Ever wonder why the name of your bank has changed eight times since you opened an account? With all the bank mergers taking place, it can be hard to remember what your bank is called. By the time you go through a checkbook, it might have merged twice.
The bankers may not necessarily like this dynamic any more than consumers do. Consultant Salvatore Zerilli, a regulatory compliance specialist who works for Mercadien, the accounting and consulting firm at 3625 Quakerbridge Road, says small to medium-sized banks are under tremendous pressure to consolidate these days, thanks to the ever-increasing cost of complying with federal banking regulations.
“It is becoming very convoluted and very difficult to work as a banker today compared to how it was 10 to 20 years ago,” he says. “It’s a very evolving industry, and it’s one that extremely over-regulates.” Zerilli, in his job as a compliance consultant, helps banks organize themselves and build systems — entire departments — to make sure they are following all of the regulations handed down by the FDIC, the Consumer Financial Protection Bureau, the Banking Secrecy Act, and a multitude of other laws and regulatory agencies.
Zerilli will speak at the New Jersey Bankers Association G.R.O.W. T.H. executive conference on Friday, April 4, from 8 a.m. to 2:45 p.m. at Pines Manor in Edison. Visit www.njbankers.com, call 908-272-8500, ext. 632, or E-mail firstname.lastname@example.org. The seminar is $195 for members, $345 for nonmembers.
Zerilli, who is a principal at Mercadien, says things have gotten more complicated for bankers since 2010, when the Dodd-Frank Act was passed. That law was meant to curtail the abuses of lenders in the sub-prime mortgage industry, curb high credit card fees, and correct numerous flaws in the financial system that led to the Great Recession. Many of the provisions about sub-prime mortgages apply only to banks with $10 billion or more in assets. But small to mid-level banks are affected by the laws anyway, Zerilli says, because complying with the regulations is viewed as “best practice” even if compliance is not mandatory.
The result, he says, has been to drive banks away from giving mortgages to customers with less than stellar credit. While it was mostly the big banks, like Bank of America, that made bad mortgages in the early 2000s, it is now the community banks that are affected. “Typically, a small community bank would work with the homeowner and come up with ways to have the consumer approved for a mortgage,” he says. “But now, with the new definitions of ‘qualified mortgage,’ they have to follow strict guidelines. If it’s not a qualified mortgage, it’s looked at differently by examiners as they come in.”
The old way of doing business was that banks were willing to give out riskier mortgages in exchange for higher interest rates. But now, he says, bankers are reluctant to do that. “Everybody hears ‘subprime’ as a bad word,” he says. “But a subprime mortgage is a viable product to put people into homes.”
Another law that causes banks headaches is the Banking Secrecy Act of 1970, which requires banks to help the government detect money laundering. Keeping an eye out for suspicious transactions is a costly activity. “That by itself can have an entire department of five people,” Zerilli says.
At any given bank, the consumer lending, commercial lending, and back office areas might each have their own personnel devoted just to complying with regulations. Banks also have to pay for software, ongoing training, and other costs.
As expensive as this can be, it is cheap compared to the costs of not complying with the law, Zerilli says. He recalls the case of Saddle River Valley Bank, a community bank in northern New Jersey. In September the bank was hit with a $4.1 million civil penalty by the Financial Crimes Enforcement Network for failing to keep records and report possible money laundering activity to the feds. The fine ate away much of the small bank’s operating capital, and it was forced to close.
Sometimes fines are not imposed, but the institution still has to pay additional costs of compliance. The Bank of Princeton was issued a “consent order” in February by the federal regulators for deficiencies in its anti money-laundering program. The bank now must pay to overhaul its compliance program, as well as comb through its past two years of transactions looking for violations.
Fines get bigger for larger institutions. Wachovia, Wells Fargo, and J.P. Morgan Chase have all been hit with mutli-million dollar fines. Rarer, but still possible, are fines or jail sentences aimed at bank managers who break the law.
Zerilli grew up in Staten Island, where his father owned a bakery, a family business that has existed since 1948. Zerilli started his career in banking as a teller in college, then went on to work at Ernst and Young, where he did external audits for community banks. He has a bachelor’s in accounting from the University of Albany. For the past 10 years, he has worked as an outside consultant, helping banks streamline their compliance departments.
You might think that the increasing complexity of bank regulations would be good news for people like Zerilli, who make a living helping banks deal with complex regulations. But the increasing compliance costs, and the increasing number of mergers, are reducing the number of clients that Zerilli has as a potential market. It turns out the consultants are just as annoyed by all the bank mergers as the public.
“It’s causing consolidation in the industry — it’s forcing banks to basically pair up with similar-sized institutions or look for upstream mergers or be acquired,” he says.