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Issues : Regulation

Compliance Burden Grows Heavier

July 24th, 2011 |

The Grant Thornton LLP Bank Executive Survey polled nearly 400 bank CEOs and CFOs in April and May about the economy and regulatory reform’s impact. Nichole Jordan, Grant Thornton’s national banking and securities industry leader, talks about some of the highlights, and offers some insights on the new compliance burden.

What did you find particularly significant about the survey’s findings?

Thirty-nine percent of respondents indicated they thought the Dodd-Frank Act would be effective or somewhat effective in preventing or reducing the threat of a future taxpayer-funded bailout.  As we take a look at Dodd-Frank one year later, we’ve been evaluating some of the more positive benefits: having compensation linked more closely to long-term performance with a focus on reducing riskier behavior and having more data transparency with a greater focus on risk management and an emphasis on a culture of compliance.  In addition, living wills create a formal structure that will benefit both those within and outside of the systemically important institution.

What did you think of the more stringent capital requirements in Dodd-Frank?

Internally within an institution, those are heavy demands to meet and it certainly limits growth in certain aspects.  However, the perception externally and in the marketplace is that having increased capital requirements is very important in this environment, especially with what we’ve seen over the last 18 months.

It certainly would seem to put more pressure on management teams.

We are seeing management teams making a shift in focus as they look at how to increase margins and overall, how to improve profitability in the institutions. We’re seeing an emphasis on trying to increase growth, but at the same time, recognizing the challenges associated with that in the current environment. Efficiency initiatives are increasing as well in banks from the standpoint of striving to develop efficiency enhancements into various processes and ensure internal controls are properly in place.

Where do you see the greatest potential for efficiency gains?

There has been a lot of success within certain institutions as they evaluate the centralization of various processes handled in multiple locations.  One example to look at from an accounting standpoint: If there are several individuals at multiple locations handling accounting for a particular branch or the reporting structure at various branches, you could centralize that process, not to reduce headcount, but to centralize by region or even at the headquarter’s location.

In the survey, there was a nearly unanimous agreement that the regulatory burden is the top concern and yet, half feel it won’t be effective at all in preventing the next crisis.

How do you react to that?

It’s difficult for any law to fully reduce the risk of the failures. Dodd-Frank would likely mitigate the risk scenario that we have just experienced, so if the pattern stays the same from what we have had over the past couple of years, Dodd-Frank would have a significant impact in reducing the risk of economic failure.  The likelihood of that same pattern occurring is relatively small, but do I think it will reduce risk? Yes.

What should the banks be doing from a compliance standpoint right now to get ready for Dodd-Frank?

One best practice would be to fully evaluate the impact and develop a timeline and an action plan that will address some of the key areas.  As we have seen, in today’s climate, an enterprise risk management process, a risk management committee and a chief risk officer are the new normal.

How should management decide whether to invest internal resources to handle the increased compliance burden or engage third parties?

Because everything is so new, it lends itself more toward being outsourced and hiring individuals who live and breathe this every day and can share that knowledge gained from serving a variety of institutions.  In future years, the inside management team can then lead the maintenance and compliance effort after the complexities of the implementation phase have been addressed.

njordan

As the national banking and securities industry leader, Nichole Jordan is responsible for overseeing the service offerings to Grant Thornton LLP’s banking and securities clients around the country. She can be reached at nichole.jordan@us.gt.com.

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