Regulatory zeal prompts new emphasis on bank compliance officers; Mitsui Manufacturers community reinvestment track record held up a stock deal.

Regulatory zeal prompts new emphasis on bank compliance officers

Mitsui Manufacturers community reinvestment track record held up a stock deal

Los Angeles-based banks and savings and loans are quietly beefing up their regulatory compliance staffs and programs. These steps include hiring new staff members, reassigning compliance to more senior officers and introducing or upgrading seminar programs and video training.

Among the companies adding new compliance officers are Sterling Bank, based in Mid-Wilshire and Columbia National Bank, based in Santa Monica.

Other institutions have reassigned compliance chores to more senior officers. Marathon Bank, for example, recently put an executive vice president in charge of what had previously been handled by a junior officer. First Public Savings Bank, based in downtown Los Angeles, is considering making a similar move.

The immediate impetus for all the changes comes from the Community Reinvestment Act, which requires lending institutions to pay back funds to the local communities where they raise deposits.

Although on the books for more than a decade, bank and thrift regulators have only recently placed the Reinvestment Act at the top of their agendas, said Sal Serrantino, president of Santa Monica-based California Research Corp. This week these regulators for the first time are issuing ratings of banks and thrifts Reinvestment Act performance, and the consequences of a bad rating have these institutions quaking in their boots. A low rating could jeopardize future regulatory approvals, Serrantino indicated.

As an example, the Federal Reserve Bank's board of governors last month delayed approval of Security Pacific Bank's application to acquire 20 percent of Mitsui Manufacturers Bank, as well as the merger of Mitsui Bank and Taiyo Kobe Bank, so that it could review objections raised by a panoply of community groups on Mitsui Manufacturers' CRA performance.

As part of the new ratings, regulators will look not only at what Reinvestment Act projects an institution has in the works but also what systems they have in place to monitor compliance.

However, the Reinvestment Act is only a catalyst. There is also a widespread perception among bankers that regulators have become tougher in the aftermath of the savings and loan crisis.

Thrift regulators got into trouble trusting the words of the likes of Charles Keating, CEO of scandal-ridden Lincoln Savings and Loan, based in Irvine. That has made bank regulators wary as well, including the Office of the Comptroller of Currency (OCC), the Federal Reserve and the California Department of Banking. With legislators breathing down the regulators backs, the regulators have in turn tightened the screws on financial institutions, said Chip Morrow, president of Marathon Bank, based in West Los Angeles, and chairman of the Independent Bankers Association of America.

"What banks used to be able to tell regulators they were doing, they now have to put in writing, which means more memoranda and paperwork," Morrow said.

Such paperwork has become, after FDIC insurance, the burning issue for bankers at the small independent institutions, Morrow said.

A survey of smaller banks conducted by Young & Associates last year reinforces Morrow's comments. More than 81 percent of the bank officers who responded said the procedures for complying with most regulations are unnecessarily time-consuming.

The survey also indicated that roughly 96 percent of the bankers felt compliance requirements have increased during the past decade, and 78 percent thought recent regulations seem to focus more on trivial or relatively unimportant issues than did previous regulations.

Added another bank officer, there is a lot more "CYA" or "cover-your-ass" work required.

Regardless, the number of examinations has unquestionably been on the rise.

No longer do examiners conduct one comprehensive review of an institution. A legal compliance examination separate from a loan audit has become commonplace.

All this compliance comes at a price. Morrow estimated that this year the cost of compliance will increase by $50,000 because of hiring, more seminars and paperwork at his $116 million (assets) bank. The increase will bring Marathon's total compliance expenditure to about 15 percent of its $1 million administrative budget, Morrow said.

Other bank executives would not even hazard a guess at the cost, but Serrantino said costs have exploded, as has the time necessary to carry out compliance.

Serrantino speaks what is on the minds of many more reticent bank executives when he terms such expenditures "ridiculous" for smaller companies. He noted that compliance spending makes no contribution to their revenues or bottom line.

In addition to their compliance departments, more than 50 smaller banks have banded together to retain a law firm to head a compliance education program. The law firm holds monthly meetings with bankers to keep them abreast of compliance issues and otherwise makes itself available to answer general compliance questions.

Not everyone is beefing up their compliance staff. Joe Borda, CEO of Westside Savings, expects life to become simpler when his institution converts from a savings and loan association to a bank this summer. Westside received the go-ahead to convert to a bank late last month.