Anecdotal evidence from bankers suggests that the cost of complying usually increases with new rules and regulations when large statutory changes are made to financial laws and rules of any country or region[1]. This burden increases significantly when such changes are made especially after a financial crisis. New regulations stemming from the financial crisis has cost the six largest U.S. banks $70.2 billion as of the end of last year[2]. Between the end of 2007 and the end of 2015, regulatory fines rose by more than 100% – or $35.5 billion- according to data from policy-analysis firm Federal Financial Analytics Inc. As per Federal Financial Analytics, the reporting costs come from a mix of requirements that are specific to these banks, e.g. particular capital surcharges that apply to banks with assets over $50 billion but impose the largest cost on the six biggest banks due to their size or risk

1. Regulatory Reporting Costs and Burden for
Small & Mid-Sized Banks
Anecdotal evidence from bankers suggests that the cost of complying usually increases with
new rules and regulations when large statutory changes are made to financial laws and rules of
any country or region1
. This burden increases significantly when such changes are made
especially after a financial crisis. New regulations stemming from the financial crisis has cost the
six largest U.S. banks $70.2 billion as of the end of last year2
. Between the end of 2007 and the
end of 2015, regulatory fines rose by more than 100% - or $35.5 billion- according to data from
policy-analysis firm Federal Financial Analytics Inc. As per Federal Financial Analytics, the
reporting costs come from a mix of requirements that are specific to these banks, e.g. particular
capital surcharges that apply to banks with assets over $50 billion but impose the largest cost
on the six biggest banks due to their size or risk
To provide the context necessary to understand the regulatory costs on small banks, let us first
have a look at the definition of a small bank.
What is a Small Bank?
Banks are typically classified as small or large based on their total asset size (i.e., the value of
the loans and securities they hold), but there is no standard, commonly accepted threshold for
what asset size constitutes a small bank. Some researchers define small as $1 billion or less in
assets, whereas others define it as $10 billion or less. The Federal Reserve defines small & mid-
sized banks as those banks with less than $10 billion in assets. Often, the term community bank
is used as a synonym for small bank. The Office of the Comptroller of the Currency (OCC)
defines community banks as generally having $1 billion or less in assets.
The terms small bank and mid-sized bank as commonly used encompasses a disparate group of
institutions, varying in size, activities, and charter. Asset size is not the most intuitive concept to
understand what is meant by a small bank. To provide some additional perspective on the size
of small institutions, it is informative to look at the number of employees at institutions of
different asset sizes. At the end of 20143
, a bank with approximately:
1. $100 million in assets had, on an average, 25 employees.
2. $1 billion in assets had, on an average, 214 employees.
3. $10 billion in assets had, on an average, 1173 employees.
1
Source: http://www.dispatch.com/content/stories/business/2016/03/25/1-regulatory-costs-hurting-small-banks.html
2
Source: http://blogs.wsj.com/moneybeat/2014/07/30/the-cost-of-new-banking-regulation-70-2-
billion/#:t3lnbKjgIaBajA
3
Source: https://www.fas.org/sgp/crs/misc/R43999.pdf

2. What is Regulatory Reporting Burden?
Financial regulation reporting can result in both gains and costs. The cost associated with
government regulation and its implementation is referred to as regulatory burden. In the
banking world, regulatory burden can be borne by banks, consumers, the government, and the
economy at large. A bank may have to face higher costs because it now must train its staff on
how to properly apply the rules and may spend more time reviewing each application. Some of
this cost may be passed on to consumers through higher interest rates and fees or fewer
lending options.
Regulatory burden on banks is manifested primarily in two different ways: operating costs and
opportunity costs.
1. Operating costs (or compliance costs) are the costs the bank must bear in order to
comply with regulation. For example, in response to a new rule, a bank may spend more
money training its employees to ensure they understand the new rules, and the bank
may have to purchase updated computer programs because the new rule defines
concepts in ways that are incompatible with its old systems.
Updating computer programs is an example of operating costs that are one-time costs
borne upfront. Other costs, such as hiring additional compliance officers, are recurring
costs that exist so long as the requirement is in effect.
2. Opportunity costs are the costs associated with foregone business opportunities
because of the additional regulation. A bank may, for example, offer fewer mortgages

3. because new regulations make mortgage lending more expensive and instead choose to
perform a different type of activity that is now more profitable.
Characteristics Determining the Regulatory Reporting Burden a Small &
Mid-Sized Bank Faces:
Size is one of the several factors that influences burden. The regulatory burden borne by a bank
depends on what rules are applied to it (rulemaking) and how those rules are applied
(supervision and enforcement). The factors that determine what rules are applied and how are
as follows4
:
1. Charter- Because a bank’s primary regulator depends on its charter, to the extent that
different bank regulators have different practices and policies, the charter will influence
the regulatory burden. If the bank has a state charter, supervisory examinations can
alternate between the state banking regulation and its primary federal regulator.
Differences in regulation and regulatory burden between banks and credit unions are a
perennial concern to the banks.
2. Risk profile- Not all banks pose the same risk of failure, risk to consumers, and risk to
the overall system, so policymakers tailor some regulations and supervisory practices by
risk profile in order to reduce regulatory burden. For, example, because small banks
with higher supervisory ratings- signaling that they are perceived to be healthier- are, all
else equal, less likely to fail they are examined less frequently and intensely than banks
with lower ratings.
3. Business model- Certain activities will attract more regulatory scrutiny than others
because they are riskier, more complex, pose more risk to consumers or broader
economy, and so on. Different banks offer different types of services and engage in
different types of activities, therefore some banks will have greater regulatory
compliance costs because they are involved in more activities or lines of businesses that
require oversight. In other words, the same activity will require a certain amount of
regulatory compliance at any bank that undertakes it. Notably, if banks engage in
certain activities such as operating in the securities or derivatives market, it could
trigger additional activity-based regulation
Although the above characteristics serve the purpose of determining the costs of regulations on
a certain bank, it is difficult to draw any conclusions about the correlation between size and risk
profile because information on supervisory ratings is confidential. Looking at the correlation
between size and measures as capital ratio gives an incomplete picture of the risk profile.
4
Source: https://www.communitybanking.org/.../Session3_Paper3_Cyree.pdf

4. Hexanika: Compliance Made Easy
Hexanika is a FinTech Big Data software company, which has developed an end to end solution
for financial institutions to address data sourcing and reporting challenges for regulatory
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integration, analytics and reporting. Our software platform can develop and clean data to be
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Our solutions also significantly reduce the time and resources required for everyday-regulatory
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specific architectural changes.
To know more about our products and solutions, read: http://hexanika.com/company-profile/
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