2023 banking regulatory outlook

Insights on key regulatory developments and trends

The disruptive factors of 2022, such as high inflation, interest rate volatility, the Russia-Ukraine conflict, lingering effects of the pandemic, stock and bond market downturns, and events in the crypto asset markets, have influenced banking regulatory perspectives and will likely impact the direction banking regulations will take in 2023. Our outlook explores what you should expect and how best to prepare for anticipated regulatory change.

‘Still work to do’ to meet core and emerging banking supervision and regulation expectations:

Onsite examinations are returning in full swing, following a respite that occurred during the height of the pandemic. From the Federal Reserve Board of Governors’ (FRB) perspective, banks still have “work to do” to meet supervisory expectations, especially in the area of governance and controls. Elements of governance and controls are also emphasized by the Office of the Comptroller of the Currency (OCC) and deemed priority objectives for 2023. Outside stated priorities and expressed expectations, the FRB, OCC, Federal Deposit Insurance Corporation (FDIC), and Consumer Financial Protection Bureau (CFPB) will inevitably assess banks’ compliance and risk management frameworks during the normal course of supervision.

Against this backdrop, our 2023 banking regulatory outlook will reflect on substantial developments in 2022 and provide a forward-looking view on possible 2023 regulatory actions across the following key areas:

2023 Banking Regulatory Outlook

Responding to forces of innovation:

Federal banking regulators are watching the transformation of banking by innovative means. In advance of the finalization of regulatory frameworks and guidance related to innovative banking activities, banking regulators are using their existing supervisory capacity to maintain the safe and sound operation of banks.

Regulatory activity at the state, federal, and international levels created strong disincentives for banks to engage with crypto assets. As we look to 2023, significant questions remain about how the regulatory perimeter should expand to address known risks that investors and consumers are facing, including clarity on how banks should engage with distributed ledger technologies and digital assets more broadly.

Fortifying governance and controls as part of core safety and soundness:

We see the following topics as fundamental to improving key functions and capabilities contributing to a bank’s governance and controls as well as its safe and sound operation:

Demand for better data governance and reporting: Increasing data availability and improving data quality represent two critical priorities for banks. As bank regulators become more data dependent, they are driving the already high prioritization of strategic data programs at the banks they supervise.

Cyber and information technology (IT) risk: Deficiency in effective cybersecurity policies and procedures to secure organization assets and data is an increasing concern of regulators. They continue to emphasize increased involvement and accountability of the board and senior leadership in setting the strategy and overseeing the organization’s cybersecurity program.

Bank Secrecy Act (BSA)/anti-money laundering (AML) and sanctions: Going into 2023, we see three primary areas at the forefront of regulators’ agendas: (1) meeting their obligations under the AML Act of 2020, (2) the continued imposition and enforcement of sanctions on Russia, and (3) the increased prevalence of digital assets throughout the banking ecosystem and the management of inherent AML risks.

Consumer protection and financial inclusion: We expect regulators’ continued momentum in protecting against consumer harm in 2023, especially at the margins of the regulatory perimeter. Ongoing regulatory scrutiny means that the legal arrangements, cultural differences, and potential governance gaps between banks and nonbanks need to be clearly understood and addressed by all stakeholders to achieve effective compliance.

Expanding the scope of financial risk management:

The ability of existing risk management processes to capture risks resulting from external factors will be a focal point for regulators in 2023. Specifically, the potential impact of changing fiscal and economic conditions on banks’ capital and liquidity positions will need additional consideration in stress testing and other risk management measures.

Capital: Capital planning uncertainty will continue in 2023 as new risks emerge. One of the most prevalent risks includes the impacts of inflation and rising interest rates, which have not been experienced since the early 1980s. New capital requirements are anticipated in conjunction with the US finalization and implementation of the Basel III international regulatory standards, as well as the potential push-down of large bank total loss absorbing capital requirements on the largest regional banks.

Liquidity: As regulators evaluate the effects of the pandemic and the rising interest rate environment, they are examining the components of internal liquidity stress tests (ILST) and the scenarios and assumptions used by institutions in their ILST models.

Climate-related financial risk: Domestic and international supervisors have reached a consensus around the need to manage climate-related financial risk, given the potential for unmanaged risk to have an adverse and possibly disparate impact on the local and global financial systems. Proposed guidance and recommendations are outstanding at all of the federal banking agencies.

Looking forward to an active 2023:

Looking to 2023, marketplace developments will continue to pressure Congress and regulators to better define who is within the federal bank regulatory perimeter and the supervisory regimes these insiders (banks and nonbanks) will face. The need for banks to work toward remediating outstanding supervisory findings and sustaining remediation efforts will be paramount to avoid the escalation of supervisory matters. The process of cleaning up the basics can help banks to get ahead and stay off the path of adverse supervisory actions. Banks will need to tune in to what regulatory leadership is saying and how that translates into what examiners on the ground are doing. Download our report to learn more.

Continuous change, delays, and additions can make it tough for financial services organizations to navigate the regulatory landscape in 2023. While every organization may want to dynamically adapt to change and succeed, those acting proactively now by linking their strategic goals with regulatory expectations will likely lead. Discover actionable insights in our regulatory outlooks collection.

2023 Financial Services Regulatory Outlooks Collection 

If you are interested in learning more about the banking industry, check out our recently released 2023 banking and capital markets industry outlook here.

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