Where will all that freed up money go?
Smaller banks were big winners from the regulatory relief bill signed into law by President Trump last month, with benefits such as easier mortgage underwriting requirements, simplified capital rules, an exemption from the Volcker Rule, extended time between exams and shorter call-report forms.
Community banks could redirect funds previously allocated toward compliance into technology investment, industry observers say.
“Any reduction in compliance-related activities should free up resources and budgets that can be redeployed to address more business and customer-related initiatives,” said Tom Kimmer, who leads the risk marketing and operations area at the analytics firm SAS. “Compliance activities and expenditures were seen by many as too onerous for many small banks, so any regulatory relief is welcome.”
According to a study by the Federal Reserve Bank of St. Louis, banks with assets of less than $100 million reported total compliance costs were almost 9% of their noninterest expenses.
But thanks to post-crisis reforms such as Basel III, most banks are well-capitalized — some might say overcapitalized — compared with a decade ago.
“Ultimately it is up to individual banks to determine the best use of funds,” Kimmer said, “whether they make capital investments to improve their technology infrastructure, expand their lending portfolios, or go in a different direction altogether, for example, mergers and acquisitions of other small banks.”
Smaller banks over the last decade or so have dedicated a portion of their technology resources towards “making manual processes more efficient” when it comes to compliance, and with some of those compliance burdens now eased they can look now to a “recalibration of business strategy,” said Scott Baret, leader of the U.S. banking and capital markets practice at Deloitte.
“Now that they’re not being constrained by these sometimes onerous requirements, you might start to see a reallocation [of budget] more into modernizing and building a bit of technology agility,” he said.
Community banks could use this opportunity to focus on becoming “digitally anchored” and invest in technology that will help differentiate them from competitors, Baret said.
“The banking model of the past was branch-centric — that was the anchor — but mobile and digital are the new anchor,” he said. “In the U.S., in many cases banks are not where they are in other countries when it comes to mobile. This could be a shot in the arm for them to invest in better digital experiences for their customers. The [banking] clients I am involved with ... I do believe are looking at this as an opportunity.”
Banks will not only have the leeway to potentially redirect the amount of technology that is used for running compliance systems, said David O’Connell, a senior analyst with Aite Group. They will likely be able to shift some of the internal manpower currently delegated toward operating and maintaining those systems, too.
The regulatory relief bill “sent a signal to regulatory bodies and auditors" that the federal government "is taking a less heavy-handed stance with regard to these things,” O'Connell said.
“That message is as important as the text of the bill itself," he said. "When an auditor goes to a bank the findings they make, the diligence with which they look, the magnitude of the citations — those are all up to the local regulator or auditor on site. They just got a signal saying, ‘We are not going to be heavy-handed as in the past.’ ”
This means smaller banks no longer have to undergo stress tests “to the level that it would satisfy regulators, but maybe just to inform their own risk analytics,” which would be a far less exhaustive process, O’Connell said.
With more cash and resources on hand, community banks could use that to invest in technology — either on internal process automation or digitizing the customer experience — or perhaps try their hand at some M&A deals, O’Connell said.
But most industry observers agree tech investment should be a primary focus for spending extra funds in community bank budgets.
“There is more of an appetite for smaller banks to spend on technology to improve the customer experience,” O’Connell said. “More so that in the past, it’s easier for smaller banks to adopt technology in a scalable way.”