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Innovation in banking compliance and risk management driving new-age technologies
Innovation in banking compliance and risk management driving new-age technologies

June 8, 2021

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Risk management is inescapable for any banking or financial institution. It has consistently been in the spotlight and every institution strives to practice innovative risk management strategies to maximize the businesses’ return on investment and reduce losses.

Further, with the advancement in technology, the banks have been witnessed an avalanche of regulations and the pressure of complying with them. As a result, banks spend greater time and energy to mitigate risks that further lead to the threat of penalties for non-compliance.

Considering the pace at which the banking industry is undergoing technological innovation, there is a substantial impact on risk management functions. Banks are investing heavily in technology-based infrastructure to leverage the use of risk management capabilities. This has helped the banks and financial institutions in analyzing the weak and strong areas that need to be managed.

AI for regulatory compliance

Regulatory compliances play a crucial role in banks’ risk management processes. Due to the rapidly changing regulatory landscape, the cost of compliance for banks and financial institutions is increasing exponentially. 

Globally banks spend around $270 billion every year on risk and regulatory compliance-related activities, out of which $128 billion/year is their spent-on technology, as per the estimates. To address challenges posed by the new regulatory environment, banks are leveraging Artificial Intelligence to make regulatory calculations and compliance easy-to-manage, interactive, scalable and less costly for their business.

Data analytics for risk detection

The banking institutions produce a large amount of data in the form of banking transactions, customer behaviour, market data, etc. Banks are using exploratory data analytics to analyze and mitigate risks.

This helps in mapping the financial profile of the customer by obtaining deep insights about customer behaviour at a granular level like spending and payment patterns, social media presence and online browsing activity for credit risk decision making. 

Having a robust credit risk management system provides real-time information to banking institutions to detect potential risks, act quicker and mitigate the risks proactively.

So, why do many banks fail to embrace risk management with the same intensity as they chase returns? The answer lies in the inherent conflict between the shareholders versus regulatory expectations for returns on capital employed. 

Shareholders expect an ROE to stay in the high teens, leading to more risky business strategies, whereas the Regulators prefer the safety of depositor’s money. An aggressive business strategy coupled with a poor risk management capability is a sure recipe for disaster.

Technological opportunities in risk management

Banking and financial institutions are responding to risk management practices by integrating institutive technologies. Given the ongoing scenario, banks are capitalizing on new-age technologies to built strong operational risk management and resiliency during the pandemic-induced market slowdown. 

As we age more towards digitization, the integration of technology will play a crucial role in ensuring transparency, accountability, responsiveness and audibility of various regulatory submissions and risk disclosures.

Source: livemint.com


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NatashaSharma

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