Home / Industry / Banking /  New-age technologies driving innovation in banking compliance and risk management

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.

Alok Tiwari, Co-Founder & CEO Cognext said, "Time and again, banks forget that risk and return are two inseparable parts of banking. The recent risk management failures linked to the collapse of Greensill, a global supply chain financier and Archegos, a multibillion-dollar hedge fund, have resulted in several billion dollars of losses to leading European and Japanese banks. It is interesting to note that in the case of Archegos collapse, banks with better risk management capabilities managed to cut their exposure ahead of time without incurring any losses. The same risk event resulted in entirely different outcomes for different banks.

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.

“Another critical aspect of risk management is about building a risk culture. Most banks have a good news culture means the Board and management always want to hear about good news, whereas risk is all about bad news," he added.

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.

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