Banking's Greatest Risk: Regulations Regulatory Burden Deemed "Out of Control"

A recent survey by PricewaterhouseCoopers in the United States and the United Kingdom reveals a sense that "... regulatory overkill saps bank resources, reduces risk diversification and creates a sense of false security..."

Financial institutions in both countries have invested considerable efforts in developing advanced risk control systems. One of the analysts said, "Bankers have thrown down a challenge against too much prescriptive regulation. Many are worried that it is beginning to stifle innovation and judgement across the industry. While few challenge the objectives of regulators, there is a clear need for further debate on how these are implemented. It is ironical that people now see the greatest dangers in regulation when new types of risk are emerging all the time: hedge funds, derivatives, electronic fraud. Banks should not be distracted from these risks by box-ticking and form-filling."

In testimony before the House of Representatives, Mark Macomber, speaking for America's Community Bankers said, "Bankers are not the only ones concerned about the impact of the increasing layers of regulation on community banks. According to FDIC Vice Chairman John Reich, the bank and savings association regulatory agencies have promulgated over 800 regulations since 1989. In the opinion of the Vice Chairman, although most of the rule changes were put in place for good, sound reasons, over 800 changes in 15 years are a lot for banks to digest, particularly smaller community banks with very limited staff. Vice Chairman Reich believes that regulatory burden will play an increasingly significant role in the viability of community banks in the future. I agree."

Chairman-elect of the Independent Community Bankers of America, Terry Jorde, in his testimony made a case for the smaller banks. He said, "In recent years, the disproportionate impact of the ever-mounting regulatory burden is significantly impacting community bank profitability. While larger banks have hundreds of employees to throw into the regulatory breach, a community bank with $100 million in assets typically has just 30 full time employees, a $200 million bank about 60. If my bank is faced with a new regulation, we must train one or more of our current employees to comply, and complying with the new regulation will take time away from customer service. My compliance officer not only has responsibility for overseeing our compliance program, but she also originated 58 real estate loans last year for sale on the secondary market, she sits on our audit and technology committee, and she regularly teaches home-buyer education courses at our community college. Unlike larger institutions, we can't just add a new person and pass the costs on to our customer. It's not just smaller community banks like mine that are feeling the pain. Larger community banks as well are drowning in paperwork and regulatory burden. They are hiring 2 or 3 full-time employees to do nothing but Bank Secrecy Act compliance. They have had to expend hundreds of thousands of dollars for Sarbanes-Oxley compliance."

Meanwhile, John Byrne, Director of the Center for Regulatory Compliance for the American Bankers Association, included in their response many suggestions for regulatory burden relief. However, they became very specific with proposals and recommendations in the section regarding the money laundering and SAR rules. They suggested the following changes:

(a) eliminate CTR filings for transactions conducted by seasoned customers through their bank accounts (where records of cash transactions are maintained in account activity data for five years);
(b) eliminate verification requirement for purchases of monetary instruments by customers;
(c) eliminate the requirement to notify directors about SAR filings;
(d) establish a standard for suspending the filing of repetitive SARs on continuing activity over which law enforcement asserts no interest;
(e) include a Federal Financial Institutions Examination Council ("FFIEC") exam instruction requiring examiners to contact the FinCEN help line and incorporate the resulting staff advisory position on contested exam exceptions; and
(f) include a FFIEC exam instruction requiring examiners to evaluate audit/testing quality of BSA compliance program before requiring banks to produce files or records for transaction testing.

BANKERS' HOTLINE is following any actions taken on the recommendations from the several agencies. We'll keep you as up to date as possible. For the full text of the associations' recommendations, we suggest you go to their individual websites.

Copyright © 2005 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 15, No. 5, 6/05