Regulations, Regulators And The High Cost Of Banking Compliance


And the regulations just keep coming. In the banking industry, the mindset among compliance staff seems to be one where the expectation is to have a new rule governing new rules that govern new rules.

As noted in The Wall Street Journal Tuesday, the fact remains that lenders are “awash in new regulations,” with swelling ranks of both interpreters and enforcers bringing “striking changes” to banks and their own internal day-to-day mindsets and operations. As it stands now, Dodd-Frank, the legislation that stands as a monument to preventing another financial crisis, is becoming monumental itself, clocking in at 22,000 pages, and counting, of rules and regulations governing every facet of banking life.

The end result – though there is hardly an end in sight – is that the regulatory arm of banking has become the fastest growing subset of the financial industry, with hiring at a pace of thousands of new staffers with an eye on keeping in lockstep with the regulatory mandates.

In addition to the staffing boon, The Journal noted that there have been actual business changes afoot within the industry, where banks have consciously pulled back from a wide range of traditional banking activities, such as student loans or some types of mortgages and even some of the staidest lines of businesses. 

The American Bankers Association said that 46 percent of banks have scaled back their efforts to grow loan accounts and also deposit accounts. The pullback has come as spending on regulations has become an expensive endeavor, as the top half dozen banks by assets, just three years ago, spent $70 billion on compliance, nearly double the year before, and of course costs have continued to rise as the sheer number of regulations themselves have gained traction. 

In this brave new regulatory world, noted The Journal, traders interact with compliance officers. Regulators monitor chat rooms. The biggest banks have regulators on site, sent courtesy of the Federal Reserve and the Federal Deposit Insurance Corp., among other agencies. At JPMorgan alone, the compliance and regulatory headcount has grown to 43,000 as of just last year, compared to 23,000 five years ago in 2011.

Costs shouldered by the banks, via staffing and other initiatives, may ultimately be passed through to the end user, the consumer who visits branches, takes on a mortgage or opens a checking account or credit card account. The reduced services that come with a reduced product line from the bank is one way consumers bear some brunt of compliance efforts. The other, as yet to be seen in real force, may come through additional fees where once there had been none (or relatively fewer transaction costs).