Banks Pour Increased Resources into Complying with Rules
Federal regulations on financial institutions have prompted Florida banks to direct more of their resources into compliance.
From the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act passed following the last rescission to federal regulations that have been in place for decades, such as the Bank Secrecy Act that deals with anti-money laundering, these regulations have prompted banks to expend more of their resource on compliance instead of on banking.
“The costs of compliance are quite significant in terms of the cost structure of smaller community banks, and that’s a drag on the ability of the bank to focus on doing business if it has to invest so [many] (sic) resources into compliance,” said attorney Bowman Brown, a partner at Florida-based Shutts & Bowen LLP law firm. “It’s critical that the banks spend the money required to comply with the bank regulatory requirements because if they don’t, they wind up with cease and desist orders and the directors of the office might be fined.”
The effects of federal regulations on the way banks operate nowadays are evident.
According to a June 2014 survey of 67 professionals at Florida banks, 50% of the banks surveyed have more than 10 employees who deal specifically with anti-money laundering (AML) compliance. In addition, 42% of the banks that responded to the survey planned to increase their AML compliance spending within the next year.
The survey, done by Miami-based accounting firm Kaufman Rossin, focused on AML compliance by banks of varying sizes, including those holding more than $10 billion in assets to those holding less than $100 million.
The size of the bank is measured by the assets it holds. While perspectives on what constitutes a large or small bank differ, for the most part, experts agree that a bank has less than $25 million in assets is considered small.
The cost of compliance is particularly cumbersome for smaller banks.
“Compliance isn’t negotiable. So it’s difficult for the smaller players to fully absorb the cost of compliance. It’s tougher,” said Mario Trueba, president and CEO of Miami-based Sabadell United. “It has to do more with spending on human capital and expertise… Compliance is not an area of a bank where you should look to save money.”
To deal with the cost of compliance, smaller banks are increasingly considering consolidation.
“I think you can expect the trend nationally and the trend in Florida to be increased consolidations, and I think you will see small banks partner up with each other,” Mr. Trueba said. “You will see some of them trying to partner up with each other and some of them trying to sell to guys like me.”
Sabadell United has about $4.7 billion in assets, Mr. Trueba said.
“You could see banks our size, us or other banks, looking to acquire and I think you will see a lot ofsellers under $500 million and under in assets,” Mr. Trueba said.
When Illinois-based First American Bank recently closed on its merger with Bank of Coral Gables, it brought about $3.5 million in assets to the South Florida community bank. Bank of Coral Gables Chairman William H. Kerdyk Jr. told Miami Today that the addition of assets would help the bank handle federal regulations.
“In the regulatory environment throughout the US, larger is better,” he said.
The cost of compliance comes from banks having to redirect portions of their budgets toward hiring experienced compliance officers, a growing profession that’s in high demand.
“The cost of doing business, the overall operating cost and the cost of compliance are absolutely factors that bank boards and owners should consider when they consider if they should continue to go it alone or if they should merge,” Mr. Trueba said. “It’s not the only factor; but it’s a factor.”
