Risk Headlines

Global Financial Institutions Regulatory Penalties Surge by 31% in 2024 -source fenergo.com

Key Points:

What a significant increase in both the total value and specific categories of fines imposed on financial institutions in the first half of 2024 compared to the same period in 2023. The total value of fines increased by 31% to over $263 million, with particularly sharp increases in certain categories such as AML (87% increase), KYC (102% increase), and transaction monitoring and SAR breaches (408% increase).

The highest single fine of $65 million demonstrates the potential for significant financial impact from major compliance failures. With banks receiving $136 million in fines, it's clear that traditional financial institutions remain a key focus for regulators. However, the inclusion of digital asset providers and payment firms in the broader data suggests that regulatory scrutiny is expanding across the financial services sector.  Financial institutions face mounting pressure to enhance their compliance capabilities in response to regulators' enhanced technological capabilities and stringent enforcement.

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Fed Chair Powell’s Speech Friday in Jackson Hole- Everything to Expect -source cnbc.com

Key Points:

Federal Reserve Chair Jerome Powell is expected to deliver a speech at the annual gathering of global central bankers in Jackson Hole, Wyoming, on Friday. The speech is anticipated to be largely a summary of past events with limited new insights into future actions.

The market is confident that the Federal Reserve will begin cutting interest rates in September, the same market that earlier in the year had predicted as high as six rate cuts this year. However, the specifics regarding the pace and timing of these cuts will depend on upcoming economic data.  The market consensus, supported by Goldman Sachs, anticipates rate cuts at the next three meetings, with further easing in 2024 potentially reducing the fed funds rate by around 2 percentage points. Powell is expected to outline this trajectory in general terms during his speech.

A.I. Risk / Technology Risk

MIT Researchers Release a Repository of AI Risks - source techcrunch.com

Key Points:

The MIT AI risk repository represents a significant advancement in the field of AI risk management. By compiling over 700 AI risks into a single, accessible database, the researchers have created a valuable tool for stakeholders across various industries, including banking and finance.

The repository groups risks by causal factors, domains, and subdomains. For a bank, this could help in identifying specific AI risks related to financial services, customer data protection, and regulatory compliance. The research found that existing risk frameworks often cover only a fraction of identified risks. This suggests current AI risk management strategies may be incomplete.

For financial institutions, this data underscores the importance of reassessing current AI risk management practices. Banks should consider adopting a more comprehensive approach that addresses a wider range of potential risks, particularly those that are currently underrepresented in existing frameworks. This could involve integrating insights from the MIT repository into their risk assessment processes, potentially giving them an edge in AI adoption and risk mitigation.

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NIST and NTIA Publish Key Resources on AI Risk Management & Safety - source jdsupra.com

Key Points:

NIST's AI Risk Management Framework (AI RMF) and its generative AI profile is significant and provide a voluntary tool for incorporating trustworthiness considerations into AI products, services, and systems.  NIST's Secure Software Development Framework (SSDF) and its new AI-focused profile is important for secure AI model development throughout the software development lifecycle. For banks heavily investing in AI, this guidance could be vital in maintaining security and mitigating risks associated with AI implementation.

NTIA's restrained approach to regulating open-weight AI models is noteworthy. It suggests a preference for innovation and self-regulation over strict government control. However, the focus on collecting and evaluating evidence implies that this approach could change if significant risks emerge. This creates a dynamic regulatory environment that organizations must continually monitor and adapt to.

Regulatory News - Fines, Losses, & Rules

SEC Approves New PCAOB Proposals Addressing “Quality of Audits” - source sec.gov

Key Points:

The SEC's approval of these PCAOB proposals reflects a comprehensive effort to modernize and strengthen the audit process, particularly in response to technological advancements and the need for greater accountability. The changes aim to enhance investor protection through more rigorous audits, clearer auditor responsibilities, and increased personal liability for those involved in the audit process.

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PCAOB Posts 2023 Annual Inspection Reports for Audit Deficiencies at Large Firms - source pcaobus.org

Key Points:

The PCAOB's 2023 inspection results paint a picture of an audit industry in transition. The overall deficiency rate of 46% remains concerningly high, indicating persistent challenges in audit quality across the industry. However, the leveling off of deficiency rates among the Big Four firms suggests that efforts to improve audit quality are also being monitored after several high-profile fines.

The PCAOB's increased focus on transparency and timeliness, as evidenced by the earlier release of reports and new data visualization tools, represents a significant shift in the regulatory approach.

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TD Bank Sets Aside $2.6 Billion for US Anti-Money Laundering Penalties - source reuters.com

Key Points:

TD Bank is actively working to resolve an anti-money laundering probe by U.S. authorities. The bank has been in discussions with the U.S. Department of Justice and the Department of the Treasury's Financial Crimes Enforcement Network. The investigation is related to the bank's anti-money laundering practices and compliance issues. This development follows TD Bank's previous challenges, including the termination of a planned acquisition of First Horizon Corp earlier this year due to regulatory concerns, the risk has substantially impacted key strategies by Management.

Risk Data to Geek Out On

The Bank Examination Problem, & How to Fix It - Bank Policy Institute - source bpi.com

Key Points:

The Bank Policy Institute presents a comprehensive critique of the current bank examination regime in the United States, highlighting systemic issues that have developed over time. The author argues that the examination process has strayed far from its original purpose of addressing moral hazard and reducing systemic risk, instead becoming a burdensome and potentially counterproductive system that focuses on immaterial issues at the expense of real financial risks.

Key points and their implications:

1. Misaligned focus: The examination process now emphasizes governance, controls, and compliance processes over material financial risks. This shift could leave banks vulnerable to significant threats while consuming resources on less critical issues.

2. Excessive burden: Banks are dedicating substantial resources to compliance and examination-related tasks, potentially hampering their ability to innovate, compete, and serve customers effectively. This is particularly problematic for mid-sized and regional banks.

3. Lack of accountability: The secret nature of the examination process and the lack of effective appeal mechanisms create a power imbalance between banks and regulators. This could lead to arbitrary enforcement and a lack of due process.

4. Competitive distortion: The examination burden on banks creates an uneven playing field with non-bank financial institutions, potentially driving business away from the regulated banking sector.

5. Systemic risk: Paradoxically, the current examination regime may be increasing systemic risk by diverting attention and resources from material financial threats and potentially driving business to less regulated sectors.

6. Reform opportunities: The author suggests several concrete steps for reform, including redefining the CAMELS rating system and refocusing examinations on material risks. These proposals offer a starting point for industry-led advocacy and regulatory reform efforts.

The underlying significance of these issues is profound. The examination process is a critical component of the regulatory framework designed to ensure the stability and safety of the banking system. If this process is fundamentally flawed, it could have far-reaching implications for financial stability, economic growth, and the competitiveness of U.S. banks in the global financial system.

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Thank you for reading,

Naeem

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