How has the increase in Cease & Desist orders, and other regulatory action items, affected community institutions?
For many community banks, they have been significantly impacted by the current economic environment. The low interest rates, coupled with lower lending demand, has already lowered the earning base for many. But what is impacting them the most, and affecting their profitability, is their ability to meet the evolving and increased regulatory emphasis and regulations. The thought of more regulations over the next few years, could be significant. Now if you couple that with some overzealous examiners who apply regulations in a very narrow and inconsistent manner, some institutions may start, along with other operating costs, is seen as another element that needs to be controlled and perhaps reduced. On the other hand, you have the Board of Directors, who are worried about personal liability and the ever increasing regulatory demand, and want to increase the amount of oversight over the bank, and in particular, the internal audit function. The regulators themselves want to see a more robust internal audit function. We all already know that during economic distress times, there is already a higher emphasis on internal fraud within an organization. That internal fraud risk is further exasperated when an institution has lay-offs and is trying to control costs. As some of those segregation of duties and controls are eliminated by the loss of those people. If one of the primary functions of internal audit is to measure and assess fraud risk during economic decline, internal audit needs to do more. So right now we have a stage setting where there is clearly a need for an institution to expand its internal audit function to manage its risks, but in many instances that risk is outweighed by the need of the bank to manage its earnings. So a big challenge for many community banks is...how do we do more with less allocation of resources?
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