CFPB analyzes bank compliance costs

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It’s no secret that banks spend a lot of money to comply with federal government banking regulations. However, what’s not at all clear is just how burdensome these costs are.

To try and answer that question, the Consumer Financial Protection Bureau, or CFPB, studied the compliance costs of seven banks and presented its data, which is extensive, and its findings, which are slim, in a 176-page report, “Understanding the Effects of Certain Deposit Regulations on Financial Institutions’ Operations.”

The report says banks’ regulatory compliance costs are concentrated in areas including: operations, information technology, employee training, compliance and retail functions. Each area accounted for a broad range of compliance costs as a percentage of the banks’ total retail deposit operating expense. On a percentage basis, the two smallest banks incurred higher compliance costs than the five larger institutions in the study.

Four bank activities triggered the most costs, within certain parameters. These activities were authorization rights, error resolution requirements, mandated disclosures and advertising standards. Authorization rights included consumers’ rights to sign up for overdraft coverage only on an opt-in basis and to opt out of sharing their personal information with third-party bank affiliates.

The report says the study’s findings were “consistent with a hypothesis” that compliance with authorization rights and error resolution regulations were generally more costly for banks than compliance with advertising standards or disclosure mandates.

The report is oddly determined to justify its own purpose. It admits that it “does not support a conclusion” about the size of compliance costs industrywide but hopes that it provides a “more solid factual basis and more systematic framework of analysis” to “elevate discussions about those costs.” It also says that it “provides insight into the sources and distributions of these costs within institutions,” “offers a vocabulary to help describe the types of operations that implement many standard types of regulation” and “provides researchers and stakeholders a field-tested method to estimate the cost of these operations in individual institutions.”

The report also points out that compliance costs are “but one of the wide range of effects of consumer financial regulation.”

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