NEW HAVEN, Conn.—The rate of enforcement activity against financial institutions in the third quarter of 2016 dropped below 7% for the first time since The Banking Compliance Index (BCI) was introduced in 2013. The most recent measure showed a 6.54% rate.
The BCI, compiled by Continuity’s Regulatory Operations Center to measure and analyze the volume of regulatory change impacting financial institutions, showed that despite this downturn in enforcement, the average financial institution will require 1.63 additional full-time employee equivalents to deal with the regulatory changes introduced between July and September of 2016, Continuity said in a statement.
According to the company, this represents an additional $39,634 cost burden for the quarter, bringing the trailing 12 months' cost figure to $150,676 for an average financial institution just to keep up with the changing regulatory environment.
“Although significantly fewer enforcement actions were initiated in this past quarter, the number of items within each enforcement action jumped in Q3 by 250% above the four-year average,” said Donna Cameron, Continuity’s director of regulatory I/O, in a statement. “These complex activities pose a heavy compliance burden on institutions, adding to the already high costs of keeping up with new regulations.”
According to Continuity, there are a number of potential explanations for the dramatic drop in Q3 enforcement actions, “including a possible reluctance to initiate new actions before a presidential election, due to the uncertainty regarding outcomes.”
In addition, Continuity noted regulators now have fewer financial institutions to oversee, with 290 banks having merged, consolidated or closed since this time last year. And in Q3, those regulators focused on larger, more complex institutions that consume greater supervision and enforcement resources, leaving fewer resources focused on smaller institutions, the company observed.
Another possible explanation for the enforcement decline, according to Continuity, might stem from external pressures of judicial actions involving the Consumer Financial Protection Bureau. In addition to forcing an inward focus at the Bureau, the criticisms and litigation may have caused other agencies to proceed more cautiously in exercising greater prudence and discretion before doling out punishment, the company said.
“Despite the dip in enforcement actions this past quarter, it would be unwise for financial institutions to become complacent,” noted Pam Perdue, EVP and chief regulatory officer at Continuity. “Historically, periods of lower enforcement activity around presidential election cycles are followed by increased scrutiny, and the actions taken against large entities always trickle down to smaller institutions.”