2024: Another Year of Regulatory Intensity

Banks can expect the regulatory intensity sparked by last year’s industry turmoil to continue in 2024, driven by the federal agencies’ commitment to addressing key priorities before the fall election. This year will feature a heightened focus on credit quality, concentration risk, liquidity, and stress analyses, particularly for banks with exposures to commercial real estate and other high-risk portfolios such as oil & gas.

The use of stress testing scenarios will be crucial in assessing how escalating operating and borrowing costs are impacting retail and commercial borrowers. Attention will also be directed towards the accuracy of risk ratings, portfolios experiencing high growth and the introduction of new products ¾ especially those offered through fintech partners and other third parties.

Change management processes are poised to undergo heightened scrutiny, particularly for banking institutions going through substantial transformations in leadership, operations, risk-management frameworks, technological integrations, and business activities. This vigilance will extend to the engagement of third-party service providers supporting critical functions.

The increasing popularity of person-to-person payments and the rise of banking as a service platforms will compel regulators to scrutinize banks’ adherence to anti-money laundering, know- your-customer and Office of Foreign Assets Control compliance rules, as well as internal controls, overdraft compliance, fraud mitigation and error resolution.

The focus on third-party risk management will persist as well, with an emphasis on ensuring that banks validate controls and have robust data protections in place. Financial models and data analytics, which garnered considerable attention in 2023, will remain in the regulatory spotlight with an amplified emphasis on modeling risk as the institution grows. This may appear daunting for many banks but can be straightforward to address and will evolve over time.

Regulators also are set to intensify their scrutiny of bank strategies, focusing much of their attention on risk governance and control functions. They will likely pay special attention to the increasing integration of artificial intelligence and blockchain technologies into banking operations, demanding that institutions defend these innovative projects and associated partnerships.

New regulatory initiatives will add further complexity to a full compliance calendar.  For example, the Corporate Transparency Act, which took effect at the beginning of the year, requires banks to disclose more information about beneficial owners to federal agencies. The Consumer Financial Protection Bureau’s proposed rule on personal financial data rights would require banks to share more financial and account data with customers.

As regulators increasingly lean on audit, credit risk review and risk-management processes, new measures will likely be introduced to validate the reliability of those functions. Despite the prevailing regulatory fatigue affecting banks, 2024 will see more M&A-related dialogue. While   capital availability and the regulatory appetite for approving mergers are uncertain, banks cannot ignore the industry’s ongoing consolidation.

As financial institutions navigate the rapidly changing regulatory terrain, advisors with expertise in capital markets, regulatory affairs and risk management will play a pivotal role as sources of strategic insight, tactical guidance and resources. For those organizations, success will be driven by the proficiency and capabilities they possess to help institutions survive and thrive in a complex and fast-changing industry.