Risk Headlines

US Bank Profits Soar But FDIC Notes Lingering Risk Concerns -source reuters.com

Key Points:

The Q2 2024 data for the US banking sector presents a mixed picture of financial performance and emerging risks. While the overall profitability of the sector has improved, with profits rising 11.4% to $71.5 billion, this growth is partially attributed to one-time gains and reduced expenses, rather than purely operational improvements.

The most significant concerns highlighted by the FDIC are in two key areas.  First is Commercial Real Estate (CRE), the non-current rate for non-owner occupied CRE loans has risen to 1.77%, the highest level since 2013. This is particularly concerning for office portfolios, reflecting the ongoing impact of remote work trends on the commercial property market. Secon Consumer Credit,  the net charge-off rate for credit cards has increased to 4.82%, the highest since 2011. This suggests growing financial stress among consumers, which could have broader economic implications.

These trends are occurring against a backdrop of continued resilience in the banking sector, with only 1.5% of banks (66 in total) on the FDIC's "Problem Bank" list. However, these problem banks hold $83 billion in assets, indicating that their potential issues could have significant impacts. The increase in provision expenses, particularly among larger banks (up 30.3%), suggests that the industry is taking these risks seriously and preparing for potential future losses. This prudent approach to risk management is encouraging, but it also indicates that banks expect challenges in the near to medium term, is this the big reason why Warren Buffett has sold off billions in bank stock recently.

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Credit Rating Agencies - Moody’s, S&P Global, Fitch & Others Fined by SEC $49 Million for Recordkeeping Failures 🦄 🦄 - source wsj.com

Key Points:

The SEC's settlement with six credit rating providers over off-channel communication violations continues a trend of similar actions against major banks, highlighting a broader regulatory focus on digital communication practices and record-keeping. The widespread nature of these violations indicates that many financial institutions are struggling to keep up with regulatory expectations amidst rapidly evolving communication technologies. This underscores the need for more robust and adaptable compliance frameworks. The substantial penalties imposed—$49 million in this case, following $1.8 billion in fines for banks—emphasize the financial risks of non-compliance. With over $2 billion now collected in recordkeeping fines, what was once a "Unicorn Regulation" dubbed by us can now be termed the "Double Unicorn Regulation."

A.I. Risk / Technology Risk

Capital One is Gaining AI Momentum - source venturebeat.com

Key Points:

Capital One's strategy is defined by a strong customer focus, significant investment in internal capabilities, and a careful balance between innovation and regulatory compliance. The company emphasizes the integration of various AI technologies, including generative AI and traditional models, while ensuring human oversight. Capital One's early adoption of cloud technology and emphasis on talent development allows a robust technological ecosystem that supports and accelerates AI initiatives across the organization.

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AI is Becoming A Make-or-Break Factor for Banks - source Panagiotis Kriaris on LinkedIn.com

Key Points:

AI is poised to fundamentally transform the banking sector, with projected financial impacts of $200-340 billion in additional annual value. Banks that successfully integrate AI into their operations could achieve significant competitive advantages through improved efficiency, customer personalization, and cost savings, while those that fail to adapt may face growth risks and industry consolidation. Success will come to those who can sustain the AI marathon and not the sprints that will have many painful hurdles.

Regulatory News - Fines, Losses, & Rules

Nordea Bank Fined $35 Million for Anti-Money Laundering Violations - source wsj.com

Key Points:

The $35 million fine imposed on Nordea Bank by New York's financial regulator for anti-money laundering violations represents a significant development in the global fight against financial crime.

This case highlights several key issues and trends in the banking industry, thehe fact that a U.S. regulator fined a Nordic bank for operations in the Baltics and Denmark demonstrates the extensive reach of U.S. financial regulators.  The mention of Nordea's unsophisticated transaction monitoring points to the critical role of advanced technology needs in today’s AML efforts. Nordea's involvement in high-profile money laundering schemes like the "Russian laundromat" highlights the severe reputational risks associated with AML failures. Nordea's has €1.5 billion investment in risk and compliance functions since 2015, which illustrates the substantial costs associated with remedying compliance failures and building robust AML programs.  Such incidents will have long-lasting impacts on a bank's image and relationships.

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OCC Acting Comptroller Discusses Bank Supervision - source occ.gov

Key Points:

Acting Comptroller Michael Hsu's speech on the evolution of bank supervision reveals a significant shift in the regulatory landscape. The key findings highlight a move towards a more proactive, holistic, and risk-based approach to supervision, driven by the increasing size, complexity, and evolving risk profile of the banking sector.

The speech underscores the dramatic growth in bank size and complexity over the past 30 years. The shift towards a more collaborative, multi-team supervisory model for large banks reflects the increasing complexity of these institutions. This approach may lead to more comprehensive oversight but could also increase the complexity of regulatory interactions for banks. The increasing focus non-financial risk such cyber, operational, and IT risks, we can add several more here but it reflects the changing nature of banking in a digital age. Banks who do not significantly enhance their capabilities in these areas to meet evolving supervisory expectations will find it extremely difficult to sustain the regulatory demands.

Risk Data to Geek Out On

Mastering Financial Risk- A Beginner’s Guide to Navigating Uncertainty - source medium.com

Key Points:

This is an overview of financial risk, starting from the fundamental concepts of uncertainty and complexity, and progressing to specific risk measurement and management techniques. It emphasizes the challenges in predicting financial outcomes due to the inherent complexity and non-linearity of financial systems. The distinction between uncertainty and risk forms a crucial foundation for understanding how financial institutions can approach risk management. 

The article also highlights the importance of using appropriate risk models and measures, while acknowledging their limitations. Finally, it provides a broad categorization of different types of financial risks, offering a holistic view of the risk landscape that financial institutions must navigate.

Core Focus:

• Fundamental understanding of uncertainty and complexity in finance

• Distinction between uncertainty and measurable risk

• Importance of appropriate risk modeling and measurement

• Recognition of limitations in risk prediction

• Comprehensive view of different types of financial risks

• Need for robust and coherent risk measures

• Awareness of rare but high-impact events (Black Swans)

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Thank you for reading,

Naeem

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