What Are Banks Spending on Compliance? Bankers as Buyers 2010

by William Mills Agency

Bankers as Buyers is an annual report prepared by the William Mills Agency, along with the assistance of analysts and bankers nationwide, “to help financial institutions and those companies serving them validate their strategic IT direction, compare investments in technology by type or direct further research.”

Below are excerpts of this year’s report concerning compliance and regulatory spending. If you are interested in the full report, it is available online at www.williammills.com.

Introduction
The effects of the credit slowdown that started in 2007 and picked up steam in 2008 were compounded by a sharp increase in unemployment in 2009. The result was higher defaults for mortgages and other types of credit, tightened credit terms and conservative spending that scrapped many technology and other projects that had been on the books.

So the technology spending reduction that began in 2009 is likely to continue in 2010, though there are signs that projects could pick up in the second half of the year. Even when spending does pick up, however, increases will be slower than in the past. Demand will be slightly lower because there are fewer financial institutions every year.

Even with constrained budgets and expected flat technology spending in 2010, decreases in some areas will permit increases in some other areas of technology spending.

Regulatory Concerns Drive Spending Priorities
After the failures of many financial institutions and federal assistance to others through the Troubled Asset Relief Program (TARP), analysts and bankers alike expect regulators to be more vigilant than ever in ensuring the bank meets regulatory standards for liquidity, safety and soundness. Another concern is financial reform legislation. Though it could be some time before the legislation becomes law, any new rules are bound to include stricter oversight.

Regulatory Spending
After the government assistance through TARP to some of the nation’s largest banks and failures of many of the smallest ones, regulators will be scrutinizing financial institutions more closely than at any time since the thrift crisis of the early 1990s, and perhaps more than even then. The fear is that many more banks could fail as expenses for FDIC insurance, regulatory compliance and security go up, revenues stay flat at best and delinquencies in credit continue.

Much of the regulatory spending will center around better monitoring and transparency, according to Barry.

Much of the problem with meeting regulatory compliance requirements is that most of the compliance technologies have been developed for the largest financial institutions, leaving thousands of smaller financial institutions with many of the same manual systems that they’ve had for the last 20 years – systems that require plenty of manual input, said Andy Greenawalt, CEO of Continuity Engine, New Haven, Conn. Those systems are not only expensive to operate because of the required manpower, they also don’t provide the risk monitoring and controls that regulators want.

“Compliance comes down to something that people have to do,” Greenawalt said. “As regulators scrutinize bank lending, policies and other activities more closely, banks need to invest in compliance technology that helps them more closely monitor activities throughout the institution.

Analysts agree that regulators will more closely scrutinize bank compliance, including risk, stress testing and monitoring of financial health. But Bradway thinks that banks will hold off on any new regulatory spending until any financial reform legislation becomes final. Even when it becomes a reality, there will be several months between the law being finalized and the date it goes into effect, Bradway said.

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