• Compliance/Regulatory Risk

    Compliance Risk arises due to non-compliance with regulatory standards and consequent levy of penalties, fines on banks or facing any other regulatory action by the appropriate authority or the Central Bank. Compliance with regulatory requirements is critical for long-term survival of a bank and to retain the banking license.

    Banks should have enough liquidity with them to meet the regulatory standards and maintain the minimum regulatory reserve requirements set by the regulatory authority. If the regulatory requirements are changed, banks have to oblige the new requirements as well within the given time frame without fail. Failure to meet the regulatory requirements can lead to hefty fine or cancellation of banking license by the regulatory authority. Thus it has significant risk to the banking business.

    The regulatory risk may still arise due to the following reasons:

    • Lack of proper compliance organization
    • Wrong Compliance Interpretation
    • Absence of Compliance reviews

    Lack of proper compliance organization

    Banks have to set up proper compliance department in order to track all compliance requirements, seek clarity of those requirements and to communicate such requirements to various business units, responsible staff and locations. Along with this, interaction with regulatory authority and training all the required staffs are also considered to main responsibilities of the compliance department.

    Absence of such department can lead to huge misunderstanding and possess high risk for the banks for possible fine or license cancellation. If one bank operates in multiple countries, they have to keep separate compliance department for each country to take care of various regulatory requirements in order to avoid any possible compliance risk.

    Wrong Compliance Interpretation

    Compliance risk can also arise from wrong interpretation of some regulatory requirements. Some organizations follow more stringent regulatory practices which sometime can go against the regulatory requirements and increases compliance risk. Sometime absence of expert compliance or legal official can lead to wrong interpretation of the compliance requirements.

    Absence of Compliance reviews

    Most of the regulatory requirements mandate proper review by outside committee to make them more effective and compulsory for the banks. Sometimes banks do the compliance review done by outside parties in order to make sure that all the regulatory requirements are satisfied and all the necessary measures are in place. If the banks fail to have proper review and compliance confirmation done regularly, it can expose the banks with possible compliance or regulatory risks.

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