Risk Headlines

Bank Earnings Season Kicks Off - source wjs.com

Key Points:

The banking sector faces complex challenges, from unrealized losses and commercial real estate exposure to margin pressures and liquidity concerns. Ongoing economic uncertainties and regulatory scrutiny exacerbate these issues, How much will bank earnings be impacted by these challenges.

• The billions in unrealized losses on balance sheets, primarily due to interest rate increases, represents a significant potential risk. While most banks may not need to realize these losses, the situation underscores the importance of careful balance sheet management and the potential for market volatility.

• Commercial real estate exposure poses significant risks, especially for smaller and regional banks with higher exposure

• Pressure on net interest margins reflects the broader challenges of the current interest rate environment

• Liquidity disparities between large and regional banks could reshape the competitive landscape

• Rising consumer credit delinquencies signal potential economic stress

_________________________________

Fifth Third Fined $20 Million by CFPB - Fake Accounts to Forced Insurance for Customers - source wsj.com

Key Points:

Fifth Third Bank forced auto insurance, fake account openings, and aggressive cross-selling practices, these problems indicate a failure in risk management, compliance, and ethical oversight.  The creation of fake accounts echoes similar scandals in the banking industry, suggesting that the pressure for growth and cross-selling remains a persistent issue. The CFPB's actions, including the ban on certain employee sales practices, signal increasing regulatory scrutiny of banking sales tactics. 

The $20 million fine, while significant, may be less impactful than the long-term reputational damage, increased regulatory scrutiny, and potential loss of customer trust. The forced auto insurance charges, affecting over 37,000 customers and leading to nearly 1,000 vehicle repossessions, represent a severe breach of customer trust and highlight inadequate controls in product sales and implementation.

A.I. Risk / Technology Risk

Citibank’s Systemic Risk Management Issues Lead to $135 Million Dollar Penalty by the OCC & FRB!- source occ.gov & federalreserve.gov

Key Points:

The amended enforcement action against Citibank by the OCC and FRB reveals ongoing challenges in addressing systemic weaknesses in risk management, compliance, and data governance. The failure to meet remediation milestones suggests that the complexity of the required changes may have been underestimated, or that insufficient resources were allocated to the task. These fines come on top of the $400 million Citi agreed to pay to settle the 2020 findings.

_________________________________

The Importance of AI in the Financial Industry - source insideainews.com

Key Points:

As financial institutions continue to embrace AI, they will need to address the many risk and challenges that accompany it use. How can AI transform operations, risk management, and better the client experience.

Regulatory News - Fines, Losses, & Rules

FINRA - Firms AI Adoption Poses Compliance Challenges - source investmentexecutive.com

Key Points:

FINRA has issued a notice to brokerage firms regarding the compliance challenges posed by the adoption of generative artificial intelligence (gen AI) and large language models. FINRA advised firms to evaluate gen AI tools before deployment and ensure compliance with existing rules. This includes addressing technology governance, model risk management, data privacy, integrity, and the reliability and accuracy of AI models. The notice reiterated that FINRA’s rules are technologically neutral and apply to both proprietary and third-party AI tools.

Risk Data to Geek Out On

2024 Federal Reserve Stress Test Key Findings - source federalreserve.gov

Key Points:

This analysis of the 31 banks in the stress test underscores the importance of understanding each bank's business model and risk profile when interpreting stress test results and assessing overall financial stability.

The 2024 Federal Reserve Stress Test results demonstrate that the U.S. banking system remains well-capitalized and resilient to severe economic shocks. However, the test also highlights areas of potential vulnerability, particularly in credit card lending, corporate credit quality, and operational resilience.

The varying performance across different bank categories underscores the importance of tailored risk management strategies and supervisory approaches. While large, systemically important institutions generally showed strong performance, some regional and specialized banks faced greater challenges under stress.

Conclusions:

1. Credit risk remains the most significant factor for most banks, particularly those focused on consumer lending and regional banking.

2. Market risk is most impactful for investment banks and large universal banks with significant trading operations.

3. Operational risk sensitivity varies widely, but appears to be more significant for foreign bank subsidiaries and specialized institutions.

4. The stress test results suggest that different bank business models lead to varying risk factor sensitivities, highlighting the importance of tailored risk management strategies.

5. Diversified banks generally show more balanced risk sensitivities, while specialized institutions (like credit card issuers or investment banks) show higher sensitivity to specific risk factors aligned with their business models.Enhance financial stability by reducing the potential for disorderly failures of large banks.

_________________________________

Thank you for reading,

Naeem

p.s. If you find the Risk Queue newsletter helpful please subscribe and share it with a friend or colleagues, you can find it here!