What's the bank's compliance culture like? Is there "buy in" from the board? If this "manager" is pushing back against a regulatory requirement that involves not only compliance but also safety and soundness, I don't think you should wait to report this to the board. I'd write it up and get it in front of the board (or at least senior management) as quickly as possible.
John S. Burnett
Fighting for Compliance since 1976
Bankers' Threads User #8