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Are regulatory management offices within banks needed in 2015?

January 1, 2015
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Some of the biggest banking stories in 2014 centered on massive data breaches at top retailers, M&A activities, and regulatory changes like the IASB’s IFRS 9 Financial Instruments. And, as is the case with every year’s end, the media has speculated on what could make headlines in 2015.

American Banker recently touched on a potentially interesting trend within their roundup of the 10 big ideas for banking in 2015 – the concept of financial institutions developing their own regulatory management and advisory offices. The writer of the article, Rob Blackwell, says: “It’s an idea that seems long overdue — the creation of a single regulatory management office designed to centralize how a bank responds to the different data and supervisory mandates issued by federal and state regulators.” While only a few banks currently have an office solely dedicated to regulatory risk and advisory in place right now, we may well see more popping up this year as banks recognize the benefits of this practice. Assembling this type of regulatory team or office could help identify shortcomings within a bank’s organization, minimize redundancies and foster improved relationships with regulators.

The article notes that many banks are suffering from common problems with regards to regulatory changes – particularly after a flurry of M&A activity and/or a fractured approach to meeting current requirements. Many bank departments operate in a silo and may be unaware that regulators are asking for similar standards across multiple lines of the bank’s business. And, if Department A and Department B have conflicting responses to a regulator’s singular question, the bank as a whole may experience increased regulatory scrutiny.

Creating a team dedicated to compliance will likely foster trust with regulators. As the article points out, “This approach also facilitates an improved sense of a bank’s data and better handling of various regulators’ data requests.”

Calculation frustration

The concept of a central office in charge of coordinating regulatory efforts may be an appealing one as more regulatory changes are in store this year – namely final guidance on the CECL model, which is anticipated within the first half of 2015. Having a department in place when a large-scale regulatory change such as CECL is announced could facilitate the transition to compliance over the time allotted. The OCC has said that compliance with the CECL model will require a substantial increase in bank data needed to perform ALLL calculations going forward, and a regulatory risk and advisory team can more easily identify holes in a bank’s current available data and advise on ways to be in compliance.

A regulatory office that has a high-level view of the bank’s operations can offer guidance to all departments on how to best prepare for coming changes. Assembling a team, rather than a standalone compliance officer with potentially limited bandwidth, will also make it easier for a bank to spot its own inefficiencies within their own complex processes, such as ALLL calculation, and respond to any compliance issues succinctly.

With regulatory changes being a top concern of many bankers, moving to this management organization model may make a lot of sense for many financial institutions in 2015.

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