Academic journal article ABA Banking Journal

Compliance Costs: A Big Hole in Banking's Pocket

Academic journal article ABA Banking Journal

Compliance Costs: A Big Hole in Banking's Pocket

Article excerpt

Red tape and regulation cost the banking industry $10.7 billion in 1991.

ABA drew that conclusion after surveying a cross-section of the industry comprising almost 1,000 banks of various sizes, and projecting the results for the entire industry.

This total represents more than half of the industry's net income in 1991. And it doesn't include the costs imposed on banks in the form of forgone interest on sterile reserves or the price of deposit insurance. Nor could respondants fix a price on the additional costs represented by the many regulations spawned by the FDIC Improvement Act. Where did it go? The costs of compliance permeate a banking organization. ABA's survey broke out the source of the $10.7 billion expense as follows:

* 55%-$5.9 billion-came from indirect costs, including hardware and software changes necessitated by regulation; printing and postage costs; and the staff time devoted by noncompliance employees to compliance tasks. (This cost represented 6.51% of respondants' operating expenses.)

* 15%-1.6 billion-went to paying the salaries and benefits of compliance management staff.

* 13%-1.4 billion-was paid out to outside experts, including consultants and lawyers. (This cost represented 3.69% of operating expenses.)

* 10%-S1 billion-represents the costs of training employees for compliance tasks. (This cost represented 2.64% of operating expenses.)

* 7%-$0.7 billion-went towards compliance training materials. (This costs represented 1.69% of operating expenses.)

"If only 25% of this cost could be redirected to bank capital, it would support additional bank lending of somewhere in the neighborhood of $20 to $30 billion per year," said Alan R. Tubbs, ABA's president, at a field hearing of the Federal Financial Institutions Examination Council. Tubbs is president of ,9120 million-assets Maquoketa State Bank, Maquoketa, Iowa.

What hurts the most? …

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