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Proportionality in Bank Regulation: Evidence and Inspiration from a Survey on North American Credit Unions

Core Content

The document explores the concept of proportionality in bank regulation, emphasizing the need for regulatory frameworks that are appropriately calibrated to the size, nature, and risk profile of financial institutions. It presents findings from a survey conducted by Ferri & Kalmi on Credit Unions (CUs) in the United States and Canada, highlighting the challenges and inefficiencies associated with current regulatory approaches.

Main Findings

• Regulatory Burden: There is a significant lack of empirical data supporting discussions on proportionality in banking regulation. The survey by Ferri & Kalmi provides crucial insights into the actual regulatory burden faced by CUs.

• Compliance Costs: The cost of regulatory compliance, measured as total compliance costs per number of employees, decreases sharply with the size of the credit union. In the U.S., it drops from 43% to 4%, and in Canada, from 21% to 4% as the credit union size moves from the first to the fourth quartile.

• Perceived Burden: In the U.S., 44% of CUs report that regulatory compliance is "the major burden," while 97% find it "rather burdensome." In Canada, these figures are 22% and 70%, respectively.

• Increase in FTEs: From 2007 to 2012, the number of full-time equivalent (FTE) employees dedicated to regulatory compliance increased by 70% (U.S.) and 94% (Canada), which is over four (three) times the average increase in total employees.

• Top Regulatory Burdens: In the U.S., the top three regulatory burdens are:

  • Lending-related consumer protection acts (80%)
  • Anti-money-laundering/anti-terrorist acts (44%)
  • NCUA examinations (40%)

  In Canada, the top three are:

  • Federal anti-money-laundering/anti-terrorism acts (89%)
  • Provincial credit union governance rules (41%)
  • Provincial deposit insurance reporting requirements (31%)

• Regulatory Induced M&As: 61% (U.S.) and 52% (Canada) of CUs report that mergers and acquisitions in the past five years were "regulatory induced."

• Perceived Issues with Regulators:

  • 69% (U.S.) and 83% (Canada) of CUs believe that regulators do not fully understand the CU mission and could distort their business model.
  • 70% (U.S.) and 66% (Canada) of CUs feel that accounting rules are not suited to the cooperative and savings-oriented nature of their institutions.

Key Insights and Inspiration

• The evidence suggests that a one-size-fits-all regulatory approach may create artificial economies of scale and fail to address the specific needs of different types of financial institutions.
• The current regulatory burden is disproportionately high for smaller CUs, raising questions about the justification of these rules based on actual risk levels.
• If the risks associated with lending-related consumer protection, anti-money-laundering, and anti-terrorism regulations are lower in small, stakeholder-oriented CUs compared to larger institutions, then there may be room to reduce or adjust these regulatory requirements for smaller entities without compromising safety and soundness.
• The survey data serves as a foundation for rethinking regulatory proportionality, encouraging regulators to adopt more tailored and context-sensitive approaches.

Conclusion

The findings from the survey highlight the need for a more nuanced and proportionate regulatory framework that takes into account the unique characteristics and risk profiles of different financial institutions. By addressing the misalignment between regulatory requirements and the actual risks faced by smaller, cooperative credit unions, regulators can foster a more efficient and supportive environment for these institutions.