2019 Economic Report of the President Cites Community Bank Survey Analysis
The 2019 Economic Report of the President,"Ensuring a Balanced Financial Regulatory Landscape," cited findings from a St. Louis Fed paper that analyzed community banks' compliance costs based on data from the 2015-2017 CSBS Survey of Community Banks.
The paper, "Compliance Costs, Economies of Scale and Compliance Performance," was co-authored by the St. Louis Fed's Drew Dahl, James Fuchs, Andy Meyer and Michelle Neely.
In Chapter 6 of the report, it notes, “As with total noninterest expenses, there are economies of scale in regulatory compliance. For example, Dahl and others (2018) found that mean total compliance costs were about 10 percent of total noninterest expenses in 2017 for banks with less than $100 million in assets, compared with 5 percent for banks with assets between $1 billion and $10 billion."
Other key findings of the analysis included:
1. Compliance costs averaged 7 percent of noninterest expense over the period studied. Personnel expenses accounted for the majority of these expenses, followed by data processing, accounting, legal and consulting expenses.
2. In 2016, compliance with mortgage-related regulations accounted for about one-third of all regulatory costs. Compliance with the Bank Secrecy Act accounted for about one-fifth of all expenses.
3. Economies of scale exist in compliance, i.e., relative compliance costs increase with decreases in bank size. Banks with assets of less than $100 million reported compliance costs that averaged almost 10 percent of noninterest expense, while the largest banks in the study reported compliance costs that averaged 5 percent. In other words, the compliance cost burden for the smallest community banks is double that of the largest community banks.
4. The compliance cost burden varied by year in the study. Compliance expenses as a share of noninterest expense rose from 5.5 percent in 2014 to 8.1 percent in 2015 before declining to 7.7 percent in 2016. The implementation of Dodd-Frank related regulations may explain this pattern in part.
5. The economies of scale results do not vary depending on scores on the quality of management or consumer compliance given to banks by their regulators. The same basic pattern of an increase of compliance cost burden with a decrease in size held regardless of these regulatory performance ratings. There is no indication, therefore, that large banks spend relatively less on compliance activities because they are willing to tolerate lower performance ratings.
6. Within a given size category, these regulatory performance ratings were independent of the amount spent on compliance. This suggests that compliance performance is based on factors other than what is spent on it.
View the data, variables and reports of the CSBS Survey of Community Banks from 2015-2017 in the Research section of the Community Banking in the 21st Century website.