US Treasury to ease community banks’ compliance burden

The US Department of the Treasury is planning to ease the compliance burden on community banks by reducing regulatory requirements.

Generally serving small towns and rural areas in the US, community banks represent around 90% of banks operating in the country. They account for about 11% of all Federal Deposit Insurance Corporation (FDIC)-insured banking assets and 15% of loans, according to Morningstar DBRS.

Treasury secretary Scott Bessent first suggested removing bureaucracy and introducing tailored regulations to benefit community banks at an April meeting of the American Bankers Association (ABA).

Bessent said the Treasury intends to play a greater role in bank regulation and will work in accordance with three key principles: namely that regulation should be derived from a clear statutory mandate, be efficient and be fair.

Fulfilling “statutory mandates” should not require “ever-increasing budgets and employee counts”, he told the meeting. “In the past, some regulatory actions have unduly burdened community banks or erected barriers to entry.

“The cost of investments in technology to comply with new reporting and other requirements; the difficulty, time and expense of recruiting specialists for compliance roles; the expense of third-party loan file reviews at the suggestion of examiners; the lending forgone to avoid undue supervisory scrutiny of relationship banking, and so on — these all add up,” he added.

Compliance-side challenge

Ron Shevlin, managing director and chief research officer at Cornerstone Advisors in Massachusetts, commented that typically, most small to medium-sized banks rely on third-party technology solutions, enabling them to be prepared for any regulatory introductions or enhancements. In addition, they are often given more time to comply with ongoing regulations — as much as twice the amount of time as large global banks, such as JP Morgan, he added.

However, he said, “the challenge is more on the compliance side for these mid-sized banks”. Though technology vendors handle the core of IT, small banks still deal with customer onboarding, Know Your Customer (KYC) considerations, and anti-fraud and anti-money laundering (AML) procedures. These compliance issues affect community banks “disproportionately” from a cost and profit perspective, he said.

Talent shortage

“JPMorgan Chase probably has more people in its compliance department than the average $10 billion bank has total number of employees,” Shevlin pointed out.

This means that, unlike adding 10 compliance people to a major bank, “adding 10 people to a compliance department at a $10 billion bank is nearly impossible because they’re so small, [and] they can’t find the people” yet for them it held “a huge, huge cost impact”, he said.

Meanwhile, Corey LeBlanc, co-founder, chief operating officer and chief technology officer at Locality Bank in Miami, agreed with Shevlin that finding talent to fill compliance roles is a challenge for smaller banks. 

“Hiring and retaining qualified compliance officers who understand regulation and modern banking systems is time-consuming and expensive, especially when they’re being recruited by fintech and national banks [with] deeper pockets [offering] more perks,” he said.  

Aligning rules to risk

However, LeBlanc says Bessent’s speech to the ABA acknowledged “something that we in the trenches have known for a long time — [that] one-size-fits-all regulation doesn’t work and should never have been expected to do so”.

Tailored regulation will entail aligning rules with actual risk, while allowing banks to support customer protection and stability.

“When the Treasury talks about ‘tailoring regulation’, I think they’re signalling a move toward proportional oversight,” LeBlanc adds. “Think of regulatory frameworks that recognise the risk profile, scope and size of the institution: a $500 million community bank serving local small businesses shouldn’t be subject to the same reporting burdens as a $500 billion national bank with trading desks and cross-border operations.”

However, he argues, tailoring only works if it is paired with support for innovation that encourages “tech-forward approaches to compliance”. This could include investing in interoperable technology as well as shared services and consortium models.

Siloed tools

“Community banks must stop investing in siloed tools,” LeBlanc added. “We need intelligent, artificial intelligence (AI)-driven systems that connect compliance, operations and customer experience into one real-time, transparent process. If we can do it right, this will help limit or even remove compliance as a burden. It should be built into the workflows.”

Community banks should collaborate through industry consortia, shared compliance platforms and technology partnerships to enhance their operations, he said.

The cost of compliance for smaller banks can be a strategic roadblock if handled incorrectly. Because these banks don’t have the budgets or in-house legal staff of larger banks, every dollar they invest “has to fulfil triple duty” — including satisfying regulators, improving operations and enhancing customer experience.

Only the beginning

Bessent ended his speech to the ABA by claiming the regulatory reforms aimed at supporting community banks were “only the beginning”, and there were plans to revisit the other aspects of prudential regulation.

The Treasury will also advocate for changes to the AML and countering the financing of terrorism (CFT) frameworks to “focus on national security priorities and higher-risk areas and explicitly permit financial institutions to de-prioritise lower risks”.

It will work with the US Congress to consider reforms to deposit insurance, including potentially higher limits for business payment accounts, added Bessent.