Compliance Costs Community Banks $4.5 Billion Annually, Survey Shows

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Community bankers have been saying for years that complying with the patchwork of banking regulations is expensive. How expensive? $4.5 billion in 2014, according to a 2015 survey.

The survey findings were released during the 2015 Community Banking in the 21^st Century research and policy conference—a conference co-sponsored by the Federal Reserve System and the Conference of State Bank Supervisors and hosted by the Federal Reserve Bank of St. Louis. The survey was conducted by state banking commissioners and sampled 974 community banks across the country. It asked bankers to identify the amounts attributable to compliance in five categories of operating expenses. The expenses are part, but not necessarily all, of a bank’s overall compliance burden. These costs are likely to exhibit economies of scale—that is, they increase (but at a decreasing rate) with bank size.

It is, of course, a matter of opinion as to whether these costs are appropriately balanced against their benefits in terms of bank safety and consumer protection. But from an objective perspective of profitability, it can be said that they represented 22 percent of community bank net income in 2014. Surveyed banks indicated that regulatory compliance accounted for:

• 11 percent of their personnel expenses
• 16 percent of data processing expenses
• 20 percent of legal expenses
• 38 percent of accounting  and auditing expenses
• 48 percent of consulting expenses

To better understand cost impacts, the survey applied these percentages to the aggregated dollar amounts, in each category, across all community banks; thus, the estimated $4.5 billion in compliance costs in these categories alone.

The magnitude of compliance costs is relevant to proposed changes in regulatory requirements that have been discussed over the past year in hearings conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996. Although the hearings have not yet resulted in any concrete proposals for reducing regulatory burden on community banks, some ideas have emerged. These include raising the asset thresholds at which 12 month (as opposed to 18 month) bank examination cycles are required and increasing the transaction value threshold under which properties securing loans require an appraisal by a state-certified or licensed appraiser.

The underlying objective is to reduce costs among community banks for which regulatory burdens may be disproportionate. As one surveyed banker said, “Small banks cannot afford to efficiently meet the same regulatory and compliance guidelines laid out for ‘big bank’ problems.”    

Additional Resources

• Community Banking in the 21st Century publication
• On the Economy: Bank Charters, Branches on the Decline
• On the Economy: A Breakdown of Bank Failures in 2014