A newly retired banker and good friend of mine just bought into a daycare in our city. During lunch recently, he jokingly said he had bought into one of the few businesses with more regulations than banking. While there may be truth in this, the regulatory burden financial institutions face today is not particularly funny. The extent of this increasing obligation over time is represented visually below.
One way to depict the depth of the reporting requirement is to show the number of items on the quarterly National Credit Union Association (NCUA) and Federal Deposit Insurance Corporation (FDIC) Call Reports.
To do this, we have to understand that Call Report items have life cycles. All Call Report items become effective at some point in time, can change by merging or splitting into multiple measures, and sometimes even expire. The net trend has been a steady increase over time for both banks and credit unions.
Call Reports have many sections, each pertaining to different financial information conveyed. At times, different areas of the report can see increased emphasis depending upon the requirements of the regulating body. For example, derivatives and delinquencies have been under more scrutiny lately and have generated an increase in related Call Report measures. As most people who work with these filings can tell you, the number of items doesn’t seem to ever get smaller.
The largest increase came after the financial crisis in 2009, when credit unions saw a jump of nearly 29% in Call Report items related to delinquencies. In terms of sheer numbers, 2014 brought another 25% increase representing 395 new Call Report requirements, most aimed at derivatives.
Interestingly, only a little over 1% of all reporting credit unions in Q4 2014 reported derivative accounts on their reports. If you had to guess the percentage increase of Call Report items over the last five years, would you have guessed a 67% increase?
On the banking side, there is additional complexity in calculating call item trend to avoid double counting items that apply to banks with both domestic and international deposits. The counts shown here represent the individual measures on Call Reports and accounts for banks with foreign and/or domestic deposits. The 5- year trend is near a 52% rise in Call Report items for bank institutions.
A number of factors have contributed to the increasing volume and complexity of regulatory requirements, including recent events like the 2010 passage of Dodd-Frank Wall Street Reform and Consumer Protection Act.
Financial institutions are tasked with complying with comprehensive and sometimes overlapping reporting requirements. Data accuracy can help ensure that the institution is not faced with sanctions or worse, such as fines or reputation risk. The regulatory burden is also exacting a toll on financial institutions ability to produce data in a timely manner.
Reporting governance means that data from multiple areas of the bank have to be coordinated without risks to time requirements or accuracy. The large increases stated earlier plus more subtle changes have brought us to the Call Report counts represented in the charts above. What is missing is the exact cost to the business.
Underlying these charts are extensive costs associated with regulatory reporting and audit review. A study by Accenture reported that 92% of banks increased their compliance spending in 2014. The bulk of which was spent on technology to leverage analytics and data mining to avoid penalties. These costs, as the Accenture study suggests, will impact ROE for many years. Financial institutions should look to disruptive technologies as well as internal processes to enhance profitability and drive down costs, particularly those associated with regulatory compliance.