Regulatory requirements could get a lot cheaper forcommunity banks — if they are willing to collaborate, and if they are willingto take on the risks that joining forces would entail.
Community bankers are increasingly interested in poolingresources with other banks to cut costs related to the Bank Secrecy Act and itsassociated anti-money laundering provisions, according to a white paper theConference of State Bank Supervisors released Sept. 12.
CSBS senior communications manager Rockhelle Johnson saidthe white paper aims to provide community banks and their regulators withspecific examples of how banks have teamed up. According to a joint survey theCSBS and the Federal Reserve shared at a recent conference, 22% of respondentbanks believe that BSA/AML compliance is the most costly regulation forcommunity banks. The survey was administered by 30 state banking commissionersacross 29 states, with a total of 557 community banker participants.
The BSA, passed in 1970, requires that financial institutionswork with the government in cases of suspected fraud or money laundering.
One banker in the survey said that BSA demands present asignificant "drag on earnings, morale and the focus of the bank on servingcustomers and the community."
The white paper, "Shared Resource Arrangements: AnAlternative to Consolidation," outlines the regulatory struggles communitybanks face when compared to larger competitors or nonbank financialinstitutions. It suggests that sharing certain resources with comparable institutionsis a way for community banks to "realize the benefits that come with alarger size and scale, yet preserve their core character, function andindependence."
Shared resource arrangements could include personnel,technology or compliance means to reduce costs and increase operationalefficiencies. Though many community banks are turning toconsolidation to cut down on costs, the paper suggests that mutually beneficialarrangements between two banks that share personnel or resources "mayachieve (or exceed) the same regulatory cost savings or economies of scale asconsolidation."
Chris Cole, executive vice president and senior regulatorycounsel for the Independent Community Bankers of America, said in an interviewthat the paper provides a "roadmap" for community banks to utilizeshared resource arrangements.
"You do see shared resource arrangements in otherindustries quite a bit," Cole said. "It is a shame in a way that wedon't see more of that in the community banking industry."
Shane Deal, deputy commissioner of financial institutionsfor the Minnesota Department of Commerce, said this type of arrangement couldhave a major impact on the way community banking is conducted in ruralcommunities.
"Some of these banks are so small that they don't havethe ability or need to have a full-time staff member," Deal said."Reducing the cost while still being able to hire high-quality staffmembers and teams is beneficial for community banks and the communities theyserve."
Cole noted that the ICBA offers to underwrite credit cardsfor its community banks, allowing them to mobilize and act as a group whenpurchasing products and services — a type of shared resource arrangement.
"What the white paper is trying to encourage more of isgroups of one, two, three or five community banks, rather than a wholeassociation, teaming up together," he said.
One issue community banks face, as cited in the paper, isthe struggle to attract subject-matter experts to fulfill compliance andregulatory roles. The solution is often costly or unaffordable for certaininstitutions.
Johnson, the CSBS spokesperson, noted that while there arebenefits to resource sharing, banks should use caution when entering intoagreements.
."If there is a crisis at that bank, just by nature ofdoing business at that bank, you're kind of at risk," Johnson said."It's making sure that you have a clearly mapped out agreement ahead oftime to handle those negotiations and other legal concerns."
Likewise, Cole said community bankers are often hesitant towork closely with competitors.
"You worry that your competitors will get access tocustomer information or information about your business, which is the thingthat you dread," Cole said. "I think they are legitimate issues, butthey are issues you can deal with. I think community banks should exploredealing with them."