Dodd Frank and CFPB: Burdensome, yes. Reason to sell your bank, no. Convenient excuse, yes.
July 25, 2015
By: Larry W. Martin, Chairman
Both Dodd-Frank and the CFPB are very burdensome on the financial services industries and their customers. As reported by the U.S. House of Representatives Committee on Financial Services, since the passage of the act in 2010 their Dodd-Frank Burden Tracker reports 224 of 400 rules written representing 7,365 pages of requirements. They estimate that complying with these 224 rules requires 24 million hours annually by the private sector. That is an unnecessary burden particularly when you try to find the benefits produced. The customers of complying institutions ultimately pay the cost incurred by the private sector in complying with the new rules. We need legislative efforts to make Dodd-Frank and the CFPB less burdensome. Unfortunately, legislative changes take time to achieve.
However, a point to keep in mind is that all banks have to comply; there are no exceptions. Your competing bank has the same burden considerations as you and your bank. While asset size and business model complexity of a particular financial services firm drives their regulatory requirements and cost of compliance, at Bank Strategies LLC, our experience indicates the basis point impact to the bottom line for regulatory compliance with CFPB and Dodd-Frank are very similar regardless of asset size. As asset size increases, so do the expectations of regulators for heightened risk management practices and so do the requirements of CFPB and Dodd-Frank—and so do the costs. While a larger bank may have scale advantages in some areas, regulatory compliance is not one of them.
Reason to sell, no.
There are numerous industry articles, bank sale announcements, and proposed legislation that imply the increasing regulatory burden resulting from Dodd-Frank and the CFPB are the single driving force causing banks to fail or to sell to a larger bank. Hogwash is what we say at Bank Strategies LLC.
Again, all banks have to comply. The burden is nearly the same to all banks. If one bank is posting strong asset growth and strong profit and a similarly sized bank is on the verge of failure or has less than average results and is selling out, it is highly unlikely that the regulatory burden of Dodd-Frank or CFPB is the sole reason for their poor performance or impending failure. It is more likely that the bank is either 1) a CAMELS of 3, 4 or 5 and under a formal agreement with a regulator due to ineffective or missing risk management practices, or 2) the bank's strategic plan and business model are off-target or obsolete and don't allow achieving contemporary performance levels, or 3) management has run out of energy, vision and ambition to reconceptualise the business to move it forward? It could be a combination of the above factors.
Convenient excuse, yes.
We will all continue to see the CFPB, Dodd-Frank and the resulting regulatory burden given as the reason for mergers of banks, it is convenient. We strongly agree for the need for revisions or elimination of Dodd-Frank and the CFPB to make them less burdensome, but until then all banks have to cope and comply.
Bank Board’s and Executive leadership can implement actions to move their organization to a more competitive posture—it takes some time, some fortitude and a plan, but is very doable. Let us take each scenario above, briefly.
Regulatory Agreement—While signing the Order and initially dealing with it may seem like there is no hope, it gets better with a solid plan of execution to address the items in the agreement. While addressing the agreement items, leadership also needs to be thinking about and planning for their business model and strategy with removal of the Order. Granted, shareholders have to be patient enough for this strategy to work, but with patience and a viable business plan and strategy, the bank can return the bank to a safe, sound and profitable bank.
Off-Target or Obsolete Business Model—This situation is usually the easiest to remedy. The toughest part of the process is recognizing that the bank needs a new business model and/or strategy. This means you have to accept that “you have been wrong” with your strategy and business model, this is very hard to do. Once you have reached the point of knowing what you have been doing is not producing the results you want, you have to utilize a “Tabula Rasa” process to identify the new strategy and business model. Total objectivity is required in looking at the possibilities. We have used a variety of approaches with client banks to help them through this process. Again, if done effectively it provides for the ability of the bank to begin showing improved results in a relatively short time.
Leadership Issues—This situation is the most difficult for the Board to deal with and often the reason a board decides to sell the bank. Instead of being straight forward in recognizing there is a leadership issue and having the difficult personal discussions and decisions required, the Board “throws in the towel.” They leave management in place and sell the bank. This is not good for the community, the employees or the customers in most cases. Granted, there are risks in brining new leadership into a bank, but when done properly with the use of experienced professional assistance you can accomplish it successfully. Often a combination of promotion from within and new leadership is the right combination to create community, customer and shareholder buy-in and support.
· · · · ·
Final thought. With a contemporary business model, strategic plan and energized cadre of personnel you can thrive and survive. Make an objective assessment of your situation and what your bank needs to produce the profitability and shareholder returns necessary for continued ownership, do it ASAP. Do not just give up and throw in the towel, adopt an appropriate plan and compete effectively. Giving up is not strategy. Play to win.
To be added to our email list, email Jim@bankstrategiesllc.com with your name and email information.