Risk Headlines

Banks Face Growing Risk as Double Defaults on Commercial Loans Mount - source ft.com

Key Points:

The commercial real estate market is showing significant stress with re-defaults reaching decade highs, suggesting current loan modification strategies may be merely delaying rather than resolving underlying issues. The NY Fed's explicit warning about "extend and pretend" practices, combined with a 90% year-over-year increase in re-defaults to $5.5bn, indicates potential systemic risk building in the sector. With only modest relief being offered in modifications and continued pressure from high interest rates, there's a high probability of further deterioration, particularly in the office sector.

• Re-default trends indicate systemic issues

• Current modifications may be inadequate

• Regulatory intervention likely

• Market conditions remain challenging

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Private-Credit Boom Has Echoes of Subprime, Warns Senior Central Banker - source wsj.com

Key Points:

The private credit market presents a significant emerging risk with alarming parallels to past financial crises, particularly regarding opacity and interconnected exposures. Banks' inability to accurately measure their total exposure to private credit, combined with the potential for duplicate positions and mark-to-model valuation risks, creates a concerning blind spot in risk management. The ECB's explicit warning and comparison to the subprime crisis suggests incoming regulatory scrutiny, requiring immediate attention to exposure measurement, risk assessment, and control frameworks.

The fundamental issue isn't just the growth of private credit, but the systemic inability to accurately measure and manage the associated risks, particularly given the lack of transparency and potential for hidden leverage.

A.I. Risk / Technology Risk

The Financial Stability Implications of Artificial Intelligence - source fsb.org

Key Points:

The FSB's analysis indicates that AI adoption in financial services presents both transformative opportunities and significant new risks, particularly around third-party dependencies, market correlations, and cyber vulnerabilities. While AI offers substantial benefits in operational efficiency, compliance, and product customization, the emergence of generative AI introduces new concerns about fraud and market disinformation. The regulatory landscape is likely to evolve with enhanced monitoring and supervision, requiring banks to balance aggressive AI adoption with robust risk management frameworks.

Regulatory News - Fines, Losses, & Rules

US Regulators Warn Bankers About Intensified Focus on Financial Crime - source usnews.com

Key Points:

The regulatory landscape for financial crime compliance is intensifying significantly, as evidenced by unprecedented enforcement actions including TD Bank's record $3 billion fine and Wells Fargo's business restrictions. Regulators are specifically targeting gaps in monitoring systems and risk management practices, with a clear message that enforcement will continue regardless of political changes. The bipartisan nature of this focus, combined with recent actions against major banks, signals a need for banks to perform immediate review and potential enhancement of AML/BSA compliance frameworks.

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Federal Reserve October 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices - source federalreserve.gov

Key Points:

The October 2024 SLOOS reveals a strategic dichotomy in lending markets, with banks maintaining standards for prime borrowers while tightening for higher-risk segments across both commercial and consumer portfolios. Commercial real estate continues to face pressure with tighter standards and weaker demand, while credit card lending shows potential growth opportunities in prime segments with expected demand strengthening. The survey suggests a flight to quality across lending categories, with particular caution in small business lending and subprime consumer segments. Focus should be on capturing prime segment growth while managing exposure to higher-risk segments.

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PCAOB Adopts Rule Amendment to Enhance the Usefulness of Audit Firm Registration Information - source pcaob.org

Key Points:

The PCAOB is strengthening audit market integrity by implementing mechanisms to remove inactive registered firms, improving the quality of publicly available audit firm information. This change enhances transparency for audit committees and investors while streamlining regulatory oversight. The implementation timeline provides adequate preparation time, with first impacts expected in fall 2026.

Risk Data to Geek Out On

Deep-dive into the OCC 2025 Bank Supervision Plan  - source occ.gov 

Key Points:

The supervisory focus areas demonstrate a clear shift toward more integrated risk supervision with particular emphasis on financial resilience and operational capability. The implementation complexity varies but is generally high across most areas, reflecting the sophisticated nature of emerging supervisory expectations. Strategic impact is most critical in areas of credit, liquidity, and technology risk, suggesting these should be priority areas for management attention and resource allocation.

Key Observations

1. Credit and liquidity risk remain top priorities but with new dimensions

2. Operational resilience is gaining importance

3. Climate risk represents a new frontier of supervision

4. Technology risk is increasingly intertwined with traditional banking risksThe OCC's FY2025 Operating Plan reveals several significant shifts in regulatory focus:

1. Integration of Risk Domains

• Growing recognition of interconnected risks

• Need for cross-disciplinary supervision

• Emphasis on holistic risk management

2. Forward-Looking Supervision

• Enhanced focus on predictive capabilities

• Stress testing requirements

• Scenario-based planning

3. Technological Evolution

• Increased scrutiny of fintech partnerships

• Focus on operational resilience

• Enhanced cybersecurity expectations

4. Emerging Risk Areas

• Climate risk integration

• Geopolitical risk consideration

• Innovation risk management

Implications:

• Banks need more sophisticated risk management frameworks

• Greater investment in technology and data analytics required

• Enhanced focus on talent management and expertise

• Need for more integrated approach to compliance

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Thank you for reading,

Naeem

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