Smaller financial institutions are experiencing a disproportionate impact of having to comply with the Sarbanes-Oxley Act. Some may even sell or go private. The finding is from research by Massachusetts based TowerGroup.

Smaller institutions are facing a double peril. Having to comply with all the various regulatory regimes whilst increasing overall technology budgets.

Community or small banks offering home equity, mortgage or consumer loan products are hit bad. This is because compliance in consumer lending has tended to be a hodge-pode of semi-automated business processes, paper documents and manual steps.

"For certain smaller financial institutions, compliance may ultimately affect their overall business model, said Craig Focardi, research director in the Consumer Lending research service at TowerGroup and author of the research. "Sarbanes-Oxley increases concerns about risk within publicly-traded community banks. Compliance costs and process improvements can quickly absorb a large percentage of corporate profits within these types of institutions."

Forcardi flagged two alternative options for these smaller organisations. They could "go private". This will take them out of Sarbanes-Oxley as the legislation only applies to publicly listed companies.

Alternatively, they could be sold to more "compliance-efficient" organisations , if they can not keep pace with new regulations.

Banks will soon have to start complying with a new regulatory scheme, that of Basel II, which regulates capital adequacy rules.

Financial services institutions which have diversified and related retail lending divisions have relied heavily on external auditors or consultants. They have not managed to shift compliance procsses costs and IT spending to permanent replicable businesses.

Larger banks with resources to invest, are able to leverage compliance IT spending to improve efficiency. Smaller, less well resourced institutions by implication have IT compliance spending as meeting short-term requirements of new or revised legislation.

"Sarbanes-Oxley and the Cost of Compliance: How Will Mortgage and Consumer Lenders Respond?", is available for purchase directly from TowerGroup.

This research comes in the wake of a call by a community bank lobbying organisation that they should be excused from the legislation.

Related Articles
Citigroup and Reveleus
Wal-Mart Bank Facing Opposition
Basel II Banks Having Doubts
Internal Control Documentation Tools
Anchor BanCorp Delisting Threat
Wachovia Sarbanes-Oxley Complaint