Banks Report 87% Higher Compliance Costs

Survey finds large spending increase over last five years, but disproportionate allocation of funds

By Danielle Lee

Banks spent an average of $83.54 million on compliance in 2006, an 87 percent increase from the $44.78 million average in 2002, with more growth expected in the coming years, according to Don Ogilvie, the Independent Chairman of the Deloitte Center for Banking Solutions.

The report, “Navigating the Compliance Labyrinth: The Challenge for Banks,” surveyed 20 of the top 50 banking and thrift institutions in the United States

With the “recent focus on mortgage lending practices” Ogilvie expects spending to increase further. “The challenge for banks in the coming year will be to manage compliance costs in a more fiscally efficient manner, while maintaining current risk management levels,” he said.

This spending figure differed from bank to bank. As a percentage of net income, overall compliance spending at the surveyed banks increased 159 percent, on average, over the same five year period, with one bank reporting a 3,200 percent rise in compliance costs.

Sixty percent of direct spending went to compensate staff, according to survey respondents, while only 18 percent went to capital expenses, including IT systems, hardware and software.

“Although the financial costs of compliance have been significant, the way banks have chosen to manage their compliance obligations may have added to these costs,” Ogilvie said. “The tendency has been to respond to increased regulations by adding people, rather than by leveraging technology and improving processes. Banks must reexamine their approach to resource allocation.”

Marc Othersen, Senior Analyst of Security & Risk Management at Forrester Research, finds fault with this generalization, citing a "dramatic increase in the number of clients asking about technology automation."

Banks have made great IT strides in the last two years, said Othersen. "In general, I would say most large international financial institutions have relatively mature cost-effective IT compliance programs supported by technology. The smaller regional financial institutions I would agree are still technology immature and are probably spending too much on human resources."

Othersen also questions whether Deloitte's sample size is large enough to apply to the entire industry, and includes international banks.

The study found varied results for banks in trying to address duplicative processes.

Only five percent of respondents claimed that increased compliance led to reduced functional duplication, while 30 percent reported that duplication had actually increased.