What are the risks in banking?
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Banking involves various risks, including regulatory, operational, and reputational risks.
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Regulatory Risks: Financial institutions often face strict regulations, especially post-9/11. These regulations aim to prevent money laundering and financing of illicit activities. Banks must assess risks in handling transactions, often leading to "de-risking," where banks avoid customers or regions perceived as high-risk, such as conflict zones. This can negatively impact innocent customers needing access to financial services, such as diaspora communities trying to remit money back home 1 .
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Operational Risks: Mismanagement and internal policies can also introduce risks. For instance, ambiguity in implementing rules can result in counterproductive actions. Jordan Harbinger shared an experience where the enforcement of banking rules led to an absurd scenario where he was advised to evade regulations by simply avoiding visible cash handling, highlighting flaws within operational risk management 2 .
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Reputational Risks: Reputational risk arises when banks are involved in scandals or regulatory non-compliance. Cases like the Wells Fargo scandal, where systemic fraud was revealed, involved large fines but no criminal penalties for individuals. This "fraud budget" approach, where fines are treated as a cost of doing business, corrodes public trust and highlights the risks associated with corporate governance 3 .
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Market and Sanctions Risks: International banking also faces market and sanctions risks. Banks have to navigate complex international sanctions, ensuring they do not facilitate illicit activities. Compliance with global sanctions can be tricky, requiring thorough investigation and enforcement to avoid significant penalties and loss of trust among international partners 4 .
Understanding these risks is critical for financial institutions to maintain regulatory compliance, operational integrity, and a good reputation in the market.
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