Smaller banks really are hit harder by the cost of regulatory compliance, a report published last week concluded.
Fortunately, bank regulators seem to be aware of the problem and are taking action, economists with the Federal Reserve Bank of St. Louis wrote in the July issue of The Regional Economist.
Economists Drew Dahl, Andrew P. Meyer and Michelle Clark Neely analyzed data on compliance costs from a survey of 469 banks conducted by state banking commissioners and the Conference of State Bank Supervisors by comparing them to total noninterest expenses. Banks with more than $10 billion in assets were not included.
“We found that, in 2014, the ratio of compliance costs to total noninterest expense increased substantially as the size of the bank decreased. For example, banks with assets of $1 billion to $10 billion reported total compliance costs averaging 2.9 percent of their noninterest expenses, while banks with less than $100 million in assets reported costs averaging 8.7 percent of their noninterest expenses,” they wrote.
(For more, see Community Banks Feel Regulatory Pinch.)
The cost of compliance personnel was the biggest piece, representing 60 percent of the cost. That ranged from more than 5 percent of noninterest expenses for the smallest banks to less than 2 percent for the largest.
A similar pattern was found in other categories of compliance expenses: data processing, legal fees, accounting and consulting.
The authors of the report recognized that the raw numbers assumed that banks were spending money to achieve the same level of regulatory compliance, so they also compared the costs to confidential ratings of the banks by their regulators.
The result “provided no evidence that compliance performance decreased as bank size increased,” they concluded. “In fact, ratios of the most highly rated banks to other banks in a given size category tended to increase in larger size categories. This suggests that governance practices across community banks may not be as critically dependent on direct expenditures as they are on the ability of management, boards, audit committees and internal auditors to work together to properly focus oversight attention, and that larger banks have an edge in focusing that attention more efficiently.”
The article quoted from a recent speech in which Federal Reserve Board Gov. Jerome Powell said: “The risks and vulnerabilities of community banks differ substantially from those of larger banks, and an explicit tailoring of regulation and supervision for community banks is appropriate,” Powell said.
2014 Mean Compliance Expenses
Asset Size Categories
| <$100M | $100M to $250M | $250M to $500M | $500M to $1B | $1B to $10B | |
| Data Processing Expense | $27.6 | $36.8 | $82.0 | $108.7 | $188.3 |
| 1.5% | 0.9% | 0.9% | 0.6% | 0.4% | |
| Legal Expense | $4.6 | $5.9 | $20.0 | $47.4 | $134.9 |
| 0.2% | 0.1% | 0.2% | 0.2% | 0.2% | |
| Accounting Expense | $19.9 | $31.6 | $45.6 | $57.7 | $188.2 |
| 1.1% | 0.7% | 0.5% | 0.3% | 0.3% | |
| Consulting Expense | $11.7 | $18.2 | $24.0 | $43.4 | $129.1 |
| 0.6% | 0.4% | 0.3% | 0.2% | 0.2% | |
| Personnel Expense | $100 | $176 | $312 | $507 | $1,203 |
| 5.3% | 3.9% | 3.4% | 2.8% | 1.8% | |
| Total Expense | $163.8 | $268.5 | $483.6 | $764.2 | $1,843.5 |
| 8.7% | 5.9% | 5.3% | 4.2% | 2.9% | |
| Number of Banks | 113 | 154 | 121 | 45 | 36 |
| <$100M | $100M to $250M | $250M to $500M | $500M to $1B | $1B to $10B | |
| Number of Highest-Rated Banks | 22 | 44 | 42 | 15 | 16 |
| Compliance Expenses as % of Noninterest Expenses | 6.8% | 5.9% | 5.1% | 4.5% | 3.0% |
| Number of Other Banks | 91 | 110 | 79 | 30 | 20 |
| Compliance Expenses as % of Noninterest Expenses | 9.1% | 5.9% | 5.4% | 4.0% | 2.7% |
| Ratio | 24% | 40% | 53% | 50% | 80% |
NOTES: The sample consists of 469 commercial banks with assets under $10 billion that responded to the CSBS survey and for which complete data are available. The highest-rated banks are those assigned to the best category by regulators in the management component of their overall CAMELS rating; other banks are in lower categories. “Ratio” is the ratio of the number of banks in the highly rated category to the number of banks in the other category.
Source: Federal Reserve Bank of St. Louis