New regulations and guidelines from state and international regulators - BenchMatrix
operational risk management in financial services

New regulations and guidelines from state and international regulators

Banking regulations directly or indirectly impact on individuals and on businesses. All are affected by these regulations and guidelines. But the purpose of these regulations should be security of assets, so to know more about these regulations and guidelines we need to read this article.

How this new regulation will impact?

In the aftermath of the financial crisis and enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010, regulators put forth a substantial number of new or strengthened regulations and guidance documents. Now, after a period of real-world experience with these expanded requirements, some lawmakers and regulators think it’s time to take a step back, evaluate what is and isn’t working, and adjust as necessary.

These themes are playing out both at a legislative level and at the banking regulatory agencies, which have substantial authority to adjust regulations within the confines of existing law. Actions being taken or contemplated include “rightsizing” regulatory requirements, amending requirements perceived overly burdensome in practice, and refining expectations communicated to banks by regulators.

Following the 2018 midterm elections, the democratic party leadership has indicated that the House Financial Services Committee will broadly focus its legislative agenda toward protecting consumers and investors, preserving financial sector stability, and encouraging responsible innovation in financial technology.

A new age of governance:

In recent years, regulators, investors, and institutions have increasingly been focusing on the adequacy of governance at all levels of an organization—from the board and senior management to the business lines and independent risk and control functions. Given the significant challenges of managing a firm of significant size and scale, strong governance is the linchpin for ensuring a business is operating as intended and in the best interests of employees, shareholders, and the broader community.

In recent years, regulators, investors, and institutions have increasingly been focusing on the adequacy of governance at all levels of an organization—from the board and senior management to the business lines and independent risk and control functions. Given the significant challenges of managing a firm of significant size and scale, strong governance is the linchpin for ensuring a business is operating as intended and in the best interests of employees, shareholders, and the broader community.

Overview of banking regulators and key regulations

Bank regulation is a form of government regulation which subject banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulation focusing on key actors in the financial markets, it forms one of the three components of financial law, the other two being case law and self-regulating market practices.

Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Another relevant example for the interconnectedness is that the law of financial industries or financial law focuses on the financial (banking), capital, and insurance markets. Supporters of such regulation often base their arguments on the “too big to fail” notion. This holds that many financial institutions (particularly investment banks with a commercial arm) hold too much control over the economy to fail without enormous consequences. This is the premise for government bailouts, in which government financial assistance is provided to banks or other financial institutions who appear to be on the brink of collapse. The belief is that without this aid, the crippled banks would not only become bankrupt but would create rippling effects throughout the economy leading to systemic failure. Compliance with bank regulations is verified by personnel known as bank examiners.

Operational Risk

Two key risks that all banks face are operational risk and business risk. Every banking transaction involves a number of steps. Most of the time, we fail to appreciate the complex set of steps that goes into every transaction. This is because the transactions complete instantaneously. However, a lot goes on behind the scenes to make our banking transactions easy and quick. As with every process, banks’ operations may not complete as desired if they’re not executed properly. Operational risk can lead to a bank’s collapse.

The closure of First NBC Bank in 2017 is an example of operational risk resulting in a bank’s failure. The regulators seized the bank’s assets after it failed to maintain sound accounting practices. It also fell short in fulfilling its regulatory capital requirements.

How to manage Operational Risk in the banking system?

In the decade since the global financial crisis, banks—and their regulators—have become increasingly mindful of the need to manage risk. However, while banks have developed sophisticated systems for controlling financial risk, they have struggled to deal effectively with operational risk.

Financial risk includes credit risk (the likelihood that borrowers will pay back their loans), market risk (the likelihood that a security will fluctuate in value) and liquidity risk (the ability of a bank to meet its obligations to its depositors and counterparties). Operational risk (OR) is the risk of loss due to errors, breaches, interruptions or damages—either intentional or accidental—caused by people, internal processes, systems or external events.

Many banks have a tough time understanding, measuring and managing the interconnected factors that contribute to operational risk, including human behaviour, organizational processes and IT systems. They find it challenging to create cultural, governance and management structures that can systematically control these risks. Instead of taking a deeply integrated, proactive and long-term approach to ORM, they end up managing operational risk with reactive, short-term measures.

Banks that take a comprehensive approach to ORM recognize four broad areas that need attention. The first is people. Even in a digital age, employees (and the customers with whom they interact) can cause substantial damage when they do things wrong, either by accident or on purpose.

The second area is IT. Systems can be hacked and breached; data can be corrupted or stolen. Systems can slow down or crash, leaving customers unable to access ATMs or mobile apps.

The third area is less tangible than the first two, but no less important: organizational structure.

The fourth area that vexes ORM planners is regulation. Since the global financial crisis, regulators have increased the number and complexity of rules that banks must follow.

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