The Federal Reserve and the Conference of State Bank Supervisors (CSBS) released the results of their second National Survey of Community Banks. The survey – featured in the 2015 Community Banking Research and Policy Conference’s third annual “Banking in the 21st Century: Opportunities, Challenges and Perspectives” report – found that compliance costs for community banks represented 22 percent of their net income.
“Respondents to the 2015 survey reported that regulatory compliance accounted for 11 percent of personnel expenses, 16 percent of data processing expenses, 20 percent of legal expenses, 38 percent of accounting and auditing expenses and 48 percent of consulting expenses. To the extent that these percentages are accurate and representative of the community banking industry, they imply a hypothetical compliance cost to community banks, in these areas alone, of $4.5 billion annually,” the report stated.
Despite stating that it was too soon to weigh these compliance costs against their benefits, the Fed and CSBS recognized within the report that the costs “are sufficient to frustrate bankers.” To develop the survey, CSBS staff members met with representatives from several Federal Reserve banks, the Fed and the academic community. The survey’s questions covered lines of business, mortgage market participation, technological innovation, regulatory compliance, competition and consolidation.
The final sample consists of 974 responses from commercial banks with assets less than $10 billion in 39 states.
The report also included anecdotal evidence on the state of community banking that the Fed and CSBS gathered through town-hall meetings. A few common themes were found from the meetings, such as “a lack of clear regulatory expectations and perceived aggressive examination tactics.” This has led many banks to hire more compliance personnel and third-party auditors, both of which are in high demand and very expensive.
“Compliance costs have also led banks to abandon certain financial products, forcing consumers to nonbank financial services providers. A CSBS and Federal Reserve survey of nearly 1,000 community bankers adds some quantifiable data to what we heard at the town hall meetings. For example, the survey revealed that regulatory compliance accounted for about 10 percent of all personnel expenses and 38 percent of accounting and auditing expenses for community banks,” CSBS Chairman David J. Cotney wrote in the report’s forward.
Banks were asked to identify their primary lines of business and, within those lines, specific products and services offered.
Commercial real estate lending was named by 74 percent of respondent banks as the primary line of business. One- to-four-family mortgage lending also was featured prominently as a primary line of business, named by 69 percent of respondent banks. Agricultural lending was named as a primary product line by 43 percent of respondent banks.
Wealth management was a small but fast-growing activity, named by 13 percent of banks as a primary line of business this year. Retirement services also have been identified as a promising point of expansion as banks seek ways to generate profit in a low-interest rate environment.
For mortgage lending, it was found that the market “was buffered last year by regulatory changes (particularly those affecting QM and non-QM mortgages) and intensified competitive pressures” and that “many banks curtailed mortgage activities.” For instance, one- to four-family mortgages were named as a primary line of businesses by 69 percent of surveyed banks as opposed to 75 percent the year before.
Loans backed by the government-sponsored enterprises (GSEs) represented about 90 percent of the mortgage market. Some community bankers saw opportunity in the new regulatory environment. In this regard, 8 percent of banks in the survey that made mortgages reported that more than 70 percent of them were in the non-QM category.
“The de-emphasis on mortgage lending as a primary line of business and among products and services appears to contrast with an inclination of banks to hold, rather than sell, the mortgages they make. In this regard, 45 percent of respondents said they held at least 90 percent of the loans they originated. On the other end of the spectrum, 12 percent of banks held less than 10 percent of the loans they originated,” the report stated.
Cotney added that the use of asset thresholds has not been productive when it comes to determining whether an institution is a community bank for purposes of developing regulatory relief proposals. The findings of the research conference, Cotney added, had shown that community banks are best identified by looking at asset size along with qualitative factors that allow for flexibility in interpretation and application.