As Regulatory Pressures Ease, the Need for Risk Discipline Does Not

Federal banking agencies have recently moved to ease some requirements for financial institutions, giving banks breathing room — but not eliminating the need for disciplined risk oversight.

Indeed, a less prescriptive environment creates more room for judgment and more responsibility on management and the board to identify the risks most likely to affect safety and soundness, reputation and performance.

“Strong corporate governance is the foundation for safe-and-sound operations,” says the Federal Deposit Insurance Corp. Directors should set a clear governance framework and monitor compliance with that framework and with applicable laws and regulations.

Banking leaders will need to keep several risks in view. “Risks don’t disappear simply because oversight has changed,” says Neekis Hammond, vice president of Abrigo Advisory Services. “If anything, risk increases as more pressure is placed on each institution to, in effect, regulate themselves.”

Credit risk is one such risk, notes Kent Kirby, senior consultant for Abrigo. “Credit risk is still a major force, and there are undercurrents I’m not sure most community banks are focused on.”

Rising insurance premiums, shipping costs and artificial intelligence-driven changes to borrower business models can affect repayment capacity. For example, if a law firm uses AI to streamline contract work, it may need less space, leaving a real estate borrower to backfill that tenant.

Relying too heavily on historical assumptions may miss changes until they show up in portfolio performance.

“Many community banks still rely on backward-looking loss experience or are navigating without any forward-looking or scenario-based credit models,” Hammond says. “Those models tell you where losses have been, but not where they could go. The risk is not knowing — and compounding other risks, such as interest rate risk.”

Directors should expect a current view of loss expectations, allowance implications and liquidity strain under multiple scenarios.

Performance risk also deserves attention. Falling rates, funding pressure and margin compression are risks banks should not dismiss, says Dave Koch, director of Abrigo Advisory Services. “Community banks will face exposure to falling interest rates as they have been asked to carry more cash and short-term assets.” If yields fall faster than funding costs, margins can tighten while many institutions still struggle to find stable, lower-cost deposits. Leaders also need a clearer view of where the bank makes or loses money by product and channel.

Risks tied to fraud and anti-money laundering and countering the financing of terrorism (AML/CFT) remain especially important in this environment. “Expectations around both fraud and AML continue to rise… driven by enforcement trends, regulatory guidance and increasingly sophisticated financial crime,” says Terri Luttrell, compliance and engagement director at Abrigo. She points to the 2026 Nacha Fraud Monitoring Rules and the push for programs that detect, investigate and report meaningful suspicious activity.

Kirby adds that AI is changing fraud risk in payment systems. “This is real money going out your door. You need to invest in effective defensive systems.”

Processes are a common area where community banks tend to fall short when self-managing compliance and risk without clear guardrails, Hammond says. “Three areas show up repeatedly: workflows, documentation and consistent accountability.”

Many institutions still treat risk measurement as a regulatory exercise rather than a strategic one, Koch says. In a less prescriptive environment, leaders need to explain how decisions are made, who owns them and whether assumptions are applied consistently.

“Understanding the three to five major risks that can hurt you in the coming 12 to 24 months is a good starting point,” Koch says. “For me, that includes funding stability (including what your depositors’ actual behaviors are), margin compression, credit normalization in key portfolios and operational strain such as thin or aging talent.”

Technology can help, especially when applied to the right problems. “If any credit with an exception requires additional approvals, no amount of automation is going to speed up that process — it’s a bottleneck in a manual world and an automated world,” says Kirby.

AI can also help institutions move beyond static dashboards to ask questions of their data and explore it dynamically. “This kind of curiosity-driven analysis… can uncover insights that might otherwise be missed,” which can be especially valuable for smaller institutions without large analytics teams, Hammond says.

“As technology becomes more advanced, transparency and governance matter more,” Hammond adds. “Models and outputs must remain explainable, auditable, and secure.”

Regulatory pressure may ease, but risk discipline still matters. Boards and executive teams that keep a current view of credit, funding, fraud and operational weaknesses will be better positioned than those mistaking fewer requirements for lower exposure.