PROMONTORY INTERFINANCIAL NETWORK SERVICES UPDATE:
The Regulatory Prognosis
By Paul Weinstein
Since the financial crisis, a significant effort has been made to put in new safeguards to prevent a recurrence of the events that led to the Great Recession. The result has been a host of new regulatory requirements ranging from lending restrictions to liquidity requirements.
These new regulations have had a significant impact on the day-to-day activities of banks, and many bankers feel that these changes have made a measurable difference on operational demands, bank revenue, and overall profitability.
In a set of supplemental questions to its quarterly Bank Executive Business Outlook Survey, Promontory Interfinancial Network asked bank leaders to weigh in on important areas of regulatory and compliance management at their institutions. We’d like to share some highlights here.
- Regulations cost smaller banks more as a percentage of revenue than larger banks. Survey respondents estimated that, on average, costs associated with regulatory and compliance obligations were nearly 9% of annual revenue. If you break this down between smaller banks (banks with assets of less than $1 billion) and larger banks (banks with assets of more than $1 billion), the regulatory and compliance costs comprised a higher share of smaller bank revenue (9.3%); larger community banks estimated that the cost of regulation was “only” about 7%.
- Senior management spends a lot of time on regulatory matters. A significant amount of senior management time is devoted to regulatory and compliance management according to the survey—one fifth on average. Regulatory compliance takes 21% of senior management time at smaller institutions, while at larger banks it’s 17%.
- Safety and soundness are still the priority. Respondents reported that the most important role of regulation is to ensure the safety and soundness of the banking industry. On a five-point scale, respondents rated ensuring safety and soundness at 3.6, on average. Other roles that rated above a 3.0 were limiting fraud and protecting customers.
- Regulatory policy is still uneven. Even in areas deemed important, bankers did not see current regulations as meeting the needs of the banking industry. On average, respondents reported that existing regulation fell below 3.0 on a five-point scale for effectiveness in all proposed areas. The changes bankers believed would make the biggest impact were repealing Dodd-Frank and revising the regulatory requirements surrounding home mortgages. Respondents believed these steps would reduce the amount of time and money spent dealing with regulations and compliance and would increase the amount of loans banks are able to make.