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Regulators Ramp Up Scrutiny of Banks Amid Rising Financial Risks

As the banking industry navigates a complex macroeconomic environment marked by rising interest rates, reduced liquidity, and supply chain shocks, regulators are increasing their focus on consumer protection and risk management.

Heightened Regulatory Scrutiny Ahead

According to a recent report, financial institutions can expect heightened scrutiny from regulatory bodies, including the Consumer Financial Protection Bureau (CFPB) and federal banking agencies. The CFPB is expected to prioritize examinations of product lines that have not received recent scrutiny, such as deposits, as well as the use of artificial intelligence (AI) in loan decision-making and payment systems.

Compliance Management Systems

To better prepare for these increased regulatory expectations, banks are advised to “level up” their compliance management systems, particularly technology companies. The CFPB’s investigation authority and exigent supervisory authority will also bring added pressure on institutions.

Focus on Consumer Protection and Risk Management

In addition to consumer protection concerns, regulators are also focused on the potential unintended consequences of deploying new technologies, such as AI. Banks must be aware of these risks and implement enhanced controls, including those using AI, to mitigate potential harm to consumers.

Proposed Basel III Reforms

The proposed Basel III reforms, aimed at improving the safety of the banking sector, will also have a significant impact on institutions. The finalization of international standards and new long-term debt requirements for insured depository institutions over $100 billion will disproportionately affect large regional banks.

Prioritizing Strategic Planning and Risk Management

As financial risks continue to be a top concern for regulators and banks alike, institutions must prioritize strategic planning, risk management processes, and governance frameworks to stay ahead of the curve. With increased regulatory scrutiny on the horizon, it is essential that banks invest in second- and third-line capabilities to meet new expectations.

Key Takeaways

Regulators are increasing their focus on consumer protection and risk management.
Banks must prioritize compliance management systems and implement enhanced controls.
Proposed Basel III reforms will have a significant impact on institutions, particularly large regional banks.
Institutions must invest in second- and third-line capabilities to meet new regulatory expectations.

Shifts in Regulatory Frameworks and Consumer Safeguards Create Expanding Challenges
Cascading Obligations and Expanding the Regulatory Perimeter

Source

2024 Banking Regulatory Outlook Report