Pakistan’s Banking Industry Grapples with Compliance Challenges Amid Global Uncertainty

In today’s rapidly changing global financial landscape, Pakistan’s banking industry is facing unprecedented challenges. The recent rise in interest rates and inflation has exposed banks to new risks that were previously camouflaged.

Unprecedented Challenges

The unprecedented increase in interest rates, coupled with the commodity super-cycle and Ukraine war, has posed significant threats to the stability of the banking system.
Global authorities are proposing new rules aimed at strengthening capital and protecting against operational losses from areas such as cyber breaches and fraud, as well as market losses.

Regulatory Challenges

The move towards stricter regulations raises concerns about the impact on credit risks arising from lending decisions.
Pakistan’s State Bank of Pakistan (SBP) has taken a prudent approach by not allowing exceptions to unrealized market losses on investments available for sale when calculating capital, unlike some international regulators.

New Dimensions in Risk Assessment

The rise of social media and artificial intelligence (AI) is complicating liquidity requirements, causing deposit outflows due to misinformation.
Banks must now consider new dimensions when simulating crises, as simplistic assumptions may not reflect individual bank liquidity risks.

Environmental, social, and governance (ESG) frameworks are becoming increasingly important in risk assessment.
Pakistan’s SBP has recognized the need for ESG consideration, with a roadmap already rolled out to mitigate climate change-related risks.

Leveraging AI Beyond Marketing

The use of AI beyond marketing is crucial, as it can be expanded to include compliance, control, credit, and other critical domains.
This will enable banks to better navigate the challenges posed by the rapidly changing regulatory environment.

Collaborative Approach

As the global banking industry grapples with unconventional risks, it is essential for regulators and financial institutions to work together to craft mitigating strategies that account for bank- specific vulnerabilities and the impact of accounting policies on reported regulatory capital.

Conclusion

In conclusion, Pakistan’s banking industry must adapt to the new reality by embracing innovative solutions such as AI, ESG frameworks, and socially responsible practices. Only then can we ensure the stability and resilience of our financial system in the face of global uncertainty.