Regulatory Relief? They're Not Seeing ItAdditional ResourcesView Data on Survey RespondentsView All Survey Question ResultsView Verbatim Survey ResponsesAboutParticipateSurvey Results (Excel file)
American Banker Friday, September 14, 2007
By Rob Garver
Bankers' sense of their regulatory burden has budged little in the past year, despite the passage of a relief bill in September 2006 — a law which many companies say is too limited in scope to have a meaningful impact.If anything, the industry's sense of burden has increased, fueled by intensifying concerns about the mortgage business and the wrenching late summer credit crisis.
The most recent American Banker/Insight Express Executive Forum Survey, conducted last month, polled 301 bankers from institutions of all asset sizes and found that the same burdens weighing them down last year remain in place in 2007. Compliance with the Bank Secrecy Act, the Sarbanes-Oxley Act, and mortgage-related disclosure requirements remain bankers' chief concerns, while the cost of compliance as a percentage of revenue was statistically unchanged.
The survey also found that bankers remain largely ambivalent about planned changes to international bank capital rules and are focusing much more directly on the day-to-day burden of providing copious disclosures when closing mortgages, filing currency transaction reports, and managing their relationship with regulators — none of which has become any easier in the past year.
"Have we seen any relief?" asked Stephen P. Wilson, the chairman, president, and chief executive officer of Lebanon Citizens National Bank in Ohio. "No, we really haven't. I'm not saying that there has been none, but the new regulations, without a doubt, are growing faster."
Larry D. Maschhoff, the president and CEO of Bank of Illinois in Normal, agreed with that viewpoint. "Very little was accomplished," he said. "There were some little things that the bill took care of, but the big things are still there, and it always seems to increase."
Bank trade groups, who watched grimly while major portions of last year's legislation were gutted by the Senate — where a single lawmaker's demand for changes can kill legislation — share their members' frustration. The provisions left on the cutting room floor included one that would have greatly reduced the filing of currency transaction reports — one of the Bank Secrecy Act's more onerous requirements — that would have allowed thrifts to make more business loans.
"The House produced a very ambitious bill … but it had to go through the unanimous consent sieve on the Senate side," said Wayne Abernathy, executive director for financial institutions policy and regulatory affairs at the American Bankers Association. "By the time that bill was done, most people were disenchanted with it."
Patricia Milon, chief legal officer and senior vice president for regulatory affairs at America's Community Bankers, said that bankers appreciate what regulators and Congress are trying to do but "continue to be adamant that those piecemeal efforts are fine but they are not going to the heart of some of the most burdensome issues."
What financial services firms are not seeing, according to Ms. Milon, is "a scalable regulatory relief effort" that could affect multiple compliance areas, rather than tweaking individual regulations. Among policymakers in Washington, "there does not seem to be the will or a way to accomplish large-scale regulatory relief."
The survey highlights what bankers see as a significant disconnect between the regulators in charge of maintaining a healthy banking system and the needs of institutions.
"All of the examiners are too focused on issues that do not serve the safety and soundness of the banking system," one respondent wrote. "For example, [they spend] too much time on BSA-related topics that ultimately do not protect the banking system and bank customers."
Ironically, the implementation of new capital rules for international banks enshrined in the Basel II accord, which has taken up a huge amount of regulators' attention in the past several years, remains a distant concern to most bankers. The majority of respondents (58%) said they have no opinion on whether the capital rules needed to be revised in the first place. Bankers have differing opinions as to why their colleagues are largely ambivalent about Basel. "I believe it is perhaps because a lot of banks have excess capital, so it is not a factor for them," said Kathleen E. Marinangel, the president and CEO of McHenry Savings Bank in Illinois. "But for me, it is critical, if you want to be competitive, to be able to deploy your capital effectively. Our experience has been that our risk is very low, and we have to hold more capital than is really necessary. We would like the ability to be able to risk weight our own assets internally, so that we can balance our capital more effectively."
Mr. Wilson of Lebanon Citizens offered another reason why community bankers might not have developed a strong opinion on the issue of Basel. "When you have an enemy swinging a sword at you, you aren't worried about the one over on top of the hill," he said. "Basel is not a survival issue. I don't think Basel is going to take us down. In the long run, credit unions, an unabated Farm Credit System, or regulatory burden could potentially take smaller banks down, but not Basel."
Disappointment with last year's efforts to ease regulatory burden is deepened by the expectation that the roiling credit markets and the expected avalanche of foreclosures will spur regulators to crack down on lenders.
One banker wrote that his institution expects an upcoming examination to be "tougher" than the last, because the bank has experienced "some asset deterioration."
And even if regulators were not inclined to tighten their oversight of mortgage lending, many expect the public outcry over foreclosures to push Congress toward even more regulation in that area in the near future.
In this year's survey, bankers were given a list of compliance areas and were asked to rank them in terms of the need for relief. Trailing only Bank Secrecy Act compliance and Sarbanes-Oxley compliance were regulations associated with mortgage lending, including rules implementing the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act.
According to Mr. Abernathy, there is every chance that things are about to get even worse. The large number of subprime mortgages that have gone bad in recent years — most of which, he says, were not made by traditional banks — will have an impact on all lender supervision.
"Nonbank lenders, who are not subject to the same rules as banks, have been getting customers in trouble," he said. "Trouble causes calls for new regulations."
Bankers report the same worries. "My gut tells me that yes, absolutely, there will be new regulation because of the current problems," said Mr. Maschhoff of Bank of Illinois. "If you apply for a home loan, we are up to more than 40 pages of disclosures we have to give you, and I can almost guarantee that you don't read it." He also occasionally sits in on loan closings at one of his bank's branches. "Almost invariably the attorney representing the borrower advises the client that it is not necessary to read the boilerplate disclosures if he or she is comfortable with the interest rates and the terms of the loan." That does not stop regulators from poring over banks' disclosures, Mr. Maschhoff said. "Our next exam starts Tuesday, and for two weeks that is one of the biggest areas they will be looking at."
Mortgage disclosures have been a source of major frustration for lenders for years, he said, because the amount of work they entail for bankers far outweighs their benefits to borrowers. "I can remember criticisms for not putting a period in an initial," Mr. Maschhoff said. "Once we misspelled a town's name, and they said, 'Wow, you guys really did wrong here.' We even got written up once for leaving a space in between lines. They get into such detail it isn't even funny."
And Mr. Wilson says making sure that every i is dotted and every t is crossed is not a cheap proposition.
"On any given day I could make a case that five of my employees, out of 251, are not working for me, but for the [state or federal] government," he said. "Without a doubt, regulatory burden is the greatest threat to the small community bank right now. Bankers are trying to keep up with it, but the smaller the institution, the less possible it is to dedicate people to keeping up with regulation."
Compliance costs for community banks have not jumped considerably in recent years, but 61% of them reported this year that 5% or more of their annual revenue went to cover compliance costs. "On the smaller-bank side, the worry is that the rising cost is going to drive them out of business," said Ms. Milon. "Most banks are looking at consolidating because they need economies of scale."
But small banks are not alone in suffering from high compliance costs. In years past, there typically was a significant gap between the percentages of large and small banks reporting that compliance costs ate up more than 5% of revenue. That gap stood at 20 percentage points last year, but it shrank to 3 in this year's survey.
Among bankers from large institutions who reported that their compliance costs had changed in the past three to five years, the percentage reporting a significant increase rose from 63% in 2005 and 73% last year to 95% this year. Some attributed high compliance costs to higher expectations from regulators as institutions get larger.
"As the organization has grown, the bar is continually raised in terms of the depth of information we are asked to monitor," one banker wrote. Others blamed an obsessive focus on specific regulations for much of the expense bankers face. "BSA is taking over the world," a banker stated. "Strict interpretation of a flood of BSA regulations leads to inconsistencies and contradictions. Our examiners are taking more of an 'education' approach than a 'gotcha' approach, but the people writing the regulations have tied their hands in many areas. … Too many of the regulations are written in black and white by people who have not been behind a banker's desk."
Some institutions clearly have sought relief by switching regulators, but the written responses to the survey make it clear that there is no obvious path for all banks to reducing burden through regulatory arbitrage.
Most comments about officials from the Office of the Comptroller of the Currency were quite positive. ("The Comptroller examiners are a cut above the others. They exhibit common sense and use good judgment," one banker wrote.) However, it's clear that no regulator can please all banks all of the time. "Since we just changed our charter last year, we saw a tremendous difference between the OCC and the Fed," another banker wrote. "The Fed was much easier to deal with than the OCC."
Mr. Garver, who covered regulatory issues as an American Banker reporter from 1999 to 2003, is a freelance writer in Springfield, Va.