks. For community banks, the cost to comply with the litany of federal and state laws and regulations threatens not only their ability to compete with their larger counterparts and serve community needs, but also their own viability. I am sure you will agree that there is something wrong when a 15-employee bank has six employees dedicated solely to regulatory compliance,” Antonakes stated in his testimony.

“There is no doubt the banking industry is a heavily regulated industry,” Antonakes said. “We’ve taken a lot of effort to reduce burden. You have to review the laws on the books. A lot of it just comes down to a common sense approach to regulations. There are certain areas of laws that need to be reformed.”

One example is the state law on electronic fund transfers created in 1981, before the invention of debit cards. According to Antonakes the state law is redundant and inconsistent with federal law which is expected to be addressed this year.

The Massachusetts Bankers Association has worked to bring some of the issues related to outdated regulatory burdens before local legislators, including a bill to revisit the law on electronic funds.

“It [the state’s electronic funds law] doesn’t add any value,” said David E. Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association, adding there are many statutes that haven’t changed in 30 to 40 years.

The MBA acknowledges regulatory burden is on the rise but, like its national parent group, does not have an official stance on creating a two-tiered or multi-tiered regulatory system.

Ragalevsky said he sees this as a problem. “There is no unity on regulatory relief in terms of an agenda among the three national [banking] trade groups,” he said.

At the same time, Ragalevsky said he encourages all banks to offer data about the disadvantages they face to trade organizations that may be able to compile the statistics and present it to regulators. Ragalevsky said he believes banks should advocate for a two-tiered system of regulations that would provide some relief for smaller institutions.

“Regulatory burden isn’t just about getting relief from regulations, it’s also about getting relief from statutes,” said Ragalevsky. “It’s about survival of the community banks.”