Knowledge of financial risk management Advanced Preparation:
This inherent Risk management systems in banks comes from a bank's products and services, customers and entities, and the geographical locations in which the institution and its customers operate.
It concludes with a specific discussion of two important areas: When the Bank Secrecy Act was enacted inthe primary intent was to combat drug trafficking, with regulations focused on the domestic banking system and on cash transactions, which were most often conducted face-to-face.
Regulations address the complex financial services environment that has continued to Risk management systems in banks since the BSA was first enacted; this environment now relies to a large extent on fast-paced, anonymous transactions within a globally intertwined financial system.
Increasingly complex product offerings complicate risk assessment activities, as these offerings, by their very nature, are more difficult to assess than traditional banking products and services.
For example, electronic banking systems, the purpose of which are to expedite the delivery of banking products and services, have replaced traditional face-to-face contact with remote, electronic account opening and transaction initiation.
Likewise, electronic cash, including mobile payments and pre-paid cards, provide similar conveniences but also greater risks associated with reduced transparency of transactions. While these innovations deliver numerous benefits to customers and bankers, the change in delivery systems often increases the risks of what previously were lower-risk services.
For example, online account openings present challenges in verifying the account holder's true identity and geographic origin or business footprint; these challenges are further exacerbated by the almost instantaneous processing and settlement of transactions.
All these issues affect an institution's ability to predict the type and frequency of transactions the customer is likely to make; without a firm understanding of the customer's risk profile, monitoring for suspicious activity and, by extension, the reporting of suspicious activity can be more challenging.
In addition to the fast pace of innovation, banks are facing a sustained low interest rate environment, and many institutions find themselves facing added pressure to offer new and competitive services, sometimes without adequately reviewing and assessing the risk of these services.
Implementation of these products without appropriate vetting can mean that the inherent risk profile of the institution increases without a commensurate enhancement to risk mitigants.
At the same time, the low interest rate environment also introduces pressure to cut costs, and operational areas such as compliance are often prime targets for trimming. At the same time, the consequences of noncompliance have become more severe. It is only after these risks are identified and analyzed that an institution can begin to develop a compliance program tailored to and commensurate with the risk profile of the institution.
Understanding the inherent risk faced by the institution will determine how it approaches the four pillars 2 of BSA compliance. For example, the level of inherent risk should determine 1 the nature and extent of internal controls, 2 the scope of independent testing, 3 the skills and expertise required of the BSA compliance officer, and 4 the focus of and approach to training.
The board of directors and senior management at community banks should develop compliance programs tailored to the specific inherent risks of their institutions. Likewise, the nature and extent of mitigating controls, including investments in infrastructure and human resources, should be commensurate with a bank's risk profile.
Not only has noncompliance in some recent cases resulted in significant fines and penalties, but weak programs can also stall expansionary plans.
In addition to the monetary penalties and fines, these banks incurred significant expenses associated with remediating their compliance programs, such as increases in staffing and investments in technology, as well as related legal expenses.
But even if compliance program shortcomings are not significant enough to warrant monetary penalties, material deficiencies that are deemed to make a program less than satisfactory can curtail an institution's expansionary activities.
The Board of Governors of the Federal Reserve System Board has published a supervisory letter on Section for institutions submitting applications to the Board that states: On a case-by-case basis, depending on information contained in examination reports and obtained from other regulators, further information about the effectiveness of an applicant's anti-money laundering activities may be required from the applicant to complete the Federal Reserve's analysis of an application.
The applications record maintained by the Board and the Reserve Banks should continue to include documentation relating to the review of an applicant's efforts to combat money laundering activities, including information about contacts with other regulators.
Most of the recent high-profile enforcement actions have focused on internal control deficiencies at large, globally active financial institutions. Although not often in the public realm, deficiencies at community banks have also been noted, and similar to findings at the large institutions, weaknesses at smaller institutions often involve a deficient customer risk-rating process.
For both large and small institutions, the ability to identify high-risk customers directly impacts the efficacy of monitoring regimes; if risk identification and follow-through are weak, institutions may fail to file Suspicious Activity Reports when necessary.
The problem often lies in inadequate customer due diligence because banks may not fully understand their customers' business. For example, a money services business MSB engaged solely in payroll check cashing likely poses less risk than an MSB providing multiple lines of products, including high volumes of cross-border money transfers.
Understanding the specifics of the business and making distinctions between high- and low-risk customers are crucial first steps in being able to calibrate risk monitoring and identify and report any suspicious activity.
The first step in understanding the inherent risk is to identify the extent to which these categories present risk for the institution; the second step is to analyze these risks more thoroughly so that the true nature of the risk is known and appropriate controls can be developed.
Specifically, customers, products, and services that obscure financial transparency, allow for anonymity, or include multiple parties along the payment chain are especially vulnerable to money laundering.
For example, financial intermediaries, such as third-party payment processors, MSBs, or foreign correspondents, pose higher risks because banks lack direct access to, or knowledge of, their customers' customers; due diligence and suspicious activity monitoring efforts are thus more challenging and more critical for mitigating risks.
Similarly, prepaid cards and virtual currencies both offer anonymity and can involve many parties, again making it difficult for banks to identify specific customer activity and determine whether that activity is suspicious. Higher-Risk Products and Services Do we have significant volumes of electronic payments, such as wire transfers, ACH, prepaid cards, and remittances?
Do we provide services to third-party payment processors or senders? Higher-Risk Customers and Entities Do we have a significant portfolio of cash-intensive business customers, such as privately owned ATMs or convenience, liquor, or retail stores? Does our customer base include foreign entities, such as financial institutions banks and foreign money service providers, including exchange houses, money transmitters, etc.Credit Risk Rating at Large U.S.
Banks William F. Treacy, of the Board’s Division of Banking Supervision and Regulation, and Mark S. Carey, of.
The courses listed below are, as space is available, open to appropriate staff of the FDIC and partner government regulatory agencies. These courses are not open to the public or staff of private banks. LogicGate is the first agile financial risk management software that adapts as your business changes, allowing you to accurately identify, assess, and monitor business risks.
Credit Risk Management Application for Banks and Credit Unions. Risk Policy, Administration and Monitoring, and more. by Precision Risk Management Systems. . Consumer Compliance Outlook > > Second Quarter Consumer Compliance Outlook: Second Quarter Risk-Focused Consumer Compliance Supervision Program for Community Banks.
The objective of IFC’s Global Risk Management advisory program is to strengthen financial institutions’ risk management capacity and frameworks, loan portfolio monitoring, and nonperforming loan (NPL) management and workouts capacity, while supporting the development of . Journal of Risk and Financial Management (ISSN ; ISSN for printed edition) is an international peer-reviewed open access journal on risk and financial management.
JRFM was formerly edited by Prof. Dr. Raymond A.K. Cox and published by Prof.
Dr. Alan Wong online in one yearly volume from until end Since October , it is published quarterly and online by MDPI.