Are Regulations Killing Community Banks and Credit Unions?

Are Regulations Killing Community Banks and Credit Unions?

Community banking has been an essential part of the financial backbone of the United States for over a century. Community bankers have funded the ideas and dreams that helped launch countless businesses across the country – businesses that sometimes grew to employ thousands of local residents and generate millions for local economies.

For many banks and credit unions today, the commitment to serve the local community is still very real. The mega banks are often looking for a “mega” deal and not the small business loan that a local company needs to get started. As a result, community banks and credit unions are vitally important to small and medium sized businesses that are often ignored by larger institutions.

Herein lies the problem, because over the last decade, the number of community banks has decreased by 27% while credit unions have decreased by 40%. Some of this, of course, is attributable to the Great Recession, but of the nearly 2,000 banks that have disappeared, only about 500 were shut down during the down turn, meaning the majority of the decline is not entirely based on this specific event. So, if the economic calamity of the last decade is not entirely to blame, what is?

While there are several factors that have led to the decrease in smaller institutions, one has had perhaps the most significant impact: the increase in regulatory requirements. Regardless of location and size, small community banks are subject to largely the same regulations as larger institutions. Regulatory agencies are continuously changing and increasing guidance around a variety of issues, including cybersecurity, vendor management, and disaster recovery, among others. The increase in regulatory requirements does two things:

It Creates a Challenging Environment to Run a Community Financial Institution

For many community banks and credit unions, meeting new regulatory requirements takes a considerable amount of time, effort and knowledge to execute successfully. Small community institutions that manage this function internally often struggle to keep up with the ever-changing regulatory landscape and provide the proper documentation to examiners. Without the right compliance expertise, it can be very difficult to ensure the institution’s processes and procedures are in line with federal regulations.

It Increases Operational Costs

Each new regulatory guidance, update, change, and interpretation requires additional expertise and more employee resources. It’s a never ending cycle. The last decade has brought about an increase in compliance changes including: the Patriot Act, the Bank Secrecy Act (BSA), new information security regulations and more requirements for lending and liquidity. All of these changes have increased compliance spending and forced institutions to redirect valuable employee time away from customer service and more revenue generating activities.

In the past, the core vendor has been the one to fill in the gaps between what banks can manage internally and areas where they required outsourced help. Historically, the core vendors helped community banks and credit unions with tasks to support everything from teller functions, to lending, to direct mail, as well as provide services such as remote deposit capture and mobile banking. Today however, many core vendors are very large and not agile enough to stay on top of the consistent changes in regulatory guidance.

This pressure in the market is forcing institutions to either hire additional in-house talent to keep up with all the new regulatory expectations or look beyond their core providers for outsourcing regulatory and compliance needs. Many that have tried to fill the gap with additional in-house expertise find that recruiting and training qualified staff to manage regulatory requirements demands considerable time and energy from a bank’s management team, which redirects valuable resources needed to support customers and banking operations.

So what’s the answer? The future of community banking depends on community financial institutions surviving in this new regulatory environment. The reality in today’s market is that the task of meeting all requirements laid out by regulatory agencies is becoming too much of a challenge for banks and credit unions – and even their trusted core providers — to manage alone. Working with a trusted IT and compliance partner that specializes in regulatory compliance can provide your institution with the regulatory expertise and knowledge to successfully meet compliance goals and provide the best banking experience to your community.

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