Anecdotal evidence from bankers suggests that the cost of complying usually increases with new rules and regulations when large statutory changes are made to financial laws and rules of any country or region[1]. This burden increases significantly when such changes are made especially after a financial crisis. New regulations stemming from the financial crisis has cost the six largest U.S. banks $70.2 billion as of the end of last year[2]. Between the end of 2007 and the end of 2015, regulatory fines rose by more than 100% – or $35.5 billion- according to data from policy-analysis firm Federal Financial Analytics Inc. As per Federal Financial Analytics, the reporting costs come from a mix of requirements that are specific to these banks, e.g. particular capital surcharges that apply to banks with assets over $50 billion but impose the largest cost on the six biggest banks due to their size or risk

To provide the context necessary to understand the regulatory costs on small banks, let us first have a look at the definition of a small bank.

What is a Small Bank?

Banks are typically classified as small or large based on their total asset size (i.e., the value of the loans and securities they hold), but there is no standard, commonly accepted threshold for what asset size constitutes a small bank. Some researchers define small as $1 billion or less in assets, whereas others define it as $10 billion or less. The Federal Reserve defines small & mid-sized banks as those banks with less than $10 billion in assets. Often, the term community bank is used as a synonym for small bank. The Office of the Comptroller of the Currency (OCC) defines community banks as generally having $1 billion or less in assets.

The terms small bank and mid-sized bank as commonly used encompasses a disparate group of institutions, varying in size, activities, and charter. Asset size is not the most intuitive concept to understand what is meant by a small bank. To provide some additional perspective on the size of small institutions, it is informative to look at the number of employees at institutions of different asset sizes. At the end of 2014[3], a bank with approximately:

  1. $100 million in assets had, on an average, 25 employees.
  2. $1 billion in assets had, on an average, 214 employees.
  3. $10 billion in assets had, on an average, 1173 employees.


What is Regulatory Reporting Burden?

Financial regulation reporting can result in both gains and costs. The cost associated with government regulation and its implementation is referred to as regulatory burden. In the banking world, regulatory burden can be borne by banks, consumers, the government, and the economy at large. A bank may have to face higher costs because it now must train its staff on how to properly apply the rules and may spend more time reviewing each application. Some of this cost may be passed on to consumers through higher interest rates and fees or fewer lending options.

Regulatory burden on banks is manifested primarily in two different ways:  operating costs and opportunity costs.

  1. Operating costs (or compliance costs) are the costs the bank must bear in order to comply with regulation. For example, in response to a new rule, a bank may spend more money training its employees to ensure they understand the new rules, and the bank may have to purchase updated computer programs because the new rule defines concepts in ways that are incompatible with its old systems. Updating computer programs is an example of operating costs that are one-time costs borne upfront. Other costs, such as hiring additional compliance officers, are recurring costs that exist so long as the requirement is in effect.
  2. Opportunity costs are the costs associated with foregone business opportunities because of the additional regulation. A bank may, for example, offer fewer mortgages because new regulations make mortgage lending more expensive and instead choose to perform a different type of activity that is now more profitable.

Characteristics Determining the Regulatory Reporting Burden a Small & Mid-Sized Bank Faces:

Size is one of the several factors that influences burden. The regulatory burden borne by a bank depends on what rules are applied to it (rulemaking) and how those rules are applied (supervision and enforcement). The factors that determine what rules are applied and how are as follows[4]:

  1. Charter- Because a bank’s primary regulator depends on its charter, to the extent that different bank regulators have different practices and policies, the charter will influence the regulatory burden. If the bank has a state charter, supervisory examinations can alternate between the state banking regulation and its primary federal regulator. Differences in regulation and regulatory burden between banks and credit unions are a perennial concern to the banks.
  2. Risk profile- Not all banks pose the same risk of failure, risk to consumers, and risk to the overall system, so policymakers tailor some regulations and supervisory practices by risk profile in order to reduce regulatory burden. For, example, because small banks with higher supervisory ratings- signaling that they are perceived to be healthier- are, all else equal, less likely to fail they are examined less frequently and intensely than banks with lower ratings.
  3. Business model- Certain activities will attract more regulatory scrutiny than others because they are riskier, more complex, pose more risk to consumers or broader economy, and so on. Different banks offer different types of services and engage in different types of activities, therefore some banks will have greater regulatory compliance costs because they are involved in more activities or lines of businesses that require oversight. In other words, the same activity will require a certain amount of regulatory compliance at any bank that undertakes it. Notably, if banks engage in certain activities such as operating in the securities or derivatives market, it could trigger additional activity-based regulation

Hexanika: Compliance Made Easy

Hexanika is a FinTech Big Data software company, which has developed an end to end solution for financial institutions to address data sourcing and reporting challenges for regulatory compliance.

 Hexanika helps establish a compliance platform that streamlines the process of data integration, analytics and reporting. Our 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. Our 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: Akash Marathe

Image Credits:

[1] Source:

[2] Source:

[3] Source:

[4] Source:…/Session3_Paper3_Cyree.pdf

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