Compliance at $10 billion and beyond
Crossing the $10 billion threshold is a special accomplishment for any financial institution—and it’s one that relatively few will ever achieve.
Besides marking a growth milestone, however, banks that pass the $10 billion mark must also address a very different, and often extremely challenging, set of compliance imperatives. Knowing when and how to prepare for these changes as well as when to seek expert advice can give banks a critical edge as they adapt to doing business at $10 billion and beyond.
NOTEWORTHY REGULATORY ACTION IN 2023
Recent bank failures prompted U.S. regulators to backstop uninsured depositors under the “systemic risk exception.” The Federal Reserve also made more liquidity available to U.S. banks to help prevent additional failures. Read more in “Recent Bank Failures and the Federal Regulatory Response.”
The cost of compliance is a significant burden for banks of any size:
55%
of retail bankers expected their regulatory compliance costs to increase in 2021 vs. the year before.1
That burden, however, can be far more costly as a bank crosses key growth milestones:
Additional compliance costs as a bank grows past . . .
$10 billion+
Equal to a 0.41% tax on average annual profits
$50 billion+
Equal to a 0.11% tax on average annual profits
$4.16 million per year
In absolute terms, this is the total increase in compliance costs, on average, for a bank with $50 billion+ in assets.2
Compliance may be costly, but it’s a bargain compared to the cost of non-compliance:
Key insights
Early planning is critical to ensuring that a bank’s compliance investments today are setting it up for success at $10 billion and beyond:
- Many banks begin planning for this transition as early as $5 billion. Banks with aggressive plans to grow and expand markets, however, may need to begin even sooner.
- Planning for compliance at $10 billion and beyond is a holistic task: It must involve the entire institution, including people, processes and risk oversight.
FI compliance at the $10 billion threshold: what’s ahead and why it matters
Here’s why compliance at $10 billion and beyond is a challenge not to be taken lightly.
The big squeeze: sizing up 3 compliance challenges
The list of changes when going from $9.9 billion to $10 billion isn’t long. It’s the significance of those changes that can create challenges without early and thorough planning. These include:
Banks that cross the $10 billion threshold can expect to take a painful hit on profitability as the Durbin Amendment caps on interchange fees kick in:
- Interchange fees on an average transaction ($38.00) fall by more than 40%: $0.43 (for banks under $10 billion threshold) to $0.24 (for banks over $10 billion).4
- Capped fees have cost card issuers nearly $106 billion in interchange revenue from 2012 to 2022, including an estimated $15.2 billion in 2020 alone.5
Key insights
- Don’t establish your compliance strategy in a vacuum. Bring your trusted business advisors and primary regulator into the process.
- Consider strategies to mitigate the $10 billion “revenue hit.” Many banks, for example, choose to jump over the $10 billion line via M&A—using balance sheet earning power and organizational efficiency to offset reduced fee revenue.
Meet the CFPB: 4 ways a compliance watchdog shows its teeth
When banks pass the $10 billion mark, the CFPB takes over as a bank’s primary regulator, enforcing 19 rules and regulations that cover a lot of regulatory turf.
The CFPB has a reputation as a tough and effective compliance watchdog. Here are four reasons why:
Key insights
- The most important compliance conversation any bank can have as it approaches $10 billion is with the CFPB.
- Remember that compliance for any bank above $10 billion is a new world with new rules. The old mantra of “if it isn’t broke, don’t fix it” won’t fly here.
Keys to building a working relationship with CFPB regulators:
Get your priorities straight: Learn which topics matter most to CFPB examiners:
- Fair lending compliance
- Unfair, deceptive or abusive acts and practices (UDAAP)
- Loan servicing and collections • Compliance management systems
Do your homework: Reach out to experts who are familiar with the CFPB’s methods and can prepare you for compliance examinations.
Talk to your peers: Seeking out similarly sized peers that have recently crossed $10 billion can yield some of your most valuable and relevant insights.
Going bigger: Compliance at $50 billion or more in assets
Banks that reach the $50 billion threshold have accomplished a truly exceptional feat. For regulators, the emphasis at this level is on tailoring an approach to compliance that suits each bank’s unique needs.
Compliance at $50 billion: 3 key practices
Higher stakes
Regulators assume these banks could put the U.S. economy at risk if they fail, so they shape their compliance requirements accordingly.
New roles
Banks are required to have a formal risk committee and chief risk officer.
OCC takes the lead
The Office of the Comptroller of the Currency (OCC) applies enhanced oversight guidelines tailored to banks at this level of size and complexity.
The Federal Reserve gives each bank a set of customized compliance requirements, including:
- Risk-based capital requirements and leverage limits
- Liquidity requirements
- Overall risk management requirements, including formation of a risk committee
- Resolution plan and credit exposure report requirements
- Concentration limits
- Annual stress tests
Compliance at $10 billion and beyond: What’s your plan?
Many banks find that working with an advisor makes it much easier to solve some of the toughest challenges associated with changing compliance priorities:
1. CFPB exam planning:
In-depth knowledge of the examination process and its aftermath, as well as a better general understanding of how the CFPB works
2. Working with regulators:
Understanding and meeting their expectations and opening clear lines of communication
3. “Regtech” upgrades:
Recommending and implementing technology investments in AI, automation, compliance management systems and related areas
- Regtech solutions can unlock efficiency gains of more than 40% by automating a bank’s Know Your Customer process, compared to traditional, manual processes.6
4. Staffing:
Ensuring that a bank has the right mix of job roles and inhouse capabilities to carry a sustainable approach to compliance
5. Strategy:
Helping a bank pick the right path up to and over $10 billion, with an eye on profitability, sustainable growth and consistent compliance
Regulatory compliance consulting that enables smart growth
Consulting professionals work with banks of all sizes to prepare them for the rigors of today’s regulatory compliance environment. It can be an especially valuable resource for banks planning the critical journey across the $10 billion and $50 billion asset thresholds: helping to prepare your people, processes, data sources and technology systems to adapt successfully to next-level compliance challenges.
Core capabilities include:
- Compliance management systems
- Compliance risk assessments
- Fair lending
- UDAAP
- Home Mortgage Disclosure Act
- Mortgage Electronic Registration System reviews
- Anti-money laundering compliance and model validation
- Global anti-bribery and anti-corruption services
1 Retail Banker International, “Retail bankers expect regulatory and compliance costs to increase over the next 12 months: Poll,” 2021.
2 International Monetary Fund, “Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences,” 2022.
3 Consumer Financial Protection Bureau, “Enforcement by the numbers.”
4 Mukharlyamov, Vladimir and Natasha Sarin. “Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards,” 2019.
5 Haslett, Kiah Lau, BankDirector.com, “The Community Bank Board Guide to Crossing $10 Billion,” 2022.
6 Ross, Jenna, Visual Capitalist, “Why Anti-Money Laundering Should Be a Top Priority for Financial Institutions,” 2019.