Fighting Words for Community Banks: Be a Champion of Change or a Victim

One of the key challenges raised by the lender panel at EDR’s Annual Client Summit last month was the rising burden of compliance chores. What used to take one person part-time now easily takes multiple people full-time. One panelist confided that his team is always seem to be preparing for the next audit coming down the pike. This challenge is forcing some institutions to turn to technology as a way to improve the efficiency of the compliance function.

What is the role of technology in compliance? Is the regulatory burden hitting community banks harder? In the latest twist on this topic, an analyst featured in American Banker last week turned a critical eye to the theory that community banks are at risk due to rising regulatory, technological and staffing costs. The results might surprise you.

Testing Conventional Wisdom: Is Bigger Better?

Using FDIC data by bank size, the analysis compared the performance of community banks with assets between $100 million and $130 million to their larger counterparts. The specific barometers of financial health included in the study were: return on assets and return on equity. In the end, the results showed little correlation between a bank’s financial performance and its asset size.

Hope for Community Banks

There is hope for community banks in today’s regulatory-focused lending environment, the author concluded, but only if they are agile. Small banks that have failed did not keep pace with the bigger banks’ efforts to “harness new technologies in order to keep up with regulatory changes and customer demands.” The author offered the following advice to small banks:

— Be smarter, faster and more effective than larger competitors.

— Don’t rely on the same technologies and processes you have been using for the last 30 years.

“Some banks still rely on paper systems to manage compliance. This is nearly unfathomable when one considers that more than 16,000 pages worth of regulatory changes were issued in 2013 alone. The staffing costs to maintain systems like these will only continue to increase.”

— Rethink your operations and cost structures.

“Technology, outsourcing and other tools can be leveraged to bring costs down and allow you to focus scarce and expensive resources on your customers and communities.”

His fighting words for community banks are good food for thought:

“Small banks that modernize and adapt will become champions of change. Those that don’t will become victims of it.”


Clearly, the regulatory climate is only intensifying. There is also more of a focus by regulators on operational risk—meaning it is not enough to have policies in place. Banks also need to show that the policies are being followed. Technological advances are well-timed. A recent study by Ernst & Young observed: “As the demands being placed on banks by regulators ramps up, technology tools are enabling institutions to meet their compliance obligations in ways that were not possible just a few years ago.” For some banks, it could just be a matter of spreadsheet simplification to reduce inefficiencies. Others may require more sophisticated systems. Remember: 16,000 pages of regulatory changes in 2013—and counting.

As noted by the author of the American Banker piece, replacing paper-based processes is time consuming, but can result in significant efficiency improvements and better compliance tracking. Not to mention freeing up a bank’s resources for core functions-and quite possibly, better financial performance. That alone is worth some thought.