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Surprising number of regulatory changes in Q3

November 10, 2014
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According to CB Insight, community bankers felt Q3 was a light one in terms of regulatory compliance. However, the Q3 2014 Banking Compliance Index (BCI), shows otherwise. The third quarter marked the highest level of regulatory changes since 1995, with 82 changes implemented.

As a result, banks are having to spend more time and resources on complying with regulations instead of profitable activities such as booking new loans. According to the data, the average financial institution spent an additional $45,264 in Q3 to manage regulatory changes.

In addition, there was a 26 percent increase in the number of hours needed to meet these regulatory changes, which results in an average of 1.86 more full-time employees needed on staff or 653 additional working hours. For most community banks, this is difficult to address, especially if regulatory changes continue to increase.

However, community banks are well equipped to solve this issue. CB Insight points out several steps to prepare for future regulatory burdens:

1. Hire qualified experts. Many banks are beginning to hire a Chief Risk Officer (CRO) to manage regulatory compliance. However, it is difficult to find and hire qualified candidates due to a shortage of educational and professional experience. Very few universities in the U.S. have risk management programs, leaving CROs in high demand. And, to ensure the right person is hired into that critical position, examiners are now checking for an adequate level of experience for the role, according to CB Insight.

2. Invest in technology. In an effort to cut costs and redeploy talent, many banks are investing in automated risk management solutions such as stress testing. This allows employees to spend less time in spreadsheets and managing data, while increasing time spent on activities that bring in revenue for the bank.

3. Involve the Board. It is also necessary to demonstrate active Board participation. Risk Management Consultant Rob Ashbaugh notes, “Because a bank Board meets periodically, sometimes only quarterly, and may only have a few minutes… it is important for senior management to put together a report describing risks, but also putting those risks into context with the bank’s current risk appetite and the overall economy.” In other words, reports to the Board must empower directors to assess current and potential risks within the loan portfolio, leading to actionable results.

In addition to the record-setting regulatory changes, enforcement actions were high in the third quarter, averaging seven items per action according to CB Insight. These often result in fines and extra hours spent to have the enforcement action removed.

For more information on preparing for the future of regulatory compliance, check out this complimentary whitepaper on Actionable Stress Test Results for Community Banks.

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