Compliance Function in Banks

Topics: Risk, Bank, Risk management Pages: 3 (853 words) Published: December 26, 2008

Kunal Vasu Mallik

On account of increasing globalization and deregulation world over, the financial sector is experiencing tremendous growth , diversification and innovation. In the face of it the banking system, the major player in the financial sector, have become susceptible and banking crises have grown, causing or aggravating economic downturns leading to significant fiscal costs. The continuous process of diversification and evolution of products creates complex problem of risk management. To manage risks and crises situation the regulators and supervisors in different countries are working continuously to upgrade the regulations and supervision. Rapidly increasing regulations which are more stringent and further reaching has made the situation more complex.

While stringent regulations were being introduced, the question came as to what is good regulation and supervision. In 1997 a group of representatives of bank supervisors from advanced countries, the Basle Committee of Banking Supervision, issued document specifying the best practices in the matter – known as BCP.

The BCP has laid down 25 core principles which a country need to comply with. In India present arrangement in the banks is that its evolution has not kept pace with the increasing complexities and sophistication in the banking business. The need for compliance of the core principles is stronger than ever, not only in India but worldwide. This area of risk management – the risk of non compliance – has been receiving a great deal of attention world over. But it is a complex function and assessment or quantifying of risk is difficult.

But what is meant by “Compliance Risk”? The BCBS paper on Compliance and Compliance Function in Banks defines Compliance Risk as “the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related...
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