Complying with Regulations: A Costly and Growing Burden

WASHINGTON -- CoreStates Financial Corp. decided last year to calculate what it cost to comply with regulations. It was astonished by the results.

The Philadelphia-based company found it had spent $12 million in 1989 -- an amount equal to 6.1% of its $198 million in profits that year.

CoreStates dedicated 144,294 hours to complying with various regulations, the equivalent of 70 full-time employees.

"That's a tremendous allocation of human resources," said John R. Adams, the compliance officer at the company, which has $22.8 billion in assets.

Upward Bound

And the cost is growing. Among regional banks alone, compliance expenses are rising at a compounded rate of 15% to 25% a year, said Edward Furash, president of Furash & Co., a Washington consulting firm.

Experts claim costs are even heftier for smaller banks with tiny staffs.

Bankers find themselves more heavily regulated today than ever before.

They must fill out innumerable forms to comply with hundreds of state and federal regulations governing everything from community investments to money laundering. That adds big costs to the industry's overhead, about 90% of which is passed on to consumers.

The financial sting is especially sharp now, as costs rise amid an industrywide profit slump.

Horror stories abound:

* J.P. Morgan says it was congratulated for making loans in compliance with the Community Reinvestment Act, but told it should advertise the program more to get the word out. The bank figures the promotional fee will be at least $50,000 a year.

* "It's got to cost us $10 million a year just to comply with regulations," groused Edward B. Brandon, chairman and chief executive of National City Corp., Cleveland.

The company has $24 billion in assets and earned $233 million in 1990. With all of the compliance people needed, "all of a sudden, I'm operating a government agency," Mr. Brandon said.

* Bank of Walnut Creek, a California institution with $100 million in assets, calculates that it spends at least $214,000 annually on compliance. The calculation was based on a survey of the amount of time five compliance officers spend on regulations.

The figure comes to 17.8% of earnings. "I thought it would be about half that," said James Ryan, president of the bank.

Reliable figures on how much the industry spends on compliance are not available. The most comprehensive numbers come from the Office of Management and Budget, which has collected regulators' estimates of the time it takes to to fill out forms and maintain records. But critics charge that the OMB data understate the problem.

An OMB review of 1,014 state banks regulated by the Federal Reserve shows that the Truth-in-Lending Law, which requires banks to make detailed disclosures so that consumers can compare loans, was the most burdensome. The banks spent 1.9 million hours in a year on compliance, including both employee and equipment time. The compliance costs were put at $7.3 million.

Ranked second was Regulation CC, the 200-page-thick rule that requires banks to make funds from deposited checks available in a timely fashion. It required 939,339 hours and cost $18.8 million.

Third was the Electronic Funds Transfer Act, which required 581,166 hours. The regulation requires creditors to provide initial disclosures at the time a consumer contracts for an electronic funds transfer.

Bringing up the rear: the Home Mortgage Disclosure Act, 130,020 hours and $2.6 million; and the Equal Credit Opportunity Act, 102,872 hours and $1 million.

At the bottom, the Community Reinvestment Act -- 6,137 hours and $306,850. The American Bankers Association claims those estimates are significantly low, pointing out that the CRA is one of the laws bankers complain about most loudly.

Truth-in-lending particularly irks bankers: "It is the tiny print that nobody reads, and if they do read it they don't understand it," said Evelyn Carroll, president of FSA Inc., a Minneapolis-based bank consulting firm. [Graph Omitted]

PHOTO : HIGH PRICE TAG: Chairman Edward B. Brandon says regulatory compliance costs $10 million a year at National City Corp.

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