What is Risk and Compliance in Finance? - GRM Institute

What is Risk and Compliance in Finance?


Banks and financial institutions became a topic of great focus after the Great Depression of 1929. The supply of money and monitoring of credit within the economy brought many rules and regulations so that the common man can be protected. To manage such complexities of the banking world, it became important to make sure that the risk and compliance of the banking industry is managed properly. This led to the set-up of regulatory agencies at the national and state levels. Banks have certain requirements, restrictions, and guidelines due to banking and government regulations. These regulations are very important to maintain the soundness and integrity of the financial system. Instability of banks as well as their important role in the economy makes the banking industry thoroughly regulated. Another main reason of the banking industry being thoroughly regulated is that governments don’t want the banking system of their country to fail.

Money lending and business credit is a major risk in the finance industry. Due to this, there was an increase in rules and regulations so that the banks are able to fulfill their part in building the economy. The risk and compliance in the current state of affairs have become onerous for banking institutions and it is important to have proper governance, risk, and compliance in place.

In the recent past, a good amount of changes have come up such as the Sarbanes-Oxley Act, Consumer Privacy, Anti-Money Laundering, Basel II, and SAS 70. These regulations make sure that each bank look at their overall governance, risk, and compliance objectives, evaluate their long-term strategy, and make sustainable GRC to support these goals.

The finance industry is also facing new risks due to the explosion of business and growth in technology. These changes have brought huge economic growth along with a multitude of risks causing a change in the approach towards risk management. The customer and investors are safeguarded due to the introduction of standardized risk management. Business process outsourcing brings external risks into the banks. The banks need to manage risks with their outsourcing partners.

The banks also need to manage risks in developing markets which brings up a lot of political, economic, and operating risks. Another focus of banks is on risks related to data and customer privacy. The introduction of electronic banking and Know Your Customer, Acts related to data privacy has brought new risks in the finance industry which should be managed properly.

The effectiveness of the compliance can be increased by taking an integrated GRC process which can help in reducing the compliance cost. It can also help in a cross-organizational risk management approach. This integrated approach related to risk and compliance can help a particular department, banks and financial institutions should realize that such an approach can benefit the entire enterprise. This can help the banks to increase shareholder value through effective governance of risk and compliance management. Also, a preventive approach towards risk management and proactive identification and tracking can lead to better operating performance.

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