Dallas Fed Report Warns of Compliance Costs on Community Banks

By Jeff Bater

Jan. 4 — Some small banks could face failure if the regulatory climate that emerged from the financial crisis isn't adjusted to better match risk with an institution's size, according to a paper by analysts at the Federal Reserve's Dallas branch.

More than five years since the Dodd-Frank Act was passed, smaller community banks are finding it increasingly tough to survive, due in part to the compliance costs needed to deal with the new regulations, the report said.

“In a regulatory environment that increasingly addresses big bank processes and tends to be ‘one size fits all,' smaller community banks appear to have a valid concern that their compliance burden is rising and the playing field is becoming more uneven,” the report said. “Regulatory oversight should match the level of risk an institution poses to the financial system and economy at large. Otherwise, more banks may become too small to succeed.”

Bank Charters Dry Up

The report cited that practically no new banks have entered the market since 2008. In remarks at an Federal Deposit Insurance Corporation event in November, the agency's chairman, Martin Gruenberg, acknowledged the environment in which to start a bank has been challenging, with net interest margins narrow and credit demand relatively modest. But he also said rising interest rates could lead to better conditions for startups (227 BBD, 11/25/15).

In 1992, community banks accounted for 64 percent of $4.6 trillion in total banking assets, the report said. By 2015, their market share had dropped to 19 percent of $15.9 trillion in total assets.

Bank Call Reports

To illustrate the burden of regulations, the report used as an example the condition report banks that file regularly.

“In the 1950s, these reports (excluding instructions) were four-page filings,” the analysts said. “The reports for the smallest institutions grew to about 30 pages in the 1980s, about 40 pages in the 1990s and about 50 pages in the 2000s. Now, the Call Report is 84 pages.”

They wrote that while the costs incurred to banks to complete the added pages and items of call reports has not increased as dramatically, the burden to report more aspects about each institution has clearly gone up.

“Indeed, the increase in the page numbers and items per filing in Call Reports might be a meaningful proxy for the hard-to-measure, latent requirements that regulators have placed on smaller banks,” the Dallas Fed report said.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

For More Information 
The Dallas Fed report can be read at http://src.bna.com/bPh.