Roughly a decade on from the financial crisis and seven years after passage of the Dodd-Frank Act, the cost of regulation continues to weigh on the banking industry, an S&P Global Market Intelligence survey found.
Respondents said the banking industry continues to grapple with compliance costs that have soared since the financial reform legislation became law: 49% said compliance costs were up 20% or more since Dodd-Frank was implemented and another 22% said these costs were up between 10% and 20%.
Some 40% of respondents said compliance costs now account for 10% to 20% of their annual expenses. Another 14% pegged the share at 20% to 30%, and 5% estimated the figure topped 30%.
"Operating in the current regulatory environment significantly drives up our overhead costs," said one Texas community banker, who estimated compliance costs are up more than 20% since Dodd-Frank. Respondents completed the survey without disclosing their names in order to provide candid answers.
The online survey, conducted during the third quarter, garnered 102 responses from across the bank and credit union industries. More than half of those who responded to the survey were bankers — with another quarter identifying themselves as industry analysts — and of these bankers, a majority said they worked for a company whose assets totaled less than $10 billion.
Their collective responses provide a snapshot of industry insiders' views on the regulatory environment in the second half of 2017.
Some respondents said mounting compliance work pulls resources away from bread-and-butter lending and deposit-gathering, and several said that the associated costs often get pushed on to customers.
"We just pass the lost revenue or cost onto the end consumer," wrote one employee from a community bank in Iowa. A community banker from Florida said the current regulatory environment makes it "cost prohibitive" for a community bank to help its community. "It isn't profitable to make loans under $1 million," the respondent wrote.
Credit unions, too, say regulatory burden is heavy.
One respondent from a credit union approximated that costs are up 20% or more since Dodd-Frank and now account for between 20% and 30% of total expenses. "Regulations are so pervasive and numerous," this respondent wrote, that "it is difficult to arrive at an accurate assessment of all costs associated with the current regulatory environment. But needless to say, these costs are crippling."
President Donald Trump has vowed to work with the Republican-controlled Congress to either repeal or roll back swaths of Dodd-Frank. A vast majority of survey respondents said they would like to see one or the other. But, overall, hope did not run high that such a shift in the regulatory winds is feasible in the near future. Asked to rate on a scale of 1 to 10 their confidence in the Trump administration's ability to implement regulatory reform before the 2018 mid-term elections, the average response was a 5.
As one community banker from West Virginia said in a survey response, the "landscape is too fractured to expect any reform."
Against that backdrop, many in the industry anticipate further consolidation among lenders. Nearly 40% of respondents said that, over the next 12 months, challenges tied to Dodd-Frank are either "very likely" or "somewhat likely" to influence their institution to consider entering an M&A transaction.
"Dodd-Frank is a major consideration for any M&A deal that is reviewed," a regional bank employee from Georgia said in a survey response.
The survey found that more than 36% think banks need to have at least $1 billion in assets to succeed. Nearly 13% think they need to have at least $5 billion, while about 12% said they need to be larger than $5 billion.
Credit unions also are merging at a steady clip. And if lawmakers in Washington make little headway on the deregulation front, some in the industry expect M&A to continue for years and eventually result in a banking landscape all but devoid of small institutions.
"I can emphatically state if significant regulatory relief is not provided for small to mid-sized institutions soon, in 20 years I doubt we will be left with anything else besides megabanks," one respondent from a credit union wrote. "This will have a dramatic, chilling effect on small business creation and economic growth in the country."