Welcome back to the Risk Queue! Critical developments transforming the risk landscape this week as U.S. regulators poised to announce major cuts to bank capital requirements, Citigroup faces a revived $1B fraud lawsuit, generative AI introduces novel security challenges requiring strategic governance, and plus more.

-From Naeem, CEO & Founder - Risk On Q

In today’s Risk Queue:

• US is potentially freeing billions in capital

• Citigroup must face $1B lawsuit over Mexican oil company fraud

• Generative AI creates new risk vectors requiring specialized governance

• Audit committees prioritize cybersecurity, ERM, and talent management

• NY Attorney General sues Capital One after CFPB drops similar case

• Deep dive: Compliance risk's evolution from a checkbox function to a strategic imperative

Risk Headlines 

Risk Headlines

US Set to Cut Capital Requirements for Banks  - source reuters.com

U.S. regulators are reportedly preparing to announce a significant reduction to banks' supplementary leverage ratio requirements in the coming months, representing one of the largest cuts to bank capital requirements in over a decade.

This regulatory easing would free up significant capital currently held against low-risk assets like Treasury securities, potentially enhancing banks’ lending capacity, improving Treasury market liquidity, and increasing profitability through more efficient capital deployment.

Key Points:

• Banks would be able to redeploy capital currently held against low-risk assets

• Change aims to improve bank participation in Treasury markets

• Represents one of the largest regulatory easings in over a decade

• Banks could see increased profitability through more efficient capital allocation

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Citigroup Must Face $1 Billion Lawsuit for Fraud - source usnews.com

A federal appeals court has revived a $1 billion lawsuit against Citigroup, alleging the bank knowingly aided fraud at Mexican oil services company Oceanografia through its Banamex subsidiary, advancing $3.3 billion despite awareness of excessive debt and forged documentation.

Key Points:

• Legal risk: Citigroup faces revived $1B lawsuit for allegedly aiding fraud

• Operational risk: Failures in subsidiary oversight and cross-border lending controls

• Compliance risk: Allegations of knowing about fraudulent activities for years

• Reputational damage: High-profile case involving employee terminations and criminal liability

• Financial impact: Potential $1B+ liability plus previous $4.75M SEC fine

A.I. Risk / Technology Risk

A.I. Risk / Technology Risk

Generative AI Risks and How to Manage Them - source dekuitte.com

As banking increasingly integrates generative AI, your institution faces a complex risk landscape requiring strategic governance beyond conventional cybersecurity, including protection against novel threats like prompt injections and AI-generated impersonation that could compromise customer accounts and financial data.

Employee use of unauthorized generative AI tools presents an immediate vulnerability for sensitive customer information, while evolving global regulations create compliance uncertainty that demands proactive monitoring.

Successfully managing these risks requires implementing specialized guardrails, enhanced model governance, and modernized security frameworks that can adapt to emerging attack vectors unique to generative AI systems.

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Demystifying AI for Finance Leaders: Strategies for Effective Adoption - source cfodive.com

The article presents AI adoption as a journey of strategic evolution rather than technological revolution, emphasizing how finance leaders can leverage existing systems and targeted use cases to overcome implementation barriers while generating measurable value.

This pragmatic approach acknowledges the reality that successful AI integration depends less on acquiring cutting-edge technology and more on thoughtful application to specific business problems.

Regulatory News - Fines, Losses, & Rules

Regulatory News - Fines, Losses, & Rules

Audit Committee Practices Report: Common Threads Across Audit Committees - source deloitte.com

The 2025 Audit Committee Practices Report reveals that while cybersecurity continues to dominate audit committee agendas across industries, effective oversight requires balancing this priority with other critical areas like enterprise risk management and talent management.

Key Points:

• Cybersecurity remains the dominant concern for audit committees, with 93% ranking it among their top three priorities and 71% including it on quarterly agendas

• ERM oversight varies by industry, with financial services companies preferring dedicated risk committees (48%) while other industries primarily use audit committees (63%)

• Finance and internal audit talent has emerged as a critical priority, with 92% of respondents indicating it's a primary audit committee responsibility

• Audit committee effectiveness is an ongoing concern, with only one-third of respondents saying their committee is effective as is

• AI governance is growing in importance, while ESG reporting priorities have declined significantly

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New York AG Sues Capital One after CFPB Drops Similar Case - source cnbc.com

The lawsuit against Capital One by New York's Attorney General alleging that the bank concealed a higher-yield savings product from existing customers while freezing their rates at substantially lower levels represents a significant regulatory and reputational threat that all banks should monitor closely.

Key Points:

• The regulatory pendulum swing between federal and state enforcement creates complex compliance challenges

• Product innovation requires thoughtful transition strategies that prioritize existing customer interests

• Disclosure standards are shifting from technical compliance toward broader transparency expectations

• Employee guidance on customer communications can become key evidence in regulatory actions

Geek Out On Risk Data

Risk Management

Managing Compliance Risk: A Key Subset of Non-Financial Risk - riskonq.com

This week, we’re turning our attention to Compliance Risk. Last week, we defined Operational Risk as a Non-Financial Risk type. As we will see, the range of non-financial risks that banks must manage is even broader than their financial risks.

We will continue our focus on non-financial risk types to deepen our understanding and explore how they fit into the broader risk management ecosystem within the financial sector.

Compliance Risk Management: Comprehensive Analysis for Financial Institutions

What is Compliance Risk?

Compliance Risk is the potential for legal or regulatory sanctions, material financial loss, or reputational damage that a financial institution may suffer as a result of its failure to comply with applicable laws, regulations, codes of conduct, or standards of practice.

It stems not only from intentional breaches but also from oversight, ineffective controls, or a failure to keep pace with regulatory change. Unlike market or credit risk, which have clearer financial markers, compliance risk often materializes through enforcement actions, fines, or lasting reputational harm.

How Does It Differ From or Interact With Other Risks?

• Operational Risk: Compliance failures are often classified as operational incidents—due to failed processes or systems.

• Reputational Risk: A breach can erode trust among customers, regulators, and investors.

• Strategic Risk: Misjudging regulatory trends can derail products or expansion plans.

• Legal Risk: Overlaps directly, as legal exposure is a core outcome of non-compliance.

Why Is It Important for Financial Institutions Today?

• Regulatory scrutiny is intensifying, particularly around AML, consumer protection, cybersecurity, and ESG disclosures.

• Costs of non-compliance are growing—U.S. financial firms have paid over $80 billion in fines since 2008.

• Regulations are multiplying and shifting, especially with digital innovation and global expansion.

• Culture and governance failures are now core focus areas for regulators and stakeholders alike.

Key Risk Categories or Sources

1. Regulatory Compliance Failures

• Inadequate adherence to banking, securities, or consumer laws (e.g., Bank Secrecy Act, Reg Z).

• Example: A bank failing to file Suspicious Activity Reports (SARs) under AML obligations.

2. Conduct & Ethics Violations

• Mis-selling of products, insider trading, or conflicts of interest.

• Example: Wealth managers providing unsuitable investment advice to retail clients.

3. Data Privacy & Cyber Compliance

• Violations of data protection laws like GDPR or GLBA.

• Example: Unauthorized data sharing triggering regulatory investigations.

4. Licensing & Registration Gaps

• Operating in jurisdictions or products without proper approvals.

• Example: A fintech launching lending services without state-level licenses.

5. Third-Party Risk & Outsourcing

• Vendors or affiliates failing to comply with applicable laws on your behalf.

• Example: Call centers overseas mishandling customer data, causing compliance exposure.

Financial Institution Context

How Compliance Risk Appears Across Institutions:

Most Affected Products/Services:

• Retail lending & credit cards

• Investment advisory

• Cross-border payments

• Automated or AI-powered decisioning tools

• Cryptocurrency and digital assets

Regulatory Environment

Key U.S. Regulatory Agencies:

• OCC – Supervises national banks; focuses on safety, soundness, and consumer protection.

• Federal Reserve – Oversees bank holding companies and monetary policy impacts.

• FDIC – Supervises state-chartered banks, especially around resolution and deposit insurance.

• SEC & FINRA – Oversee securities markets, broker-dealers, investment advisers.

• CFPB – Consumer protection enforcer for fair lending, UDAAP, and servicing rules.

• OFAC – Sanctions compliance and cross-border payment enforcement.

Global Frameworks to Watch:

• Basel III – Regulatory capital and supervisory guidelines (compliance risk tied to operational risk capital).

• DORA (EU) – Digital Operational Resilience Act for ICT risk compliance.

• EBA/ESMA – Risk-based guidance on outsourcing, ESG, crypto-asset compliance.

Risk Management Strategies

Traditional Approaches:

• Code of Conduct & Ethics

• Policy frameworks aligned to each regulatory obligation

• Compliance Training & Certification

• Internal audit & regulatory examinations

• Control testing & issue tracking systems

Modern Tools & Technologies:

• RegTech platforms for automated monitoring, testing, and reporting

• AI/ML for pattern recognition in transaction monitoring or policy violations

• Natural Language Processing (NLP) for parsing and interpreting new regulatory texts

• Real-time dashboards and integrated GRC (Governance, Risk & Compliance) systems

Emerging Trends & Innovation

• AI & Algorithmic Compliance: Scrutiny of “black box” AI decision-making in lending and underwriting.

• ESG Disclosures: Rising expectations for accurate, verifiable sustainability claims.

• Crypto & Digital Assets: Compliance around custody, AML, and investor protection remains fluid.

• Remote Work & Surveillance: New exposure due to distributed workforce monitoring challenges.

• Global Convergence: U.S. firms with overseas operations must comply with GDPR, MiFID II, etc.

Measurement & Monitoring

Key Metrics & Indicators:

• Regulatory breaches or fines (frequency and materiality)

• Control testing success/failure rates

• Percentage of staff completing compliance training

• Number of outstanding issues or regulatory findings

• Audit cycle performance and issue remediation timeframes

Governance Frameworks:

• Three Lines of Defense model

• Compliance Risk Assessments (CRAs)

• Issue Management and Reporting Dashboards

• Board- and committee-level oversight structures

Actionable Insights & Best Practices

✅ Success Factors:

• Embed compliance early in product and business design (“compliance by design”)

• Tone from the top—Visible executive support for integrity and accountability

• Keep pace with change using real-time regulatory intelligence tools

• Invest in culture—Employees should feel empowered to raise concerns

⚠️ Common Pitfalls:

• Underestimating third-party and outsourcing risk

• Compliance operating in isolation from business teams

• Reactive compliance rather than anticipatory governance

• Failing to document decisions, assumptions, or controls

🏆 Real-World Example:

A mid-sized regional bank deployed AI-based monitoring to flag potential Fair Lending violations by analyzing mortgage denial rates across zip codes. Early detection helped avoid a public enforcement action and improved internal controls.

📌 Bottom Line:
In an era of increasing complexity and accountability, compliance risk is no longer just a check-the-box function—it is a strategic imperative. Financial institutions that invest in proactive, tech-enabled compliance frameworks will be better positioned to compete, protect, and adapt.

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Thank you for reading.

Naeem

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