RISK MANAGEMENT IN BANK

ASSIGNMENT – 1
SYBCOM (HONS) ACCA DIVISION – A
NAME – LAYBAH HANIF DUKHA
PRN- 1202220110
INTRODUCTION –
The banking industry operates on a global scale, facing complex challenges and risks that transcend
national borders. International banking scams highlight the importance of robust risk management
practices to mitigate potential threats and ensure financial stability.
Definition/Meaning of the terms and process:

1) Risk: In the context of international banking, risk refers to the exposure to potential losses or
harm arising from cross-border transactions, market fluctuations, geopolitical factors,
regulatory changes, and fraudulent activities .In the context of the Wells Fargo scandal, the
primary risk was associated with the bank's aggressive sales targets and the subsequent
unethical behavior of employees. The risk was that employees would resort to fraudulent
activities to meet these targets, leading to severe reputational damage, financial losses, and
regulatory consequences for the bank.

2) Risk Management: It involves identifying, assessing, and mitigating risks to safeguard the
bank's assets and reputation while maintaining compliance with regulatory requirements.
Risk Identification: International banks identify risks associated with cross-border transactions,
currency fluctuations, geopolitical instability, regulatory differences, and the potential for fraudulent
activities.
Risk Assessment: Banks assess the likelihood and potential impact of identified risks on their
international operations, financial health, and reputation.
Risk Prioritization: Risks are prioritized based on their severity, likelihood, and potential impact on
the bank's global operations.
Risk Mitigation: International banks implement measures to mitigate identified risks, including
hedging strategies, diversification of portfolios, strengthening compliance measures, and enhancing
due diligence procedures for cross-border transactions.
Continuous Monitoring and Reassessment: Risk management is an ongoing process, and banks
continuously monitor their exposure to international risks, reassess risks, and adjust mitigation
strategies as needed to adapt to changing market conditions and geopolitical developments

3) Risk Management Process: This encompasses risk identification, risk assessment, risk
prioritization, risk mitigation, and ongoing monitoring and reassessment .Wells Fargo's risk
management process failed to adequately identify, assess, and mitigate the risks associated
with its sales practices. There was a failure to anticipate the potential for employees to engage
 in fraudulent behavior and a lack of effective controls to prevent or detect such activities.
Additionally, there was a failure in monitoring and oversight mechanisms to ensure
compliance with ethical standards and regulatory requirements.
.
WELLS FARGO -INTERNATIONAL BANK SCAM 2016
One example is the scandal involving the international banking giant, Wells Fargo.
In 2016, Wells Fargo faced a scandal involving the opening of millions of unauthorized accounts by
its employees to meet aggressive sales targets. This unethical practice not only violated customers'
trust but also raised significant regulatory and reputational risks for the bank on an international scale.

Explaining the types of risks involved in the example:

The Wells Fargo scandal of 2016 involved several banking risks, highlighting systemic failures within
the institution. Here's an explanation of the banking risks involved:
1. Operational Risk:
 Unauthorized Account Openings: Employees opened millions of unauthorized
accounts without customers' knowledge or consent. This constituted a significant
operational risk as it involved failures in internal controls, processes, and systems.
 Inadequate Oversight: The lack of effective oversight and monitoring mechanisms
within Wells Fargo allowed fraudulent activities to persist undetected for an extended
period, exacerbating operational risk.
2. Compliance Risk:
 Violations of Regulations: Wells Fargo's employees engaged in deceptive and
fraudulent practices to meet aggressive sales targets, violating various regulations
related to consumer protection, fair banking practices, and anti-fraud measures.
 Regulatory Scrutiny: The bank faced heightened compliance risk as regulatory
authorities, including the Consumer Financial Protection Bureau (CFPB) and the
Office of the Comptroller of the Currency (OCC), launched investigations into the
scandal. These investigations led to substantial fines and penalties for non-
compliance.
3. Reputational Risk:
 Loss of Trust: The unauthorized account openings and subsequent revelations
damaged Wells Fargo's reputation as a trustworthy financial institution. Customers,
investors, and the public at large lost trust in the bank, resulting in reputational
damage that impacted its brand value and long-term viability.
 Negative Publicity: Widespread media coverage of the scandal generated negative
publicity, further eroding public confidence in Wells Fargo and its ability to conduct
business ethically.
4. Legal Risk:
 Lawsuits and Legal Liabilities: Wells Fargo faced numerous lawsuits from affected
customers, shareholders, and regulatory agencies seeking damages for harm caused
 by the fraudulent practices. These legal actions resulted in substantial financial
liabilities and settlements.
 Regulatory Enforcement: The bank was subject to enforcement actions by regulatory
authorities, including fines, consent orders, and mandated remediation efforts. These
actions highlighted the legal risks associated with non-compliance and unethical
conduct.
Overall, the Wells Fargo scandal of 2016 exposed the bank to significant banking risks, including
operational, compliance, reputational, and legal risks. The fallout from the scandal underscored the
importance of robust risk management practices and ethical conduct within the banking industry.

Recovery steps for Bank:

Overhaul Corporate Culture: Wells Fargo should prioritize rebuilding its corporate culture by
fostering ethics, integrity, and customer-centric values to prevent similar misconduct in the future.
Strengthen Compliance Measures: The bank should enhance its compliance framework, internal
controls, and oversight mechanisms to ensure adherence to regulatory requirements and ethical
standards.
Implement Transparent Governance: Wells Fargo should enhance transparency and accountability in
its governance structure, including the board of directors and executive leadership, to restore investor
confidence and rebuild trust.
Compensation and Accountability: The bank should hold accountable those responsible for the
scandal, including executives and employees involved, and implement appropriate disciplinary
actions. Additionally, revising incentive structures to align with customer satisfaction rather than sales
targets could mitigate future risks.
Restoring Customer Trust: Wells Fargo should prioritize restoring customer trust through transparent
communication, fair treatment, and restitution for affected customers, thereby rebuilding its reputation
and market credibility.