Potential Risks for Banks

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Legal risk:
Legal risk means that the loss can result from the ambiguity in a misunderstanding of, or indifference to the way the law and regulation apply to the business, its processes, its relationships, and services. The legal risk occurs because of unenforceable contracts, adverse judgments, or lawsuits that can disrupt the operations or condition of a banking organization. One example is that of Guaranty Bank (Texas) bank whose charter required it to keep 70% of its assets in housing-related investments. In 2009 the Office of Thrift Supervision compelled the bank to take a $1.5 billion writedown on the mortgage-backed securities it held. The bank stated that it was too undercapitalized to continue. There was reputational loss and the bank failed. Implementation of measures to ensure that it is compliant with regulatory requirements is that the in-house legal counsel should have detailed and continuous training of relevant laws, legal counsel should be client-oriented, and understand the risks that need to be mitigated. To implement legal risk management reporting lines for internal and external legal counsel should be set up and communicated, standards for consisting advice should be instituted, Also, procedures should be in place to monitor if the advice given has been followed and if any condition or qualifications have been correctly dealt with. Most important control functions should be in place to ensure that its role in reviewing the compliance programs in place.

Compliance Risk:
Compliance risk in banking and insurance is the risk to capital or earnings that occurs from violations or non-conformance with rules & regulations, laws, codes of conduct, ethics, or customer relationships. Compliance risk also includes exposure to material loss, forfeiture, and legal penalties because the bank has not acted in compliance with industry regulation, laws, internal practices, or prescribed best practices. An example of a bank that succumbed to compliance risk and had to be closed was the Am Trust Bank, Cleveland, Ohio on December 4, 2009. Implementing risk management for compliance risk is mainly related to third parties, understanding enforcement policies, and building a culture of ethics and compliance with the law. The compliance efforts should be monitored; Also, the management must proactively monitor changes in rules and regulations. For example, the recent COVID-19 pandemic triggered new rules such as ...