Risk Headlines

OCC calls for Stricter Rules as ‘Bank Runs Accelerate’ in the Digital Age - source wsj.com

Key Points:

• The need to adapt financial stability regulations to the new realities of lightning-fast digital bank runs has become a focus for regulators. As deposits can flee at unprecedented speeds driven by herd mentality and technology, existing liquidity buffers and crisis infrastructure have proven inadequate.

• Regulators aim to constrain volatile funding but also upgrade crisis preparedness through stricter standards, testing requirements, and transparency into backup Fed support programs. Banks will need to ensure collateral can be swiftly converted to cash, and prepare for likely new stringent short-term liquidity requirements.

• Operational readiness is also emphasized - the speed of runs means little value in assets that can't be monetized intraday. More broadly, real-time payment systems will strain liquidity risk management. Expect Regulators to further exam and challenge bank’s liquidity risk capabilities this year.

A.I. Risk / Technology Risk

SEC Chair Warns AI could Lead to ‘Fragile’ Financial System Risk- source thehill.com

Key Points:

• Rather than financial institutions developing proprietary models tailored to their needs and risk profile, the SEC chair warns about an ecosystem evolving where most firms simply adopt a standard model from a 3rd party AI provider. This could propagate flaws widely across the system and could lead many institutions into trouble simultaneously while limiting options for differentiating the bank's approach.

• The mitigation strategy is to maintain diversity - in both models and underlying data sources. This allows for redundancy if a major provider has issues, and reduces the coordinating effects that could cascade across the financial system. Given the rapid pace of AI adoption, bank leaders should make model risk management and evaluation of concentration risk top priorities.

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JPMorgan Suffers Wave of Cyber Attacks as Fraudsters get ‘more devious’- source ft.com

AI is escalating cybersecurity threats faced by global banks like JPMorgan, hackers utilize AI to conduct harder to detect attacks at scale. Banks are dealing with soaring technology costs just to maintain basic defenses. Risks are increasing faster than banks can keep up.

Regulatory News - Fines, Losses, & Rules

CFPB Proposes Rule to Stop New Junk Fees on Bank Accounts - source reuters.com

There is a central clash between protecting consumers by restricting certain “junk fees’ versus ensuring banks can sustain services and credit options reliant on flexible fee structures. Differing views on consumer harm versus services offered.

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CFTC Proposed Rules on Operational Resilience Risk - source cftc.gov

The CFTC or Commission is proposing to require that futures commission merchants, swap dealers, and major swap participants establish, document, implement, and maintain an Operational Resilience Framework that would include three components—an information and technology security program, a third-party relationship program, and a business continuity and disaster recovery plan—supported by broad requirements relating to governance, training, testing, and recordkeeping.

Emerging Risk

Commercial Real-Estate Exposure

Key Points:

The SEC is concerned of the rising risks from the substantial volume of maturing CRE debt. This presents major refinancing hurdles given higher rates and property market weakness. The core concern is that losses cascade across lenders, constrain credit access, and spill over into the broader economy. Granular risk disclosures are lacking, especially from smaller banks concentrated in CRE.

• Massive CRE refinancing wall ahead

• Economic risks if credit tightens significantly

• Need for more granular risk segmentation

• Emphasis on oversight for smaller banks

Enhanced transparency and risk management are urgent priorities for bank’s, both to mitigate direct threats and avoid reverberations. Please read the two attached articles below for further details.

1) SEC Wants More data from Banks on CRE Investments - source wsj.com 

2) The Bill Is Coming Due on a Record Amount of CRE Debt - source wsj.com 

Risk Data to Geek Out On

ASIFMA Report - Enabling an Efficient Regulatory Environment for AI - Practical Considerations for Generative AI in Capital Markets - source ASIFMA.org

ASIFMA provides this paper is to initiate further proactive engagement with regulators on generative AI, to help advance the public-private dialogue and to push forward greater collaboration so as to ensure that generative AI is used in a secure and responsible manner in the capital markets industry.  

Thanks for reading,

Naeem

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