July 23, 2018

Rule Bending Is Over: It's Time for a Culture of Compliance


Provisions of Dodd-Frank legislation, designed to prevent another financial crisis, are being rolled back. But that doesn’t mean that banks should return to the period of bending the rules. Industry observers believe that banks need to create a culture of compliance that will ensure necessary regulations and procedures are followed and understood.


Bank provisions enacted to avoid the excesses of the 2008-2009 financial crisis are being rolled back as part of a recently passed Congressional bill that will ease regulations, especially on small, mid-sized, and regional banks. 

Regulations enacted in the wake of the financial crisis are being removed to some degree.

Small and Midsized Banks Freed from Financial Crisis-Era Regulations…

In the aftermath of the financial crisis, banks who were on what was colloquially called the “too big to fail” list were subject to additional regulation. They were required to submit to annual stress testing to ensure they met capital requirements and followed regulations. Under the new bill, only the largest U.S. banks remain, including J.P. Morgan Chase, Citigroup, Wells Fargo, Bank of America, and Goldman Sachs.

In total, just 12 banks remain on the “too big to fail” list, down from 38 at its height. 

The result could be more active lending by the 26 banks freed from financial crisis-era legislation.

The move was hailed by the banking sector. Rob Nichols, the chief executive officer of the American Bankers Association, termed it “right-sizing” regulatory rules for the financial sector. He characterized the rules as detrimental to a strong economy.

But bankers are encouraged to understand and follow the rules in lending and other practices.

Banks Cautioned to Follow the Rules

At the same time, though, the financial sector was cautioned to follow the rules. In a recent American Banker article titled “Bending Rules Isn’t Worth the Risk,” an industry observer called for bankers to ensure that their corporate cultures respected — and followed — rules and regulations, especially those requiring firm documentation to approve loans and know your customer (KYC) standards.

The article noted that the 1990s era was rife with a culture of rule-bending, as demonstrated by popular business books of the period like First, Break All the Rules. The author recounts that his boss during the period distinguished between “red rules” (those that had to be followed) and “blue rules” (those that could be bent).

The piece seems to explicitly acknowledge that a cultural norm in banking of bending the rules resulted in financial crisis-era problems, and issues since, such as the scandals at Wells Fargo.

The caution is especially timely now, when banks face competition from FinTechs that may promise faster and more competitive service. Banks may feel they have to ignore cumbersome rules and regulations in order to compete.

Bankers are advised to explain to potential customers that regulations protect them and ensure equity in the system. They aren’t solely red tape.

Importantly, the article also observes that the tone of any organization comes from the top. Banking leadership in respecting rules and regulations is called for.

How a Loan Sale Advisor Can Help Bolster a Culture of Compliance

Following the rules is essential to banking stability and credibility going forward. 

The loan sale advisors at Garnet Capital have built a culture of compliance and can guide clients to follow guidelines in areas that may be unfamiliar to them. Another set of eyes on transactions can provide extreme value to the financial sector. Sign up for our newsletter for more information.