Risk Headlines

How Banks Turn Tariff Uncertainty into Record Q1 2025 Profits - source wsj.com

Key Points:

The record trading revenues reported by major banks – Goldman Sachs (27% increase in equities), JPMorgan (48% jump to record high), and Morgan Stanley (45% increase) – demonstrate how policy uncertainty can create ideal conditions for intermediary businesses. These banks earned over $12 billion in equities fees, exceeding even pandemic-era trading booms. This suggests that certain types of market volatility – particularly policy-driven uncertainty that prompts portfolio repositioning rather than panic-driven selling – can create optimal conditions for bank trading desks.

Bank executives acknowledge that the tariffs and associated uncertainty "could push the economy into a recession" and weigh on "corporate borrowing and dealmaking." The current policies generating record trading revenues could ultimately undermine broader banking fundamentals if they persist and damage economic growth. This is a specific moment in the risk cycle, where volatility is sufficient to drive significant trading activity but not severe enough to cause systemic stress. This distinction between "productive volatility" and "destructive volatility" has important implications for how banks calibrate their risk appetites and business strategies in response to policy-driven market uncertainty.

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Bank of America to Pay $540 Million in FDIC Lawsuit 2025  - source reuters.com

Key Points:

A federal judge has ordered Bank of America to pay $540.3 million to settle FDIC claims that it underpaid deposit insurance by failing to implement a 2011 rule on reporting counterparty risk exposure, representing a significant penalty but less than half the $1.12 billion initially sought. The court rejected the bank's arguments that the rule lacked reasonable basis and that the FDIC acted arbitrarily, while also ruling that some earlier claims were time-barred, limiting the assessment period to Q2 2013 through end of 2014.

The timespan involved is notable - from the 2011 rule implementation, to the conduct period (2013-2014), to the lawsuit filing (2017), to the final resolution in 2025. This fourteen-year timeline highlights how regulatory decisions can have extremely long tails. Bank of America had denied any intent to evade payments and had established financial reserves in anticipation of this decision.

A.I. Risk / Technology Risk

How Artificial Intelligence Could Reshape Finance - source deloitte.com

Key Points:

Deloitte's report reveals that leading organizations are achieving positive ROI from GenAI initiatives despite limited workforce access (below 40%), suggesting significant untapped potential for financial institutions willing to invest strategically in AI-powered finance transformation. While 48% of CFOs cite GenAI adoption as a top internal risk due to extended implementation timelines and rapid technological evolution, organizations that delay risk falling behind competitors who are already seeing "encouraging returns on their early GenAI investments."

The finance function's traditional risk-averse culture presents a particular challenge, as it "tends to be less oriented toward experimentation" than other departments, requiring CFOs to foster innovation while maintaining appropriate controls. In both short-term applications (automating financial analysis, enhancing risk mitigation) and long-term transformation (completely changing how finance work gets done), implementation success depends more on organizational change readiness than technological capabilities.

As GenAI becomes integrated throughout finance, the CFO role will likely evolve from traditional financial stewardship to "presiding over functions that weave throughout the organization," with technology freeing finance professionals from data management to focus on strategic insight generation and value creation.

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AI and the Implications for Governance - source brookings.edu

Key Points:

The Brookings Institution's comprehensive analysis of AI public opinion surveys reveals growing concern about AI's impacts, with public sentiment in the US and UK leaning more negative than positive, suggesting financial institutions should anticipate increasing scrutiny of AI applications in banking.

Support for AI regulation has grown substantially in recent years (increasing from 57% to 66% in the US between 2020-2022), yet the public trusts neither tech companies nor governments alone to implement effective oversight, creating an opportunity for banks to demonstrate leadership through transparent, multi-stakeholder governance approaches. Governance approaches that align with public values will be crucial for maintaining legitimacy and effectiveness, making customer-centric AI ethics frameworks a strategic imperative for forward-thinking financial institutions.

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New Reference Process & Service Library Supports Operational Risk Across Financial Services - source mckinsey.com

Key Points:

The McKinsey-ORX reference process and service library addresses a critical gap in operational risk management by connecting previously siloed process and service frameworks, enabling financial institutions to create comprehensive end-to-end risk coverage in a digitalized industry increasingly reliant on third parties and complex technologies, while simultaneously supporting broader strategic objectives beyond risk management including process optimization, control automation, and organizational design.

Regulatory News - Fines, Losses, & Rules

US Bank Regulator Begins Work With DOGE Staff - source usnews.com

Key Points:

Department of Government Efficiency has placed a team within the FDIC leadership structure with an initial focus on reviewing contracts and workforce, signaling potential significant changes to the agency as part of the government’s reduction efforts. Any reduction in FDIC staffing or operational capacity could directly impact supervision quality, examination frequency, and potentially the stability of the deposit insurance system that guarantees up to $250,000 per depositor. Since the FDIC is funded through bank premiums rather than taxpayer dollars, changes to its structure could directly affect firms’ costs while potentially creating new risks in the banking system's safety net.

As one of three federal banking regulators alongside the OCC and Federal Reserve, changes at the FDIC could also create regulatory gaps or inconsistencies that complicate compliance efforts across banks.

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Banks Alarmed After Their Regulator Gets Hacked - source wsj.com

Key Points:

A significant cyberattack on the Office of the Comptroller of the Currency's email system has driven major banks, including JPMorgan Chase, Bank of America, and Bank of New York Mellon, to restrict electronic information sharing with the regulator due to security concerns and dissatisfaction with the OCC's communication and response. This unprecedented breakdown in regulatory information channels occurs while banks remain "largely in the dark" about what sensitive information may have been exposed to hackers, creating uncertainty about potential risks to your institution's confidential data previously shared with the regulator.

Banks are now seeking alternative secure methods for necessary regulatory communications while the OCC conducts an independent third-party assessment of the incident, including review of compromised email messages.

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The Five Largest Operational Risk Losses in March 2025 - source orx.org

Key Points:

A significant cyberattack on the Office of the Comptroller of the Currency's email system has driven major banks, including JPMorgan Chase, Bank of America, and Bank of New York Mellon, to restrict electronic information sharing with the regulator due to security concerns and dissatisfaction with the OCC's communication and response. This unprecedented breakdown in regulatory information channels occurs while banks remain "largely in the dark" about what sensitive information may have been exposed to hackers, creating uncertainty about potential risks to your institution's confidential data previously shared with the regulator.

Banks are now seeking alternative secure methods for necessary regulatory communications while the OCC conducts an independent third-party assessment of the incident, including review of compromised email messages.

• Galaxy - $200 Million

  • Galaxy to pay USD 200 million for not disclosing intent to sell Luna tokens.

• Aspiration Partners - $145 Million

  • Aspiration Partners fund defrauded of USD 145 million by co-founder. 

• Stifel - $132.6 Million

  • Stifel ordered to pay USD 132.6 million by FINRA for over-concentrating family accounts in notes.

• Westpac - $81.8 Million

  • Westpac to pay AUD 130 million over flexible commission on car loans.

• AEON - $66.9 Million

  • AEON suffers JPY 9.9 billion loss from credit card small-payment fraud.

Risk Data to Geek Out On

Define Systemic Risk Management - Managing Financial Risk - riskonq.com

This week, we will continue focusing on a key financial risk management program, moving to Systemic Risk. Last week, we covered Concentration Risk. Over the coming weeks, we will define these concepts to enhance our understanding and their application in the vast risk management ecosystem in the financial sector.

Systemic Risk Management: Comprehensive Analysis for Financial Institutions

Systemic Risk Management (SRM) is the identification, assessment, and mitigation of risks threatening the stability of the entire financial system, addressing interconnected vulnerabilities that could trigger cascading failures or market collapse. It prioritizes financial stability, contagion containment, and regulatory alignment.

1. Core Principles and Objectives

• Financial Stability: Prevent systemic collapse via proactive monitoring of interconnected institutions and markets.

• Contagion Mitigation: Limit risk transmission through interbank lending, derivatives, and asset correlations.

• Policy Coordination: Align macroprudential regulation with monetary/fiscal policies to address cross-border spillovers.

Distinct Types of Systemic Risks

Interconnection with Other Risks

• Credit-Liquidity Link: Mass defaults strain liquidity, forcing fire sales.

• Operational-Market Link: Homogeneous AI/ML models amplify sectoral biases during crises.

2. Implementation in Financial Institutions

Institutional Adaptations

• Banks: Stress test 30% unemployment scenarios and 40% collateral haircuts.

• Investment Firms: Monitor SRISK metrics for capital shortfalls during crises.

• Central Banks: Deploy liquidity buffers (e.g., 2008 AIG bailout).

Regulatory Landscape

• Basel III: Mandates liquidity coverage ratios (LCR >100%) and net stable funding ratios (NSFR).

• Dodd-Frank: Establishes FSOC to monitor non-bank risks (e.g., shadow banking).

Measurement Tools

3. Contemporary Strategies

Risk Identification

• Insurance Premium Framework: Quantifies systemic risk as the cost to insure against losses ≥15% of liabilities ($110B in March 2008).

• AI/ML Models: Predict correlated defaults using macroeconomic indicators (20% higher accuracy than traditional methods).

Crisis Management

• Tail Risk Hedging: Purchase out-of-the-money puts on systemically important ETFs.

• Liquidity Buffers: Maintain HQLA exceeding Basel III minima (e.g., 30-day LCR).

Technology Integration

• Blockchain: Automates collateral management via smart contracts.

• Macroprudential Stress Tests: Simulate firm-level network failures (e.g., bank-conglomerate linkages).

4. Emerging Risks & Digital Shifts

• Climate Systemic Risk: Stranded fossil fuel assets threaten $4T in global GDP by 2030.

• Cryptocurrency Contagion: Unhedged Bitcoin exposures exceed 2% of Tier 1 capital at major banks.

• Forced Liquidations: Systemic crises reverse efficient positioning, causing "best trades to become worst".

5. Best Practices

1. Dynamic Network Modeling: Conduct quarterly macroprudential stress tests with industry linkages.

2. Early Warning Systems: Track leverage growth (>5% quarterly) and criticized loans (>10% of portfolio).

3. Cross-Border Coordination: Share risk data via federated AI among regulators.

Case Study: 2008 Crisis

• Root Cause: $14T in MBS exposures, Tier 1 ratios <4%.

• Reform: Basel III raised capital requirements to 10.5% + G-SIB surcharges.

Pitfalls to Avoid

• Overreliance on credit ratings for securitized products.

• Siloed risk teams ignoring cross-border exposures.

By integrating network analytics, real-time monitoring, and policy coordination, financial institutions can transform systemic risk management from reactive firefighting to proactive resilience-building.

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Thank you for reading.

Naeem

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