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Report: Financial Regulations Are a “Regressive Tax” on Small Banks

Compliance costs may have dropped in 2017, but community banks still suffer from an inherent competitive disadvantage, according to recent analysis of the CSBS 2018 Community Bank Survey.

Overall annual compliance costs at community banks declined by 13 percent to $4.6 billion from 2016 to 2017, the national survey shows. But that is still a challenge for many small banks because they do not have the same infrastructure as larger banks to efficiently absorb these costs, according to a research paper by Temple University Professors William C. Dunkelberg and Jonathon A. Scott. The paper is one of a series that takes an in-depth look at the results of the CSBS annual survey, which this year included 521 community banks from 37 states.

Dunkelberg and Scott explain: “Few small banks have their own legal or compliance departments. Compliance often requires incurring additional fixed costs larger than needed -- hiring an additional accountant or computer programmer, for example -- which impairs the bottom line to a larger degree than at larger banks. More importantly, this burden creates a competitive advantage for larger banks that can more easily absorb (utilize) these fixed costs.”

The findings show 38 percent of small banks (under $100 million) reported that compliance costs were more than 20 percent of their total expenses, whereas only 13 percent of large banks (more than $800 million) reported a similar burden. Small banks reported most of their compliance costs were spent on salary and data processing, the paper found.

“Compliance uses up valuable and scarce capital and hours of expensive human capital,” the report concluded.

To read the paper, click here

In addition to regulatory compliance, the annual survey asked questions about trends in small business and other lending, banking services, mergers and acquisitions and management succession. 

The survey is released each year at the Community Banking in the 21st Century research and policy conference. To read the full survey, click here.

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