Integrating Compliance Framework Essential for Effective Risk Management in Modern Banking

Banks Must Align Operational-Risk View with Compliance Functions to Ensure Comprehensive Risk Oversight

The regulatory landscape has undergone significant changes, forcing banks to adapt and evolve their risk management strategies. One crucial aspect of this transformation is the integration of compliance frameworks into operational-risk views. This move offers numerous benefits, including comprehensive risk oversight, efficiency, and a competitive advantage.

Gaining a True Understanding of Risks

Integrating compliance management with operational-risk monitoring enables banks to gain a true understanding of their portfolio of risks, ensuring no material risk is left unattended. This alignment also reduces the burden on both business and control functions, minimizing duplicative efforts and promoting a risk-based allocation of resources.

Practical Steps for Integration

To achieve this integration, financial institutions must take the following practical steps:

• Develop a Single Inventory: Create a single inventory of operational and compliance risks to ensure a comprehensive understanding of material risks.
• Standardize Taxonomies: Develop standardized taxonomies for risk, process, product, and controls to facilitate communication and collaboration across functions.
• Coordinate Risk Assessment and Remediation: Coordinate risk assessment, remediation, and reporting methodologies to reduce duplication and promote efficiency.
• Define Clear Roles and Responsibilities: Define clear roles and responsibilities between risk and control functions to ensure effective accountability.
• Establish Integrated Training and Communication Programs: Develop integrated training and communication programs to educate stakeholders on the importance of compliance and operational-risk management.
• Develop Governance Processes and Structures: Establish governance processes and structures that span across risk and support functions to promote collaboration and oversight.

Rethinking Compliance Functions

Banks are rethinking the organizational structure of their compliance functions, with a recent trend being the migration of compliance to a risk organization. This reinforces the view of compliance as a risk similar to operational risk.

Measuring Progress

To measure progress on this journey, a ten-point scorecard has been developed, focusing on key outcomes such as demonstrated focus on compliance, integrated risk views, and clear tone from the top. By applying this scorecard, banks can track their transformation and identify areas for improvement.

Conclusion

The integration of compliance frameworks into operational-risk views offers a significant opportunity for banks to get ahead of the regulatory curve, delivering better oversight while increasing efficiency. Those that successfully make this shift will enjoy a distinctive source of competitive advantage, enabling them to deliver better service, reduce structural costs, and significantly de-risk their operations.

Quote: “The integration of compliance frameworks into operational-risk views is essential for effective risk management in modern banking. By aligning these functions, banks can gain a comprehensive understanding of their risks and respond more efficiently to changing regulatory requirements.” - [Name], Risk Management Expert