Complianceball: The Art of Winning an Unfair Compliance Game

In the backlash against the misdeeds of large financial institutions that were deemed responsible for much of the economic downturn of the past half decade, the entire financial industry has been saddled with escalating regulatory burdens. And the regulatory onslaught is not over yet.

While the rise in regulations is perhaps an understandable response, the problem is that, for the most part, the increasing regulatory burdens are not just limited to large banks; all financial institutions are bearing the weight. But the vast majority of financial institutions don’t have the resources to hire thousands of extra employees to address rising risk and compliance issues (see this Reuters article about JPMorgan Chase hiring 5,000 extra employees to address risk and compliance issues). [Reference:]

Hence, in a very real sense, smaller financial institutions are at a competitive disadvantage when it comes to shouldering their share of the increased regulatory burden. What can be done to help level the playing field?

“Moneyball,” a book (and a 2011 movie starring Brad Pitt) about baseball, can provide some useful pointers to smaller institutions playing in a big team industry.

The book, subtitled “The Art of Winning an Unfair Game,” chronicles the efforts of a small market team, the Oakland Athletics, to compete against the much larger market teams, such as the New York Yankees and the Boston Red Sox, in the early 2000s.

The central premise of the book is that the collective wisdom of baseball insiders over the past century may be formidable, but may neglect some important technological tools and analysis methodologies that have been developed after the insiders thought they had it all figured out.

The Oakland As of that era had been struggling to put a competitive team in the field. Their manager, Billy Bean (think Brad Pitt), turned his efforts to a young statistician (think Jonah Hill) who argued that the statistics traditionally used by players, managers, coaches, scouts and front office were relics. The statistician was developing new models that the more established teams hadn’t even considered to produce a more successful team for far less money.

For a statistics loving baseball fan, the movie is incredible. But, even for those who don’t love either statistics or baseball, there are lessons to be learned, especially if you’re involved in compliance for small- to mid-sized credit unions. And the lessons aren’t confined to strictly compliance.

For example, let’s say you are a BSA expert trying to decide which of two job offers to accept.

Both are similar positions at similar-sized financial institutions in the same metropolitan area and offer similar benefits. But financial institution number 1 is offering $85,000, compared to $75,000 for institution number 2.

At first, it appears to be a no-brainer. But you, remembering the principals of Complianceball, decide to look deeper. You see that financial institution number one has an asset-to-employee ratio of $5.8 million and rising. The FI’s Tier One Leverage Capital Ratio is 9.5% and declining with troubled assets of 95.00% of Tier One Leverage Capital. Earnings are -0.65% of Total Assets and have been stagnant.

Financial institution number two has an asset-to-employee ratio of $4.8 million and is stable. The FI’s Tier One Leverage Capital Ratio is 11.5% and slowly climbing with troubled assets of 5.00% of Tier One Leverage Capital. Earnings are +1.05% of Total Assets and have been steadily rising. The position is paying $75,000.

Of course, on the basis of salary only, you might be inclined to think that offer number one is clearly superior. But after considering the fiscal condition of each institution, you may opt for the position with the second, more stable institution. However, upon considering the principles of Complianceball further, you might take into account the fiscal condition of financial institution number one, recognize how its circumstances compel it to have to offer $85,000, and you, mindful of your Complianceball-level expertise in the world of BSA, use that little piece of information to negotiate a sweetened deal (season tickets to the local baseball team, for example).

The point isn’t just about getting season tickets or more money; the point is that having additional information available to you allows you to make more informed decisions and take action accordingly.

Naturally, the above scenario isn’t directly about BSA, but those types of fiscal considerations are bound to affect a financial institution’s BSA Department as well as all other areas of compliance.

That is why at NeighborBench, we include an analysis of key Call Report data as part of our compliance assessments of every financial institution we work with. We identify those factors, far beyond the typical predictions based on CAEL (Capital, Asset, Earnings and Liquidity factors that comprise key ratios used for Safety and Soundness), that are likely to have a material impact on the institution’s compliance performance levels.

Of course, data mining of past filings as an indicator of future issues isn’t anything new. After all, Moneyball-style proponents don’t say that establishment scouts and their use of statistics aren’t of some use. They only contend that there are other ways of looking at the data in this day and age that could reveal telling information and help a financial institution respond accordingly.

Consider, for example, what an institution could learn through an analysis of its ratio of withdrawn, closed for incompleteness, and approved not accepted applications to applications that are funded or declined. Tracking such a ratio can provide meaningful data to an institution seeking to monitor how aggressive its lenders are in pursuing applications to outcome other than funded or decline. When that same analysis is combined with ethnicity and minority variables, the ratios can become exceptionally telling.

While some in the compliance arena may be wary of delving into such analyses for fear that it might summon regulatory attention, others understand that there are more and more data miners in the regulatory world as well as in the consumer advocate world who are doing just that, and that it is far better to be ahead of the game than behind it.

In compliance, just as it is in baseball, there really is no substitute for experience. But at the same time, there is no room for complacency either, especially in light of today’s rapidly evolving compliance environment. It makes it vital that smaller financial institutions that don’t have the resources of their larger counterparts progress employ such techniques to keep up.

Despite having the third lowest payroll in 2002, the Oakland As managed to win 103 games and make the playoffs. Today’s compliance game requires a similar combination of analytics and experience to help level the playing field with the big institutions.

Ken Agle

Ken Agle

Ken Agle, President of AdvisX, brings more than 25 years of experience covering almost all facets of financial institution risk management operations. He has conducted more than 350 compliance reviews ... Web: Details