Small banks, shocked by the rising cost of compliance, are finding ways to work together.

First National Bank in Elkhart, Kan., is a great example. The $74 million-asset bank is working on a plan with a number of other banks to share a compliance officer. The hope is that by sharing the costs each bank can afford a top-notch employee, even if he or she has to divide their time among the institutions.

"We aren't large enough to hire an expert … that's got 20 years of compliance background, knows the rules, knows the regs and knows how to apply them," Shan Hanes, the bank's president and chief executive, said. "There are several of us that are in the same boat, but collectively we can afford that person."

The banks, which Hanes declined to name, are similarly sized competitors that are located within 60 miles of each other.

First National's group isn't alone when it comes to sharing services. In fact, Hanes was inspired when he heard about another bank in Wichita, Kan., that had been sharing an IT officer with two other institutions.

The decision to share services follows years of debate as to whether smaller banks have been bearing the brunt of regulatory burden since the financial crisis and the subsequent passage of the Dodd-Frank Act and other laws. A recent conference hosted by the Federal Reserve and the Conference of State Bank Supervisors featured a study that supported those claims.

"The smaller you are, the higher the relative cost of regulation," Julie Stackhouse, head of supervision at the St. Louis Fed, said in an interview tied to the conference. "I don't think we can look past that."

There have been instances where regulators have included exemptions designed to relieve some burden on smaller institutions. Still, a number of community banks are left looking for ways to reduce that burden even more, including plans to share staff and resources.

Hanes, meanwhile, knows his plan raises some questions, one of which involves how the institutions should handle a compliance person's benefits. Another issue might deal with how the individual divides his or her time, particularly if compliance issues surface at one or more institutions.

"If one bank is having compliance issues, probably the [others] are too because we have the same compliance officer, the same system and the same audit," Hanes said. "So in theory we're probably all going to be in the same boat."

The idea makes sense to some industry observers. Or at least it doesn't raise too many red flags.

"It's all upside," said Jon Bruss, chief executive at Fortress Capital Management. "I don't see any negatives, as long as all of the usual precautions are taken to assure confidentiality between each of the banks."

The Fed lacks a defined outline for sharing compliance services, and it hasn't seen any of the banks it regulates try to collaborate in this manner. Still, the idea did come up during meetings associated with the Economic Growth and Regulatory Paperwork Reduction Act.

The Office of the Comptroller of the Currency has "seen a number of examples of successful" collaborations, including instances of banks working together "to bid on larger loan projects in competition with larger financial institutions," an agency spokesman wrote in an email.

While noting the positives that could come from working together, the OCC spokesman also noted that institutions should "address cultural, legal, corporate governance and competitive matters upfront and perform diligence before collaborating with another entity."

The OCC, meanwhile, released a white paper in early 2015 to address collaboration.

There are other twists on the concept.

Spring Bank in Brookfield, Wis., determined four or five years ago that it didn't need a full-time compliance officer, despite hiring Judy Etta for the job, so the $222 million-asset bank began letting other institutions pay a fee for the executive's time. Spring Bank markets the effort as its "compliance management program."

"I didn't need a full-time person to do this, but it was an opportunistic hire because [Etta] was a talent," said Dave Schuelke, Spring Bank's chief executive. "We haven't had any problems. … It's worked well. It's unique."

In fact, Spring Bank turns to outside sources to handle several functions, including human resources and loan review.

"I think banks … should look at outsourcing and/or sharing," Scheulke said.

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