Risk Headlines

Credit Quality- $280 Billion Risky Loans Flagged Across JP Morgan, Wells Fargo and Bank of America - source dailyhodl.com

Key Points:

The dramatic surge in criticized loans across major U.S. banks, reaching nearly $280 billion, signals a significant deterioration in credit quality and potential systemic risk. The trend is particularly concerning given the triple-digit increases at several tier-one institutions and the fact that even the strongest banks like JPMorgan Chase are seeing substantial growth in at-risk loans. Credit risk management strategies and potential portfolio rebalancing becomes key focus of CRO’s.

• Total criticized loans at major banks reached $279.98B, up from $240.37B end of 2023 - indicates deteriorating credit quality

• JPMorgan's 26.3% YoY increase to $26.01B - suggests rapid risk acceleration at leading institution

• Four tier-one banks showing triple-digit increases - points to systemic risk concerns

• Highest level since 2020 - historical context raises red flags

• Regional banks showing extreme increases (Flagstar at 338.6%) - indicates potential systemic issues

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Accounting Errors Force US Companies to Pull Statements in Record Numbers - source ft.com

Key Points:

The unprecedented increase in financial restatements among public companies signals a critical need to reassess internal controls and audit processes. The combination of remote work challenges, complex accounting standards, and heightened regulatory scrutiny creates significant risks for financial institutions.

This trend requires focus on strengthening financial reporting controls and audit procedures while preparing for potential increased regulatory oversight.

• Record surge in financial restatements (140 companies in first 10 months) - indicates increased regulatory scrutiny and control risks

• Double the restatement rate from four years ago - suggests systemic issues in financial controls

• Major companies involved (Macy's, ADM) - demonstrates no organization is immune

• Remote work impact on audit quality - highlights operational risk considerations

• SEC pushing for more transparent error reporting - signals regulatory focus on financial accuracy

A.I. Risk / Technology Risk

How Financial Services Are Drawing AI Talent - source wsj.com

Key Points:

Banks are successfully positioning themselves as premier destinations for top AI tech talent, evidenced by significant increases in recruitment from elite universities and recognition for AI innovation through patents.

The industry's stability, combined with investments in cutting-edge research departments and academic partnerships, is creating a compelling value proposition that rivals traditional tech companies. This shift presents a unique opportunity to accelerate digital transformation. How long will the banks stay committed to this path will depend on how quickly AI reshapes the financial industry.

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The Financial Stability Implications of AI - source fsb.org

Key Points:

The Financial Stability Board report signals increasing regulatory attention to AI risks in financial services, with particular focus on third-party dependencies, model risk, and new threats from generative AI. Financial institutions should prepare for enhanced oversight while developing robust governance frameworks for AI deployment.

• AI adoption creates critical third-party dependencies requiring oversight

• Generative AI introduces new fraud and market manipulation risks

• Current regulatory frameworks may need enhancement

• Long-term structural market changes require proactive monitoring

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What Does the Data of 12,000 Financial Institutions Reveal About Recordkeeping & Surveillance Priorities - source globalrelay.com

Key Points:

The financial services industry is experiencing a fundamental shift in communication surveillance and recordkeeping requirements, with dramatic increases in WhatsApp and AI monitoring adoption. The regulatory focus has expanded beyond traditional channels to include personal devices, social media, and emerging technologies, while enforcement actions have reached unprecedented levels.

• 258% increase in WhatsApp communication capture - indicates growing regulatory pressure and compliance adaptation

• 400% increase in firms seeking to capture generative AI data - shows emerging technology risk and control needs

• 38% of U.S. firms vs 9% of U.K. firms capturing social media - reveals regulatory jurisdiction impact

• JPMorgan's $350M fine for surveillance gaps - demonstrates severe consequences of control failures

• Significant rise in personal LinkedIn account monitoring (28%) - indicates shift in business communication channels

Regulatory News - Fines, Losses, & Rules

SEC Charges Morgan Stanley $15 Million for Failure to Prevent and Detect its Financial Advisors’ Theft of Investor Funds - source sec.gov 

Key Points:

Morgan Stanley Smith Barney's failure to implement basic controls against unauthorized third-party disbursements resulted in millions being stolen from client accounts through ACH payments and wire transfers. The firm lacked fundamental safeguards, such as screening for matching names between advisors and payment beneficiaries, enabling hundreds of unauthorized transfers over a seven-year period. While MSSB's self-reporting and remediation efforts were considered mitigating factors, the case highlights the critical importance of robust payment controls and supervision systems.

• Policy deficiencies led to significant fraud

• Multiple financial advisors conducted unauthorized ACH transfers and wire transfers

• Lack of basic name-matching controls for ACH payments

• Enforcement action includes $15M penalty plus consultant oversight

• Failures occurred over extended period (2015-2022)

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OCC Acting Comptroller Hsu- On Preventing the Increase of Financial Fraud - source occ.org

Key Points:

The Acting Comptroller's remarks signal a significant shift in regulatory thinking about fraud prevention, emphasizing collaborative action and cultural change over traditional compliance-based approaches. This requires banks to rethink their approach to fraud prevention and invest in both technology and partnerships.

Risk Data to Geek Out On

Basel Committee Publishes Final Guidelines for Counterparty Credit Risk Management - source bis.org

Key Points:

The Basel Committee has issued comprehensive new guidelines for counterparty credit risk management in response to significant industry failures like Archegos Capital.

The guidelines reflect a fundamental shift toward more integrated and dynamic counterparty risk management, recognizing that traditional credit risk approaches are insufficient for modern financial markets. They emphasize the need for banks to combine sophisticated quantitative measurement with strong qualitative oversight, supported by robust data and systems infrastructure. The framework must be both forward-looking and responsive to changing market conditions, with clear governance and accountability at all levels. Banks who achieve these mandates will have the luxury to model this framework across other risk domains.

The guidelines represent a significant raising of supervisory expectations that will require substantial investment in people, processes, and technology. The emphasis on non-bank financial intermediaries and integrated risk management approaches will particularly impact current business models and organizational structures.

Significant Call Outs:

• Integration of market and credit risk disciplines is essential for effective CCR management

• Real-time monitoring and dynamic risk assessment capabilities are critical

• Strong governance and clear accountability must span all levels

• Robust data and systems infrastructure is foundational to success

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Thank you for reading,

Naeem

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