WASHINGTON—Collectively, credit unions each year face a $7.2-billion price tag to address regulation, according to a new study commissioned by CUNA that also quantifies how much Dodd-Frank has inflated the bill.
During its Governmental Affairs Conference CUNA took a deep dive into its study data that shows, not surprisingly, that small CUs face the greatest costs as a percentage of income. But the numbers also reveal that while larger credit unions better absorb the impact of increasing regulation, many are addressing the growing problem through improved processes and technology instead of just adding staff or using up more of current employees’ time.
Cornerstone Advisors conducted the two-phased study to quantify the impact of regulation at small ($115 million in assets and under), medium ($115 million to $1 billion) and large credit unions (above $1 billion). The study gathered data in terms of increased costs, including staffing, third-party expenses and capitalized expenses, and reduced revenue opportunities. The financial impacts are considerable in terms of the scale of credit union operations, noted CUNA Chief Policy Officer Bill Hampel.
Hampel emphasized the importance of the data because the movement always approaches Congress asserting that excessive regulation is not needed for credit unions since they did not cause the financial crisis, and that the rules coming down from Washington are hurting credit unions.
“Before (the study) Washington had no idea of the impact regulations are having on credit unions, and now they do. And since 2010 you have told CUNA that your primary advocacy issue you want us to address is reducing the rising tide of regulations,” said Hampel, who noted that CUNA has sent a full report to Congress on the study.
Costs Keep Escalating
Cornerstone Senior Director Vincent Hui noted how the regulatory costs keep escalating. Hui explained that the regulatory cost of 54 basis points of assets in 2014 represents a 15-basis-point increase from the 39-basis-point cost the study found in 2010.
“This means that regulatory costs for credit unions in 2014 were $1.7 billion higher than they would have been without the changes that occurred from 2010 to 2014,” said Hui. “Adding the 10-basis-point reduction in revenues from regulation ($1.1 billion) yields an increase in total financial impact of 25 basis points ($2.8 billion), from 39 basis points to 64 basis points. Pretty big jumps.”
Another big increase since 2010 has come from credit unions adding staff time to address compliance.
“What’s really interesting is comparing 2014 to 2010 data to look at time spent on regulatory activity,” said Hui. “That time has nearly doubled (91% increase). That was a huge number. We expected the number to be big, but we did not expect it to be that high.”
The study shows that small CUs again suffer the most when it comes to the proportion of total staff dedicated to regulatory activities (42%), with the percentage dropping as assets climb—mid-size CUs (24%), and large (17%). Overall, the movement dedicates 27% of total staff time to regulatory activities.
The Biggest Cost Drivers
Looking at all CUs, the largest component of regulatory expense is for staff, at 74% of the total—not surprising as compensation typically accounts for about half of total credit union operation expenses, Hui said. Of the staff costs driven by regulation, the largest component came in member-facing staff, the study shows, suggesting that credit unions have to employ more such staff than otherwise, and/or that member facing staff have to divert much of their attention from serving members to complying with regulations.
Other costs were third-party (about 22%) and depreciation of capitalized expenses (about 4.5%).
The study also considered how revenue has been influenced by regulation, especially by changes in regulation. Participants identified a number of business lines that had been affected by regulatory changes, primarily related to lending and interchange income. Although, lending revenue has been affected by regulation, the amount is difficult to accurately quantify, noted Cornerstone Director Ryan Myers.
“Therefore, the only revenue reduction included in the study is that due to reduced interchange income as a result of the Durbin Amendment to the Dodd Frank Act. This means the study’s $1.1-billion estimate for revenue reduction underestimates the actual amount,” he said.
While the study found cost impacts were much stronger at smaller versus larger credit unions, in contrast, adverse revenue impacts were stronger at larger than smaller credit unions. This is because members of larger credit unions are more likely to generate interchange income by using a debit card from their credit union, Myers explained.
One Silver Lining?
The study solicited credit union CEOs’ views on how the funds devoted to regulation would have been reallocated within the credit union had they not been spent on regulation-related costs. Better member pricing, better service delivery, and institutional strengthening topped the CEO’s lists. In addition to extensive data collection, the study solicited participating CEOs’ viewpoints of where they had seen the greatest increase in regulatory impact in the areas of greater costs, reduced productivity, and reduced revenues. The greatest cost and productivity impacts occurred in compliance, mortgage and consumer lending and internal audit. The greatest revenue impacts were in mortgage lending, debit interchange and payments.
But a “silver lining” in the data, Myers explained, is that high-performing CU's don't just "take it" by hiring a lot more people. They address the issue more via processes and technology.
“There is opportunity to make an impact on these costs instead of just bearing them,” said Myers, noting again that the larger the credit union, the easier this is to do. Giving the example of a $1-billion CU that improved its efficiencies, making the right technology investments and adding the right workflows, “you might save as much as $2 million in annual costs.”
Hui pointed out the importance of making such changes because if CUs excessively overspend for compliance, they starve other areas of needed resources to grow and survive.
“Just think about what you could do with that additional money being spent on regulation that could be directed to help your members,” said Hui.