Risk Headlines

ECB warns banks of liquidity risk from geopolitical shocks - source globalbankingandfinance.com

Key Points:

The ECB's warning about liquidity risks from geopolitical shocks represents a significant shift in regulatory focus and highlights emerging vulnerabilities in the global financial system's architecture. While liquidity risk has always been a concern for banks, the specific connection to geopolitical tensions signals a new era where previously reliable financial system stabilizers may become less dependable.

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Deutsche Bank Accused of Hiding Mishaps From Regulators - source wsj.com

Key Points:

Deutsche Bank is facing issues with its internal controls after a former senior operations manager, Noah Ramos, sued the bank alleging it concealed operational mishaps from regulators. These mishaps reportedly led to a $30 million loss in the U.S. division. Ramos claims he urged executives to report operational breaches related to loans to wealthy clients to Federal Reserve regulators, but executives allegedly misrepresented the problems as accounting errors and distributed the losses across other bank businesses to conceal them.

This case exemplifies a particularly dangerous form of operational risk where fundamental banking processes failed without triggering appropriate alerts or responses. The magnitude of the improper accrual ($173 million) leading to a $29.5 million loss signals potentially systemic weaknesses in how payment applications are reconciled and verified. More concerning is the alleged corporate response—characterizing operational failures as accounting errors and dispersing losses to avoid regulatory scrutiny—which, if proven, would indicate a problematic risk culture prioritizing short-term regulatory avoidance over sustainable compliance.

Deutsche Bank has previously faced regulatory action for control deficiencies, resulting in substantial penalties, including a $186 million fine from the Fed in July 2023 for failing to improve control systems, particularly around money-laundering prevention.

A.I. Risk / Technology Risk

SEC Roundtable Reveals Cautious Approach to GenAI Adoption in Finance - source pymnts.com

Key Points:

Despite the AI industry's enthusiastic claims, financial services firms are adopting generative AI cautiously with human oversight still essential for most applications, as revealed at a recent SEC roundtable. ROI calculation challenges persist even as costs decrease, while MIT researchers warn of emerging risks in multi-agent AI systems that traditional risk frameworks cannot adequately address. Rather than pursuing full automation, successful implementation appears to focus on augmenting human capabilities through "human-in-the-loop" approaches, with ongoing collaborative engagement with regulators emerging as a best practice.

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Top Operational Risks for 2025 by Risk.Net - source risk.net 

Key Points:

1. Information security Information security (infosec) tops Risk.net’s poll once again this year, a trend that those tasked with combating cyber threats – forced to consider new angles of attack from an ever-growing pool of criminal actors boosted by technological developments and artificial intelligence – say shows no sign of abating. Jump to category

2. IT disruption 

3. Change management

4. Resilience risk

5. Third-party risk

6. Execution & process errors

7. Regulatory compliance

8. Geopolitical risk

Regulatory News - Fines, Losses, & Rules

Regulatory pressure works: Big Four Auditing Shortfalls Wane in Latest Inspections - source wsj.com 

Key Points:

Audit quality has significantly improved among Big Four accounting firms, with deficiency rates declining to 20% from 26%, indicating enhanced reliability in financial reporting across the banking sector and beyond. PCAOB inspections particularly focused on high-risk areas relevant to banking, including cryptocurrency holdings, complex revenue recognition, and commercial real estate debt valuation.

The Big Four firms collectively audit about 80% of the market capitalization of public companies as of the end of 2024, representing the dominant force in financial statement assurance. Their average deficiency rate over the previous decade was 25%, making the current 20% rate a notable improvement in historical context.

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CCAR Methodology May Give First Glimpse of Fed’s Transparency Drive 30 - source risk.net

Key Points:

The Federal Reserve appears to be moving toward greater transparency in its CCAR methodology, with industry lobbyists focusing particularly on obtaining more detailed information about Global Market Shock scenarios and new private equity treatment that significantly impact capital requirements for large dealers. This evolving regulatory approach may provide bank’s with valuable insights for optimizing capital allocation and risk management.

Risk Data to Geek Out On

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

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

Tax Risk Management: Comprehensive Analysis for Financial Institutions

Tax Risk Management (TRM) is the systematic identification, assessment, and mitigation of risks arising from tax obligations, regulatory compliance, and strategic tax decisions. For financial institutions, TRM safeguards against financial penalties, reputational damage, and operational disruptions while optimizing tax efficiency.

1. Core Principles and Objectives

• Compliance: Ensure adherence to global tax laws (e.g., OECD Pillar 2, FATCA) and reporting standards.

• Strategic Alignment: Integrate tax strategy with business goals and risk appetite.

• Governance: Implement a "three lines of defense" model, segregating responsibilities between business units, risk teams, and audit functions.

Distinct Types of Tax Risks

Interconnection with Other Risks

• AML-Tax Link: Suspicious transaction patterns (e.g., layered corporate structures) may indicate tax evasion or money laundering.

• Market-Tax Link: Tax rate changes (e.g., IRAP reductions in Italy) alter liability structures and capital allocation.

• ESG-Tax Link: Stakeholder demands for transparent tax contributions align with sustainability goals.

2. Implementation in Financial Institutions

Institutional Adaptations

• Banks: Deploy Tax Control Frameworks (TCFs) to automate withholding tax compliance and monitor cross-border payments.

• Investment Firms: Integrate tax due diligence into portfolio stress testing (e.g., assessing tax implications of bond holdings).

• Fintechs: Use AI to track real-time tax law changes across jurisdictions.

Regulatory Landscape

• Basel III/IV: Link capital adequacy ratios to tax risk exposure.

• Pillar 2 Global Minimum Tax: Mandates 15% effective tax rate for multinationals, requiring recalibration of transfer pricing.

• Dodd-Frank/CFTC: Enforce derivatives tax reporting and margin collateralization.

Product-Specific Risks

• Loans: Withholding tax errors on cross-border interest payments.

• Securities: Mismatches in dividend tax treatments between jurisdictions.

• ESG Funds: Tax incentives for green investments vs. penalties for "greenwashing".

3. Contemporary Strategies

Risk Identification & Scoring

• Data Analytics: Use k-means clustering to detect anomalies in VAT/GST filings (e.g., outlier deduction claims)8.

• AI/ML: Predict audit triggers by analyzing historical tax authority challenges69.

Governance Frameworks

• Tax Risk Appetite Statements: Define acceptable risk thresholds (e.g., UK-required public tax strategies).

• Red Line Policies: Automatically reject transactions exceeding predefined aggressiveness thresholds.

Technology Integration

• ERP Systems: Centralize tax data (e.g., Thomson Reuters ONESOURCE reduced JLL’s workload by 60%).

4. Measurement Frameworks

5. Emerging Risks & Digital Shifts

• Digital Taxation: OECD rules on digital service taxes (DSTs) complicate profit allocation.

• Cybersecurity: Ransomware attacks targeting sensitive tax data (e.g., client withholding details).

• ESG Reporting: Tax transparency demands in sustainability reports (e.g., country-by-country disclosures).

6. Best Practices

1. Cross-Functional Collaboration: Involve tax teams in M&A due diligence and product launches.

2. Dynamic Policy Updates: Revise tax risk frameworks biannually to reflect legislative changes.

3. Tech-Driven Automation: Deploy AI for real-time tax code monitoring and robotic process automation (RPA) for filings.

Case Study: Major Global Insurer1

• Challenge: Align tax-risk management with enterprise risk appetite.

• Solution: Workshops to map tax decisions to board-approved risk limits, implementing "red line" policies.

• Outcome: Reduced disputes with tax authorities by 40% and improved audit outcomes.

Pitfalls to Avoid

• Siloed tax teams lacking visibility into business unit transactions17.

• Overreliance on external ratings without internal validation.

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Thank you for reading,

Naeem

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