“Regulatory Overload” is a term community bankers are all too intimate with at a time when there are more pressing issues to attend to – including asset quality, lending, losses, funding sources, expense control and revenue generation.
Every financial institution is facing, without a doubt, the most trying years of their existence. Most are merely attempting to stay afloat, never mind the added weight of keeping up with industry changes resulting in new regulations and modifications to existing regulations that keep tugging them under the surface.
Do we dare even mention the Dodd-Frank Financial Reform Act and the yet-to-be determined consequences that will assuredly emanate from this political bastard-child? It’s said that there are currently 243 pending rulings and 67 outstanding case studies stemming from Dodd-Frank. How will that translate into regulation by the primary regulatory bodies?
It’s true, compliance is an area long-viewed as a cost center, rather than a profit center. Outwardly, the perception is that compliance doesn’t provide a return or profit. But what isn’t so obvious is that the cost associated with non-compliance and violations could easily far exceed any year’s profit.
Trying Times
That being said, it may be helpful to take a closer look at compliance through a different pair of glasses. A place to begin may be to compare compliance with insurance. Who among us would even consider running a bank without D&O or bond insurance? Even the bravest banker wouldn’t do that.
As community bankers attempt to cope with the never-ending barrage of compliance-related hassles, here are some considerations worth thinking about.
Does your institution have sufficient resources allocated to assure appropriate and timely implementation? Then, because compliance is not an as-of-a-point-in-time function, but rather a fast moving target demanding constant attention, are there appropriate resources available to support the day-to-day function? How much money have you budgeted for compliance and compliance technology? What are the best ways to deploy those funds?
These are truly challenging times for banks. We’re entering an era of heightened oversight from Washington with the most recent regulatory reform drama, along with the yet unknown consequences of the reform.
The nature of bank regulation is certain to change significantly over the next three years, and understanding the rules of the new game will be an increasingly large concern for community bankers. It will be a burden on already taxed personnel resources and will undoubtedly increase the cost of compliance. As we struggle to understand the potential impact, so, too, will the regulators. They must write regulations, of course, and attempt to disseminate the rules to their own staff, with interpretations that will likely vary from one regulator to another.
Not only will banks be required to have policies and procedures in place to comply with the new regulations, but they must be able to demonstrate state and federal compliance through ongoing monitoring and periodic audits. When a single new regulation of any significance goes into effect, it can produce a chain reaction throughout the organization as new policies are written, software programs are modified or purchased and people are trained.
Is Outsourcing The Solution?
It is sobering, perhaps frightening, to stop for a minute and consider what community banks will be facing over the next few years. Not the issuance of a single new regulation, but several new regulations taking effect more or less at the same time, along with significant changes to existing regulations. This is comparable to the difference between a wave and a tsunami. What does your sea of compliance hold for you?
Unfortunately, the industry’s regulatory burden is escalating at the same moment when its profitability is under intense pressure. This creates even greater urgency for spending every compliance dollar as prudently as possible.
Managing compliance risk effectively and efficiently is possible, in part by leveraging both internal and external resources. Compliance has become so complex and demanding that some form of outsourcing is an option that should be given careful consideration. It’s nearly impossible for one person to cover all the bases, especially in organizations where the compliance officer has another primary role.
Even if an institution doesn’t want to outsource its entire compliance program, it may make sense to rely on subject matter experts outside the organization to administer a piece of the program. A good example is the BSA and various AML regulations, Privacy, Loan Review, Information Security or any of the other highly demanding regulations.
In most outsourcing relationships, the bank is actually leveraging the infrastructure and skill set of a third party at a lower rate than if it were to maintain those resources in-house.
In effect, a bank can buy into a “department” where the costs are shared with other banks. It’s likely that a carefully selected consultant will be better informed and more effective because of the widespread experience such resources will garner as they enter the cold waters of new regulations.
Megan L. Desso is assistant vice president-internal auditor and compliance officer at Bankers’ Bank Northeast in Glastonbury, Conn., which provides correspondent banking services to more than 200 community banks in the Northeast. Desso can be reached at mld@bankersbanknortheast.com.
