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Where is the regulatory reform lifeboat?
By Megan Desso
“Regulatory Overload,” a term that community bankers are all too intimate with at a time when, truthfully, there are more pressing issues to be attended to, such as 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 and most are merely attempting to maintain buoyancy, never mind the added weight of keeping up with industry changes resulting in the latest new regulations or those 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. 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. However, what isn’t so obvious is that the cost of the penalties associated with non-compliance and violations could easily far exceed any year’s profit.
With 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,” here are some considerations worth thinking about. Does your institution have sufficient resources allocated to assure appropriate and timely implementation? Then, because, as we are all well aware, “compliance” is not an as-of-a-point-in-time function but 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 what are viewed as the yet to be known 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 ever mounting 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 as they write regulations and attempt to disseminate the rules to their own staff with interpretations that will likely vary from one regulator to another.
Drowning in the new compliance requirements, 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 compliance to their state and federal regulators 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.
Not to be frightening, but 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 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 by using such strategies as 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, Glastonbury, CT. It provides correspondent banking services to more than 200 community banks in the Northeast. Megan can be contacted at firstname.lastname@example.org.