Sat, December 02, 2023

The 3 biggest risk factors for banks

Banks and risk factors

Big and small banks have to cope with numerous challenges daily. The financial crisis that occurred in 2008 had a tremendous impact on financial institutions. They had to adapt to the new reality. While many of those changes resulted from new financial regulations designed to prevent another crisis, technological advancements raised customers’ expectations and created new risk factors.

Undoubtedly, banking risk management responsibilities encompass various aspects. Interestingly, changes in banking regulations and reliance on new technologies, bring new challenges in addressing the risks associated with banks.

As stated above, they face risks that extend beyond their depositors’ balances and loan portfolios. Let’s start with cybercrime. Importantly, surveys of bank executives and banking experts list cybercrime as the leading risk for financial institutions.

It is no secret that financial institutions are working hard not to attract unwanted attention. So, when a bank data breach appears in news reports, many of the targeted bank’s customers respond by transferring their accounts to other institutions. Clients grow resentful of financial institutions when it becomes necessary to change bank cards, etc. Moreover, the costs expand beyond those incurred for the re-issuance of new cards. 

Several years ago, the Federal Reserve Bank of New York identified cybersecurity as one of its foremost risk priorities. However, in July 2016, it faced ongoing criticism for having been tricked by hackers into transferring $101 million from Bangladesh Bank to accounts in the Philipines and Sri Lanka on February 4, 2016. 

Hackers gained access to Bangladesh Bank’s computer system with stolen credentials. The fact that they could deceive the New York Fed sends an important message to the banking system about the need to verify credentials used in processing online transactions. 

Banks and authorities 

Let’s discuss another important risk factor. It is worth noting that another significant risk confronting the banking industry is known as conduct risk. Notably, conduct risk concerns the consequences resulting from how financial institutions deliver services to their clients and how those institutions perform in regard to their competitors.

In the wake of the 2008 financial crisis, the CFPB was created to educate and inform people about abusive banking practices. The Consumer Financial Protection Bureau (CFPB) plays an important role in protecting and educating people about various types of financial products, etc.

It is levying significant fines for market abuse and poor conduct. So, organizations should be mindful of the consequences of failure to provide employee awareness programs for avoiding conduct risk. 

We have to mention regulations as well. The increased regulation of the banking industry since 2008 brought risks of misinterpretation of new regulations and risks arising from failure to introduce the necessary changes to keep up with regulatory expectations. 

They must comply with statutory requirements outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Besides, they also must follow regulations established by the CFPB. Consequently, they must devote time, effort, and resources to understanding and complying with these new regulations. 

Unsurprisingly, smaller financial organizations experience greater infrastructure pressures when attempting to keep up with these regulatory changes. As a result, managers must sacrifice time from other tasks and change their focus toward addressing regulatory compliance. 

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