Evidence Sketchy for Dodd-Frank Boom in Compliance Costs

The massive expansion in postcrisis regulation has drawn loud protests from many bankers, but it is difficult to discern from their financial statements any explosion in compliance costs.

Fees paid to outside accountants and auditors appear to have fluctuated little in recent years. Consulting and advisory expenses have dipped and rebounded since 2008, showing no clear-cut relationship to the 2,000-odd pages of the Dodd-Frank Act that became law in July 2010.

One area where costs have mounted markedly involves legal fees, especially for institutions with more than $4 billion of assets.

For smaller institutions, however, the fees have leveled off since mid-2010. What’s more, the wave of foreclosure proceedings carried out by large servicers appears to be just as likely a culprit for the jump as is the cost of complying with increasingly complex supervision.

To be sure, the specific components of “compliance costs” are ill defined or hard to get at; additional staff hired to deal with new or tougher regulations are lumped into companywide compensation expenses. Moreover, other ways in which regulations influence costs are less tangible. “Dealing with regulation and compliance used to be 2% to 3% of a CEO’s job. Now it’s 15% at least,” Christopher Annas, chief executive of Meridian Bank in Devon, Pa., told American Banker recently.

Bankers and regulators have also clashed over contentious inspections, with some bankers complaining that overly aggressive examiners have forced them to rein in lending in ways that have hurt revenues.

It is easier to quantify the effect of regulation on narrower line items, like the reduction in debit card interchange income for large banks that have resulted from a cap instituted under the Durbin amendment.

All told, broad increases in compliance costs would most likely be reflected in growth in auditing bills as banks scrutinize the health of loan portfolios more closely, and in consulting fees as they look to outsiders to help interpret and implement new rules.

Banks are required to report such expenses when they exceed $25,000 and 3% of total “other” noninterest expense, a catchall for items not covered in specific categories, like salaries and rent.

For the vast majority of institutions, auditing, consulting and legal fees do not meet the threshold. The data here reflects the hundreds of entities for which these expenses were in fact large enough to report each quarter from 2008 through the first quarter of this year.

Among institutions with less than $4 billion of assets, accounting fees have hovered between 1.6% and 1.7% of total noninterest expenses (including salaries and rent but not amortization or impairment of intangibles) over the preceding four quarters since late 2008. Such fees made up a smaller piece of the pie at larger institutions but were also relatively stable.

The decline in consulting expenses through 2009 and their subsequent recovery may be an echo of temporary belt-tightening during the recession, which officially ended in the middle of that year.

Legal fees make a somewhat clearer case for the rising cost of compliance, yet for smaller banks their share of noninterest expenses has stabilized since mid-2010.

If bankers are being buried in Washington paperwork, perhaps it’s more apparent in the distractions they’re facing in running their businesses than it is in the checks they’re writing to outsiders.