Risk Headlines

Regional Banks Earnings Squeezed By Higher Rates and Looming CRE Loan Losses - source wsj.com

Key Points:

The regional banks' business model is under pressure, with threats from high interest rates and looming credit risks. With their heavy reliance on interest income from loans and deposits, these banks are seeing steep profit declines as they are forced to pay more for deposits. Also, many regional banks have a high concentration in commercial real estate loans, which poses a significant risk of credit losses as property values decline post-pandemic.

Regulators are closely monitoring these risks and are considering stricter capital rules in the wake of recent bank failures, which would further constrain regional banks. Banks that have diversified business models will likely weather the storms ahead.

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Bank CEOs Herald AI - Reshaping Future of Finance - source qz.com

Key Points:

The rise of AI is ushering in a new competitive landscape in banking, widening the gap between tech-savvy first movers and laggards. This raises the stakes for banks to rapidly cultivate the talent, infrastructure, and innovation culture necessary to harness AI technologies effectively. 

The article underscores the momentous impact of AI on banking, with the key question being how proficiently each institution's leadership can navigate the opportunities and challenges AI will bring. The CEOs interviewed consistently view AI as a pivotal technology that will transform their business to an extent not seen since the advent of the internet and the existential threat it could pose to banks that fail to adapt and leverage its capabilities.

A.I. Risk / Technology Risk

Data Privacy Considerations for Employees Facing AI Technologies - source ankura.com

Key Points:

As AI becomes more integrated into the Firm’s operations, it is critical to proactively address potential privacy risks to employee and customer data through deliberate policies, access restrictions, anonymization, and controlled rollouts.

• Proactive policy development and access controls are essential

• Data protection measures like anonymization enable AI benefits while mitigating risks

• Controlled pilot programs allow for assessing impacts before broad implementation

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International Basel Committee on Banking Supervision Tells Banks to Anticipate Risks From Using AI - source reuters.com

Key Points:

Basel committee emphasizes the importance of banks anticipating and managing risks associated with the use of AI and ML in their operations. While the impact of these technologies on global financial stability remains uncertain, they have the potential to amplify future banking crises if not properly governed. Bank’s risk management teams will be crucial in providing day to day strategy in mitigating these unknown risk. The increasing digital innovation in the financial sector necessitates collaboration among central banks and regulators to establish an appropriate regulatory framework. The upcoming Basel Committee report on the digitalization of finance will provide valuable insights and guidance for banks and regulators alike.

Regulatory News - Fines, Losses, & Rules

US Regulators Mulling Bid to Limit Bonuses for Wall Street Execs - source wsj.com

Key Points:

The proposed regulations aim to address the misalignment of incentives between bank executives and the long-term stability of their institutions. By requiring deferred compensation and increasing clawbacks, regulators hope to encourage more prudent risk management and discourage excessive risk-taking. Six agencies, including the Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC), are involved in developing the plan, and the measure could be proposed fairly soon.

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Financial Services Prepare for Regulatory Refresh - source deloitte.wjs.com

Key Points:

Financial Firms must navigate a rapidly evolving regulatory landscape, with heightened oversight, new safety and soundness rules, modernized consumer regulations, and the need for proactive management to remain compliant and competitive.

• Regulatory changes will have significant operational and strategic impacts

• Proactive planning and resource allocation are essential

• Technology and partnerships must be carefully evaluated to achieve agile and robust risk management practices 

• Opportunities may arise for well-prepared institutions

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Financial Conduct Authority (FCA) helps Launch AI Hub to Assist On Regulation - source fstech.co.uk

Key Points:

The FCA's involvement in a pilot scheme aimed at guiding AI developers to meet regulatory standards, highlights the importance of proactive regulatory oversight and collaboration between innovators and regulators in managing AI-related risks. As AI becomes increasingly integrated into banking processes, from customer service to risk assessment and fraud detection, ensuring compliance with regulatory standards is paramount.

Risk Data to Geek Out On

Technology Risk Management Overview - source riskonq.com

Key Points:

Here is general structure designed to identify, assess, control, and monitor the technology-related threats and vulnerabilities that could disrupt a bank's operations and objectives. AI platforms can utilize this structure but there are additional elements that will likely be required as the technology becomes operationalized.

Governance
Defines roles and responsibilities for overseeing technology risk. Ensures that technology decisions align with the bank's risk appetite and that resources are allocated to manage technology risk effectively.

• Risk Identification & Assessment
  Systematically identifies and catalogs potential technology risks, like cybersecurity breaches or system failures. Analyzes the likelihood and potential impact of these risks.

• Risk Mitigation & Control
  Implements safeguards to reduce the likelihood or impact of identified risks. Includes technical controls (e.g., firewalls, encryption) and procedural controls (e.g., access management, incident response plans).

• Monitoring and Reporting
  Tracks key indicators to provide visibility into the bank's changing technology risk profile. Reports risk information to management and the board for informed decision-making.

• Three Lines of Defense: A model ensuring different layers of risk ownership: (1) Business/Tech Units, (2) Risk Management Function, (3) Internal Audit.

• Technology Risk Taxonomy: A structured way to categorize technology risks (e.g., cyber, operational, vendor, strategic, etc.).

• Risk Control Self-Assessments (RCSAs): Tools used by business units to identify and rate their own technology risks.

• Key Risk Indicators (KRIs): Metrics used to track exposure to specific technology risks.

• Scenario Analysis: Examines how severe but plausible events could impact the bank, aiding in stress testing and resilience planning.

• Policies and Standards: Formal guidelines and minimum controls for managing technology risk.

• Security Architecture: Design of the bank's cybersecurity defenses, layering technology, processes, and people.

• Vendor Risk Management: Processes to assess and manage risks from third-party technology providers.

• Business Continuity Planning & Disaster Recovery: Plans to minimize disruption and recover critical operations after a technology incident or outage.

• Risk Dashboards and Reports: Tools to visualize and communicate risk information to stakeholders.

• Incident Management: Processes for responding to, investigating, and learning from technology incidents.

• Regulatory Reporting: Meeting the technology risk reporting requirements set by banking regulators.

Key Principles

• Alignment to Business Objectives: The risk framework supports the bank's overall goals and growth plans while managing risk effectively.

• Risk-Based Approach: Resources focus on the highest priority risks with the potential to cause the most significant impact.

• Continuous Improvement: The framework evolves with technology and the threat landscape to maintain effectiveness.

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Thank you for reading,

Naeem

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