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First Mega Merger Of The Year, What are the big Risks? & AI Risk Management For Developer's

ALSO: BofA Has A Massive Data Breach; OCC Lifts Long Dated Consent Order At Wells Fargo

Author

Naeem Qasim
February 22, 2024

Let's dive into the Risk Queue, there is a lot to cover!

-Naeem, CEO & Founder - Risk On Q

PICKS

  1. Mega Merger- Regulators will have a lot to consider.

  2. AI Compliance, Developer’s have a playbook.

  3. Data Breach & Consent Orders: One Bank is dealing with data compromise and another is celebrating consent order relief!

Risk Headlines

Key Points:

  • Significant regulatory scrutiny and pushback is a key risk factor.  "Investors are assigning only a 50% chance to the deal being completed amid concerns the proposed acquisition could become a lightning rod for U.S. regulators and lawmakers fretting over high credit card interest rates and fees."

  • Also potential antitrust challenges pose a risk to deal approval.  Combining Capital One and Discover, the top four and five players in the U.S. credit card market by loans, would create the biggest issuer with around $250 billion in card balances and a market share of 22%." High market concentration could raise anticompetitive concerns.

A.I. Risk / Technology Risk

Key Points:

For software developers there are several critical considerations when implementing and managing AI technologies within the organization. Compliance with rapidly evolving regulations is a top priority, as failure to adhere to laws related to fairness, accountability, and transparency can result in severe penalties and damage the firm's reputation. Robust governance structures, risk identification processes, and continuous measurement and monitoring are essential for effective AI risk management. This will require tech to collaborate with other disciplines to get this right.

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Key Points:

The BofA breach was linked to a service provider, which was hacked by an unauthorized third party. As a result, personally identifiable information such as names, addresses, and Social Security numbers of affected customers was exposed. Security experts have emphasized the adoption of next-generation multi-factor authentication (MFA) solutions to fortify supply chains.

Regulatory News - Fines, Losses, & Rules

The OCC termination of the consent order is a significant step for Wells Fargo. However, it's important to note that there still remains a Federal Reserve consent order against Wells Fargo, as well as a requirement by the Fed that the bank does not grow any bigger until it fixes its sales and risk management culture.  This work has nearly been going on for a decade and the effort around risk management can be expected to be more rigorous and taxing going forward. 

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The SEC announced that TIAA registered broker-dealer will pay more than $2.2 million to settle charges that it failed to comply with Regulation Best Interest (Reg BI), Reg BI protects retail investors by requiring broker-dealers to act in the best interest of their customers when making recommendations.  The SEC’s order finds that TIAA Services violated Reg BI’s General Obligation as well as Disclosure, Care, and Compliance Obligations.

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SEC Credit Ratings published its annual staff report to Congress for credit rating agenciesand to discuss the state of competition, transparency, and conflicts of interest among them.

Emerging Risk

Key Points:

The stress test evaluates the resilience of large banks by estimating losses, net revenue, and capital levels under hypothetical recession scenarios that extend two years into the future. This year, 32 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets, results published in June 2024.  

Large banks with substantial trading or custodial operations are also required to incorporate a counterparty default scenario component to estimate and report potential losses and capital effects associated with the unexpected default of the firm's largest counterparty.  Bank’s will have tremendous amounts of resources working on the stress scenarios to prepare their risk profile and capital adequacy impacts to the FED and OCC, expect the regulators not to pass or place contingency on several banks this years.

2024 Stress Test Banks

source Federal Reserve

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SIFMA provides perspective on the unprecedented rulemaking agenda of the SEC. The SEC is on track to propose 64 new rules by the end of the Chair's first four years in office, many of which claim to fix what is not broken.

Risk Data to Geek Out On

Conduct Risk - source techtarget.com

What is Conduct Risk? It is one of the primary risk concerns and focuses for regulators, how business behavior is governed and how they mitigate potential risk. Many believe conduct risk was the primary cause of the 2007 financial crisis. This is a great primer on Conduct Risk.

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Thank you for reading,

Naeem

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