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Regulatory Compliance in Banking: 5 Steps to Take Now

Roland Alston, Appian
June 15, 2023

The 2020s began with quite a rollercoaster ride for the banking industry, marked by rising interest rates and two of the largest bank failures in U.S. history. Notably, larger, systemically important tier-1 institutions did well. But skyrocketing interest rates pummeled smaller, regional tier-2 banks. Consequently, credit risk will be a critical evaluation for regulators as they look for it on bank balance sheets.

New regulations will call for higher compliance standards, meaning banks will come under much more scrutiny of their processes and decision-making. That will require more transparency and audibility, and that's a problem for organizations with manual processes that sit within many different functions.

The bottom line? Regional banks will likely have to hold a lot more tier-one capital to allay fears about being able to adapt to an environment that fuels rapid changes in deposit accounts. With regional and smaller banks in the U.S. making up over a third of total bank lending, any pullback in credit provisioning could undermine financial stability and growth. In other words, the overall profitability of the U.S. banking system is under enormous pressure. Its a challenging situation that requires careful compliance, risk management, and strategic decision-making.

In this post, we explore five essential steps that bank leaders must take to fortify regulatory compliance and secure sustainable growth and profitability, now and in the future.

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The urgency of regulatory compliance in banking.

Don’t be fooled: Compliance is more than a box-checking exercise. Failure to meet regulatory obligations can have severe consequences, including hefty fines, reputational damage, and loss of business opportunities. In 2022, fines in the banking industry for failing to prevent money laundering and other financial crimes surged by more than 50%, according to the Financial Times.

Five key steps to take.

Compliance is crucial to managing, controlling, and ultimately mitigating risk. It protects customers and establishes stakeholder trust. But compliance in the finance industry’s ever-evolving regulatory landscape demands an agile approach as institutions strive to stay ahead of the curve and adapt to future laws and regulations.

Step 1: Stay informed about regulatory requirements.

For banks, staying on top of regulatory changes is vital for ensuring compliance. The landscape is constantly evolving to address emerging risks and protect stakeholder interests. To stay ahead, banks must become more efficient and agile in how they monitor, track, and adapt to regulatory updates.

Step 2: Conduct a comprehensive assessment of compliance risk.

To effectively manage compliance risks, banks must thoroughly understand their unique vulnerabilities. Conducting a comprehensive assessment of compliance risk helps identify potential areas of non-compliance and assess their impact on the business. By prioritizing risks based on their likelihood and possible consequences, banks can more effectively allocate resources and focus their efforts on high-priority areas.

Step 3: Implement robust compliance policies and procedures.

Well-defined policies and procedures are the foundation of a strong compliance framework and should align with regulatory requirements and industry best practices. Such clear guidelines help ensure that employees understand their critical role in maintaining compliance. It’s also important to establish monitoring and reporting processes to strengthen  accountability across the organization.

Step 4: Implement effective compliance monitoring and testing programs.

Continuous compliance monitoring and testing programs are vital for ensuring ongoing adherence to regulatory requirements. Banks should conduct regular internal audits and regularly test their compliance controls and processes to evaluate their effectiveness.  Such monitoring will help you determine whether or not staff are following compliance controls in their daily activities, to guard against liability and costly regulatory fines.

Niche software and AI tools aid in compliance, but integrating these applications requires a process automation platform. Look for a platform with data fabric capabilities that can orchestrate and connect applications to your existing systems with all of their data, while enabling flexible, reusable workflows that can be tweaked as regulatory demands evolve.

Step 5: Establish a robust system for compliance reporting.

With the help of reliable regulatory compliance technology, banks can generate comprehensive, ongoing reports of where they stand, so they stay on top of changing regulations, play by the rules, and demonstrate compliance. It's all about using the right tools.

An agile compliance reporting system is also essential for effective compliance management. Banks should develop structured frameworks that facilitate the reporting, escalation, and resolution of compliance issues. Such timely, accurate reporting ensures transparency and shows regulatory authorities the bank’s commitment to regulatory compliance.

By following these five steps, banks can establish a solid foundation for compliance, confidently navigate a complex regulatory landscape, and work toward long-term success in a dynamic business environment.

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