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GAO notes regulations’ trickle-down effects on smaller banks

Mary Ellen Biery
January 8, 2016
Read Time: 0 min

A lengthy report released recently by the U.S. General Accounting Office (GAO) highlights the challenges that regulatory changes bring to financial institutions. The GAO acknowledged that community banks, credit unions and their professional industry associations reported increased compliance burdens and reduced activity in specific business activities, such as certain mortgage lending, as a result of Dodd-Frank. 

In addition to the challenges tied to staffing, training and time allocation, however, government auditors also described industry participants’ concerns about potential “trickle-down effects” on smaller institutions as a result of current or future regulations aimed at larger banking institutions.

“For example, representatives from community banks and credit unions we interviewed stated that while [the Consumer Financial Protection Bureau] exempts them from certain rules or parts of the rules, their prudential regulators might hold them to regulatory standards for larger institutions as a best practice,” the GAO report said.

FDIC and Federal Reserve officials told the GAO that they had been hearing similar concerns from the institutions they regulate. The FDIC officials reported they are working with examiners to help ensure they follow policies that “take into consideration the size, complexity, and risk profiles of banks,” according to the GAO study. Fed officials, too, said they are guiding expectations of examiners and trying to communicate clearly the applicability of rules to smaller institutions.

Nevertheless, “trickle-down regulation” has been an ongoing issue for many smaller institutions in recent years. Former FDIC Chairman Sheila Bair, now a policy advisor with DLA Piper, in July noted that regulators don’t like to be seen as weak regulators.

And a Sageworks survey of banks and credit unions earlier this year found that many financial institutions with less than $10 billion in assets were already conducting stress tests. Banks of that size generally are not required to do so under Dodd-Frank, even though some may be expected to conduct stress tests because of loan and portfolio concentrations in specific areas, such as commercial real estate.

In the Sageworks Bank & Credit Union Examination Survey, 99 percent of respondents had assets below $10 billion, yet 58 percent of institutions surveyed said they were already stress testing. One-third of institutions reported having received pressure from examiners, who asked them to start or expand stress testing, including a handful (3 percent) of respondents who said examiners required the institution to implement stress testing by the next exam.

Given the challenging regulatory environment, some banks and credit unions are seeking ways to increase efficiency in order to comply with regulations and better manage portfolios. One option is to use automated software solutions to streamline processes and to accommodate new or changing regulations more easily. Some institutions have found that standardizing more of the lending process has helped them provide consistent methodologies that address examiner concerns and prove auditable to prying examiners (or auditors).

For more help dealing with regulatory challenges, visit Sageworks’ resources section. Financial institutions looking to learn more about the Financial Accounting Standards Board’s (FASB) upcoming change to accounting rules for expected credit losses can also attend complimentary webinars. Sageworks and CliftonLarsonAllen will provide during a two-part webinar series the latest information, key insights and examples to help institutions prepare for FASB compliance.

About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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