Imagine going to a tailor and discovering that there is no measuring tape, just ready-made clothes of one size, meant for all. While it would be suitable for people of a particular size, there would be a large number of customers who would be highly disappointed. There would be greater confusion if the tailor stitched fabrics taking the measure of just one random person and expected the rest to just “fit in”. Fortunately for us, tailors have a measuring tape and ensure we get the perfect fit. But regulators are yet to figure out a similar strategy for banks, which is why most regulations are implemented for banks and financial institutions of all size.


As regulatory expectations continue to rise, there is an increased need to emphasize each institution’s ability to react to regulatory scrutiny. With multiple complex regulatory deadlines for 2016 staring in the face of financial institutions, managing regulatory compliance and risk has never been so complex.

We take a look at what led to banks being subjected to so many regulations and how size plays a very important role in the regulatory burden faced by small and midsize banks:

2008: The Financial Crisis, New Regulations & Regulators

The financial crisis of 2008 significantly altered the banking landscape, and the number of new banking regulations increased with the passage of legislations like the Dodd-Frank Act & Basel III Reforms. The objective of these new regulations was to restrict ‘too-big-to-fail’ large banks from investing large sums in risky activities, in turn ensuring a situation like 2008 does not repeat again.

However, the addition of new regulatory bodies and regulations has added to the regulatory requirements that banks now need to meet. As our article on Regulatory Impact on Small and Midsize Banks suggests, the current regulatory environment has become particularly stressful to community and medium sized banks which are not as well resourceful as the large banks to comply with these additional requirements.

Hester Peirce, Ian Robinson, and Thomas Stratmann of George Mason University’s Mercatus Center surveyed community bankers and found that the median compliance staff for respondents doubled from 1 to 2 in the three years following enactment of Dodd-Frank.[1]

Numbers of Newly Created Banks (De Novos)

New Banks Numbers

Image Source: Richmond Fed:  Explaining the Decline in the Number of Banks since the Great Recession

How Large & Small Banks Are Regulated?

According to survey findings released during the 2015 Community Banking in the 21st Century research and policy conference, community banks spent an estimated $4.5 billion in 2014 for complying with the various banking regulations. These expenses are part, but not necessarily all, of a bank’s overall compliance requirements.[2] These findings just go on to show how size is one of the factors that policymakers need to consider when applying regulations to a bank and deciding how a bank needs to be supervised.

Community banks spent an estimated $4.5 billion in 2014 for complying with the various banking regulations.

A whitepaper ‘The Impact of Dodd-Frank on Community Banks’ opined, “The major flaw of the federal banking regulatory system is that it treats a community bank with $165 million in assets (the median-sized American bank) as the same essential creature as JP Morgan Chase or Bank of America.”[3] The current banking regulation systems follow a “unitary model”, which is a system where the broad principles underlying bank regulations are same for all banks, regardless of size and activities. However, as Federal Reserve Governor Daniel Tarullo puts it, Dodd-Frank Act and other reforms require “different categories of banking organizations—largely, but not exclusively, on the basis of total assets—to which different regulatory requirements are to apply.”[4]

President and CEO of community bank holding company Northwest Financial Corp Jeff Plagge says, “All too often, regulation intended for the largest institutions becomes the standard that is applied to every bank. This approach layers on unnecessary requirements that do little to improve safety and soundness, but add significantly to the cost of providing services.”[5]

The need of the hour

Referring to the 2015 Community Banking survey above, surveyed banks indicated that regulatory compliance accounted for:

  • 11 percent of their personnel expenses
  • 16 percent of data processing expenses
  • 20 percent of legal expenses
  • 38 percent of accounting and auditing expenses
  • 48 percent of consulting expenses

Other than the high costs incurred by banks to stay compliant, the frequency of reporting and the increase in regulatory requirements add to the pressure. Banks have to face annual regulatory tests along with submitting quarterly call reports. The process to generate, format and scrutinize for any errors takes weeks and at times months. An example of this is the call report, a key quarterly filing required by regulators. It now has 57 rows and 89 pages of instructions, a huge pike in recent times.

Reg Filings Pages

Image From: CrowdFund Insider: Dallas Fed on Community Banks: “Too Small to Succeed”, Crushed by Excessive Regulations

Although regulators agree with the need to change the outlook towards regulating small and medium size banks, the steps toward regulatory relief might take some time to be enacted. “We understand a one-size-fits-all approach doesn’t work,” said OCC Senior Deputy Comptroller for Midsize and Community Bank Supervision Toney Bland. Bland acknowledged that his agency “could do more” to reduce regulatory burdens on smaller institutions and said the OCC was in the midst of a comprehensive review of its regulations toward that end.[6]

A data-driven solution will provide consistency and transparency throughout the entire analytics and submission process and will strengthen banks’ risk data aggregation capabilities and internal risk reporting practices. -Alex Tsigutkin

Banks need to rely on technology and enhancing and simplifying existing processes to streamline and meet regulatory demands. In order to do so, banks need to prioritize and strategize their objectives when it comes to addressing data challenges.

Hexanika: The end-to-end regulatory solution

Hexanika is a FinTech Big Data software company which has developed an end-to-end regulatory compliance solution. The innovative machine learning big data solution improves data quality, keeps regulatory reporting in harmony with the dynamic regulatory requirements and keeps pace with the new developments and latest regulatory updates.

Hexanika helps establish a compliance platform that streamlines the process of data integration, analytics and reporting. The software platform can develop and clean data to be sourced for reporting and automation, simplifying the processes of data governance and generating timely and accurate reports to be submitted to regulators in the correct formats. The solutions also significantly reduce the time and resources required for everyday-regulatory processes, and are robust enough to be implemented on existing systems without requiring any specific architectural changes.

To know more about our products and solutions, read:


Contributor: Vedvrat Shikarpur

Feature Image Credits: Skyangel

[1] Working Paper: How are small banks faring under Dodd-Frank?

[2] St Louis Fed: Compliance Costs Community Banks $4.5 Billion Annually, Survey Shows

[3]Tanya Marsh and Joseph Norman, “The Impact of Dodd-Frank on Community Banks,” American Enterprise Institute, white paper, 2013, p. 7, at

[4]Gov. Daniel Tarullo, “Rethinking the Aims of Prudential Regulation,” speech at the Federal Reserve Bank of Chicago Bank Structure Conference, May 8, 2014, at

[5] Law 360: Small Banks Slam ‘One Size Fits All’ Dodd-Frank Regs

[6] Law 360: Small Banks Slam ‘One Size Fits All’ Dodd-Frank Regs

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