Risk, Regulation and Compliance: Leading Through Geopolitical Instability, Cyber Threats, Disruptive Innovation and Unknown Unknowns

Leading a regulated entity during the best of times is complicated. But adapting your leadership strategy when you face a confluence of factors—geopolitical instability, cybersecurity threats, disruptive innovation and unknown unknowns—is critical to how your company identifies and mitigates an increasing number of risks (within business units and across the enterprise), capitalizes on emerging innovations without creating excessive vulnerabilities, and anticipates and complies with regulation.

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Claire Williams (00:08):
We are going to talk about compliance, risk, and regulation. I'm Claire Williams. I'm the Congress reporter at American Banker. I am coming up here from Washington. I spend most of my days on Capitol Hill asking lawmakers, visiting bankers and other policymakers about the things that the people in this room care about. So today we're going to go over a little bit about some of the things that bankers are thinking about on risk compliance and regulation and get some perspectives about what it's like being a leader in banking during this time. Things are unquestionably moving very fast in Washington. Federal agencies like the CFPB are being gutted while bank agencies are operating with way fewer staff as the government undergoes a right sizing reorganization, whatever you want to call that. And yet, banks still have to comply with consumer protection laws, still have capital requirements and a whole matrix of very complicated regulation that you're still obligated to comply with.

(01:18):
So how do we deal with the kinds of opportunities that things like the stablecoin bill and crypto market structure bill, and to some extent, deregulation offer while continuing to be compliant and keep that safety that customers come to associate with banks. So if we want to go ahead and get started, I think everybody, if you could introduce yourself. We have a great panel. We have Amanda Allexon, a partner at Simpson Thacher & Bartlett. We have Tasnim Ghiawadwala, global head of commercial bank at Citi and Meghan Shue, EVP, Chief Investment Strategist at Wilmington Trust. So yeah, I want to ask everybody to introduce yourself and tell me a little bit about how you interact with the risk and compliance world and how you think about it in your day-to-day job.

Amanda Allexon (02:15):
Hi, Amanda Allexon. As she said, I'm a partner at Simpson Thacher. I specialize in bank regulatory law. I started my career working for Congress and I transitioned to working at the Federal Reserve for over 10 years before I transitioned to private practice. So risk and compliance are inherent in who I am, my background, and it's part of my daily advice that I give to clients. Clients call every day wanting to understand just what's happening right now on a million different topics. The ABC of Consumer Compliance Laws, AML BSA, you name it, we get the call, but we're also getting a lot of calls about what's possible, like what's possible today that wasn't possible a year ago. And so it's my job to help people navigate those waters and figure out how they can achieve their goals within the four corners of the law.

Tasnim Ghiawadwala (03:11):
Hi, my name is Tasnim Ghiawadwala. I'm the global head of the commercial bank at Citi. My day-to-day job is that we're supporting our clients transact and do business all across the world. We operate in 94 countries at Citi. So complying with regulation in 94 countries, you can imagine what a challenge that poses for all of us because it's not just the US regulations that we have to pay attention to, but we have to also comply with all of the local regulations as well as certain regional regulations like EU law, which overlays on national regulations. So ensuring that we can support our clients—our target clients are clients with global ambition who are looking to operate cross-border. For us as a company and as bankers to be able to understand the local regulatory environment and be able to advise our clients on what the art of the possible is in whatever country they're looking to do business, helping them risk manage and helping them transact.

(04:26):
It's part of our core DNA that we do every single day.

Meghan Shue (04:31):
Hi, I'm Meghan Shue. I am the Chief Investment Strategist at Wilmington Trust, which is the wealth management arm of M&T Bank. I feel like a little bit of an odd duck on this panel. I sit in an investment role, so I have a little bit of a different approach to risk, regulation, and compliance. Aside from trying to mostly avoid our compliance team when I can, I view it in two ways. One is as an investor. We are constantly looking at the regulatory environment, mostly that is coming out of Washington, and trying to figure out what risk does that pose either to the upside or downside, because in my job, risk is not a negative. It's always two-way. There are upside risks and downside risks. Regulation can actually, in some ways, give life to new industries by providing those guardrails. So we're constantly looking at what is coming out of both the national as well as the local level, because M&T is a regional bank.

(05:36):
We do a lot of work with small businesses up and down the Eastern Seaboard and really trying to figure out how those regulations will impact their businesses as well as the investment opportunities. And then I also, as an employee of a regional bank, have an appreciation for regulation. We all, especially as investors, know that regulation tends to be more onerous for smaller companies, for regionals than for those large... and in some ways it can be more onerous because of just fewer workers and less balance sheet than some of those bigger companies. And so we're constantly trying to figure out how that impacts our lending ability. Sitting as part of a regional bank has been very interesting during the past 15 years or so as we've seen regulations evolve.

Claire Williams (06:30):
Great. Meghan, I wanted to follow up with what you said about being a bit of an odd duck on the panel. I don't get to talk to people on the investment side very often. So I'm curious even just about the process of how you are thinking about regulation. Is this something that is typically coming from you? Are you looking at the market? Are you looking at investments and saying, "This is where the risk is. These are the things that my institution needs to go talk to lawmakers and policymakers about"? Is this coming from a risk and compliance team? Is this coming from the C-suite? How does the process start when you're identifying these kinds of risks?

Meghan Shue (07:15):
Well, I think my primary hat is as an investor. And so as I sit as an investor, my job is not to opine on what policies should come out of Washington. It's to observe what is likely and what we are getting. I'm a receiver of information in that sense. And as I started to say, it's really about trying to figure out not how to remove all risk from the investment process, but to figure out what risks we want to take when we have enough information. As we all know, sometimes you can get regulation coming out of Washington, but regulation in particular when it comes to policy is one of those things that can be greatly influenced by the people in power, not necessarily the words written on the legislative piece of paper that makes its way through Congress. So keeping an eye on not only what is going through the congressional channels, but also what direction the administration leans when it comes to regulation and how that might influence the businesses that we are looking at from an investment standpoint.

Claire Williams (08:29):
Awesome. Amanda, you work with a lot of banks and fintechs helping them navigate through Washington's gauntlet of compliance and policies. How's business?

Amanda Allexon (08:45):
Well, it's always fairly busy. There aren't that many bank regulatory attorneys out there in the world, but yeah, we've seen an uptick. As I mentioned, the environment has shifted dramatically in this past year. So we're getting a lot of calls from people just wanting to understand what's happening. And then there's another group of people who have been waiting on the sidelines to do certain things, to be able to offer certain products and services, to be able to shift their internal processes, to be able to engage in M&A, to be able to get a charter for some fintechs. So we see them starting to come to the forefront and seek advice about how to navigate that process.

Claire Williams (09:29):
Got it. Thinking about the Trump administration, from my perspective, there's risks and there's opportunities here. What to each of you are the biggest things that you're worried about and where do you see the greatest room for bankers to grow their businesses and extend their services for their clients?

Amanda Allexon (10:02):
So starting with the concern, there's a lot of talk and energy with this administration about right-sizing regulations and taking a more risk-based approach, which I think everybody is on board with. Finding the right balance between decreasing regulation and making sure that everything is appropriately accounted for with respect to these new technologies and innovations that are coming in is very difficult. Reasonable people are going to disagree and that's going to change from administration to administration. I think the positives are that this administration is the most open to new charters and new technologies of any that we've seen in the last several. So there's a lot of opportunities to try new things and to get the agencies to act on them quickly, which is a huge change from the last four years.

Tasnim Ghiawadwala (11:16):
I think it's right to think about it in terms of what risks and opportunities the administration's policies and various executive orders pose. What we're seeing with our clients is that particularly on the tariff side, because it's been changing so frequently over the last six months as to what the level of tariffs are, there's various trade deals that have been executed really, really quickly. Things that would have taken years to execute with a country are being done in a matter of weeks and months. Our clients are sitting by and wondering when this is going to settle down so they can really invest. We're seeing a lot of clients thinking about moving manufacturing to the US as well, where they may have offshored. We're seeing international clients who are based, say, in Asia, rather than having factories in Asia, they're thinking of moving those production facilities closer to their clients in the US.

(12:31):
So I think there are a lot of positives, but there's a lot that clients are having to deal with simultaneously and changing frequently.

Meghan Shue (12:44):
I completely agree with the tariff comments. As an investor, that has been one of the biggest headwinds and risks that keeps resurfacing throughout this year. But there are a lot of opportunities for banks, especially as it relates to the shifting regulatory environment that Amanda was talking about. We're seeing more consensus around reducing some of the capital requirement ratios. The supplementary leverage ratio could free up a relatively small amount, maybe $10 to $15 billion for banks. But underneath that, there's a lot more that could be freed up just from allowing subsidiaries to release some of their capital requirements and giving banks the ability to allocate capital more efficiently, which is really what we would want to see as investors. There's also a pickup in capital markets activity.

(13:53):
We've seen an uptick in M&A value so far this year. Interestingly, M&A volume is still kind of flatlining, which tells me that you've got a few big companies with cash on their balance sheets that are willing to make some big deals, but the small businesses are still handicapped by the risk and uncertainty around tariffs. I think lower interest rates and more clarity on the trade front could unlock more capital markets activity, which would be a huge benefit to banks. We believe we're on the front end of a renewed rate cut cycle from the Fed. We think we're getting another two rate cuts this year and another three next year. That lower interest rate environment, coupled with concerns about US fiscal debt and Fed independence, is keeping the long end anchored. That steeper yield curve is a more profitable environment for lenders. So I think it's a really constructive environment for banks today. And as Amanda said, it's about getting that balance right because we're already hearing some things about private credit deals that are going bad and bankruptcies. The antenna is up, but generally speaking, we are pretty constructive and optimistic on the banking environment.

Claire Williams (15:30):
Right. Jamie Dimon's famous cockroaches.

Meghan Shue (15:33):
Anything he says catches on, doesn't it?

Claire Williams (15:36):
The man's quotable. I did want to touch briefly on something that I hear about quite a bit, which is rhetoric around debanking. I talk a lot with people about how these are not your Dodd-Frank Republicans. They're more populist; there's more hostility and more willingness to talk about big banks in a way that is negative from this crop of Republicans than there was 10 or 15 years ago. So I'm curious if you all see a lot of this debanking rhetoric as just political rhetoric. Is this something that you think of as a risk and is this something that bankers are concerned about? Amanda, I thought you might have a good perspective on this.

Amanda Allexon (16:28):
Yes. For many decades, administrations and Congress have used banks to achieve different social and political goals because the industry is so regulated and they don't have that type of hook for other industries. When I think of the current rhetoric around debanking, I put it in that context and I see it as a natural shift from the last administration's policy choices. They emphasized certain things and banks had to make adjustments to their businesses, risk structures, and client bases based off of what the initiatives were from the last administration. They're going to have to make changes coming into this administration. Yes, we think about it with our clients in connection with things like M&A, engaging with the agencies, liability exposure, and any number of ways.

Claire Williams (17:37):
Got it. Are we all AI'd out? If we're talking about opportunities and leading through disruption like AI, crypto, and Stablecoin, from a policy perspective, are there things you want to talk to regulators about or within your institutions? Are there things that can be done from policy perspectives to make implementing AI within banking institutions easier? Tasnim, what would help even internationally from a global perspective?

Tasnim Ghiawadwala (18:26):
Yeah, sure. I think just starting with some of the use cases we're using at Citi, we've already rolled out AI agents of three different kinds to support employees. We've got one supporting programming. There's another one to understand how to do something or where to look up a policy—it's like our own internal ChatGPT. Then something we just announced in September is that we're getting all of our relevant staff trained on prompt engineering as well. We really see AI as something that's here to stay and we need to get on board with getting the best use and efficiency out of it. We're coming at it more from the routine mundane tasks that can be easily automated—reconciliations, accuracy, pulling in data, and analyzing it.

(20:06):
We're starting to use it for credit underwriting, for example, in terms of capturing the data that clients are sending us. There are still humans involved—it's not like humans are not involved—but a lot of the keying-in and core analysis stuff we're leveraging AI for. In the back, around certain settlement processes, trade settlements, and reconciliations, we've been using it for a little while. We are making a big effort at Citi to embrace AI. I was on a different panel a few weeks back where a client said something that really resonated: at the moment we're talking about AI in the same way that people used to talk about the internet in the year 2000. Now nobody talks about using the internet because it's such a normal thing that we all do.

(21:19):
This client thinks that's what is going to happen to AI. In five or ten years, it'll just be something that we all use without even thinking about it. If you start thinking about AI in those terms, it really gives you an idea of what the possibilities are. Every single client I talk to is doing something with AI, whether it's software development, manufacturing, or chemicals. Everyone is investing in how they can get the best AI use cases for whatever it is they're trying to do.

Claire Williams (22:20):
Amanda, is that something you're often advising banks about? Are people concerned about the policy implications of how they implement AI? Is this something that Congress or a regulator needs to address?

Amanda Allexon (22:35):
Well, I think the bank regulatory agencies and statutes are never going to keep up with technology. Just taking the main statute that governs the activities of national banks, not to geek out too much, it was drafted in 1883 and it hasn't fundamentally changed.

Claire Williams (23:01):
The industry's the same as it was in 1880.

Amanda Allexon (23:03):
Exactly. But what we see is that the statute has mostly done right by us over time. The industry has in fact advanced. Regarding your comment about the internet, people were also uncomfortable with credit cards and ATM cards. When banks transition from fully manual processes to any sort of automated process, it is a natural trajectory of banking. Banks are leaders in this space. From my perspective, the bank regulatory agencies would do well if they focused on hiring a lot of new staff that is technology-forward. Staff is who fills in these gaps. Examiners are on the front lines, and if it's the same examiner you've had for 25 years, they might not be the most change-forward person.

(24:16):
So I do think there's a big opportunity here for banks and staff to be leaders, to come up with best practices and governance policies to help push the agencies in the right direction.

Claire Williams (24:32):
One of the other big things bursting into the world of finance is crypto and Stablecoin. The Stablecoin Bill, the Genius Act, passed through Congress at record speed compared to the last 10 years. We still, however, have a market structure bill that consistently needs to get moving to help people. Meghan, from an investment perspective, are there still things that need to get done in market structure? Are you comfortable dipping your toe into that world without some of that clarity, or do you feel like we should put the brakes on and have a more robust process?

(25:40):
How are you weighing those two things?

Meghan Shue (25:43):
We are definitely more of the latter—making sure that we have a robust process and fully understand it because this area has developed very quickly. From an investment perspective, there is the investment potential of cryptocurrency and stablecoins versus blockchain technology, which is the underlying technology and a completely different thing. Then there is how banks actually approach this space. Bitcoin was created 16 or 17 years ago to get away from centralized banking and risks associated with the dollar. Now we have legislation being passed to support some of this activity. Stablecoins are different; they're backed by the dollar or safe assets like treasuries.

(26:48):
In some ways, they further reinforce the US's position as the dominant currency and safe haven asset, which is critical as you think about the banking industry and how relevant the Fed can stay. The Fed is basically obsolete if you have a system that is not reliant on banks, the dollar, and treasuries, because they can't do anything to control monetary policy. Those are the things we're watching. We want to be mindful of how we can be proactive, but also mindful of the risks to banks in general. I think interest on deposits and the backing of these stablecoins with treasuries and dollars have been constructive. But where this goes and how quickly it evolves takes a lot of expertise. This is one area where you have to really know where you're going and what you're doing before you wade in.

Claire Williams (28:17):
Sadly I don't have this ability, but if I had a magic telephone that could get you five minutes with anybody—a policymaker, the president, a lawmaker—what are you telling them or what are you asking for?

Meghan Shue (28:36):
Ooh, this is a hard one. I'll call the president and I'll tell him two things. First, regarding the tariffs: as investors, we've been very focused on the velocity and amount of change as it relates to tariff policy. I think some goals are quite legitimate as it relates to national security, but I would say the time for negotiation has passed. Let's set the policy and let businesses actually plan. If you give the rules of the road, businesses are so adept at adapting, but when the rules are constantly changing, they freeze up and don't spend. We really want to see CapEx intentions increase to support US economic growth. Second, on the AI topic: I have a 10-year-old daughter and an eight-year-old son, and I think about what their job prospects will look like. AI is incredibly exciting and there will be a huge productivity boom, but it's also terrifying.

(30:38):
I was just reading a stat that the number of computer science majors has doubled over the past 10 years, and they now have one of the highest unemployment rates coming out of school. The need for retraining resources is greater than ever to take these graduates and find places where they can use their skills. We are going to be faced with a shrinking labor force, so we need the people; we just need them positioned to do things with this new technology.

Tasnim Ghiawadwala (31:05):
I'd probably call the president as well. I'd give feedback on what my clients are dealing with—the cost burdens some policies are creating and the freezing of decision-making. I'd give the actual day-to-day implications of those policies because I think policies are sometimes created with multiple goals in mind, but it always falls on businesses and individuals to carry the impact. Providing that feedback is important. Second, I'd want to talk about encouraging balance in policy. We all agree you need a base level of regulation to protect consumers and the banking system.

(32:49):
The trend to soften some of the regulation of the past is hugely welcome, but we need to make sure we don't throw the baby out with the bathwater by going too loose. Things like the Genius Act are a massive step forward, but we need to go to the next level to figure out how to actually implement and embrace it. Don't assume that just because we've got the Genius Act, everyone is going to start transacting with Stablecoins. There's so much additional detail, interpretation, and guidance needed that we must stay the course.

Amanda Allexon (34:03):
From my perspective, just dovetailing off of those points: stability in regulation. It takes so much time and money for banks to make investments to reflect regulatory changes. If regulation continues to swing so aggressively between administrations, it makes it incredibly hard for people to plan or decide whether to dip their toe into new products. Second, be very thoughtful about chipping away at our current regulatory makeup, like the balance between supervised and unsupervised entities. There are competitive equality issues that my bank clients are concerned about. Finding that right balance takes a lot of time and a lot of qualified people.

Claire Williams (35:19):
Awesome. Well, I think we have time for at least one question. Raise your hand and we'll try and grab you a microphone. I have plenty more, don't worry. Going once? Going twice. All right. Tasnim, I learned via reading the profile in this wonderful magazine that you recently climbed Mount Kilimanjaro. Which is harder: climbing Mount Kilimanjaro or being the global head of commercial bank at Citi?

Tasnim Ghiawadwala (36:00):
You didn't tell me you were going to ask that question! Honestly, it was a personal ambition for many years. I agreed to it because a friend asked me to join her, and I half didn't know what I was getting myself into, but I'm so glad I did it. But being the global head of the commercial bank at Citi is a pretty hard job, I can tell you. There are too many people to keep happy.

Claire Williams (36:32):
Way less straightforward, I feel. Is there any risk right now in bank policy land that keeps you up at night? What do you think is something people aren't worrying about enough?

Tasnim Ghiawadwala (36:57):
I can have a go. The thing that keeps me up at night—and we've touched upon it—is that banks are highly regulated and we spend huge amounts on systems, platforms, training, and monitoring. Now, the definition of money is coming into question. There are a lot of unregulated non-bank financial institutions playing in this space. I think about how this is going to evolve. There are trillions of dollars of dry powder sitting outside of any bank. When that meets the banking system, looking at both through similar lenses is very important.

Amanda Allexon (38:26):
Two things. One, the loss of institutional knowledge at the agencies is a concern. I've heard that some have lost 30% of their entire exam employee base. That is going to lead to challenges in effectively supervising institutions just from a capacity point of view. Second, I'm a little concerned that we don't have an effective resolution process for where the unregulated market touches the regulated market because of the size of the unregulated market. It's inevitable that there's going to be challenges, and how do we handle that?

Claire Williams (39:23):
When you say that, are you talking about Fintech service providers, stablecoins as competitors, asset managers? All of it.

Amanda Allexon (39:41):
All of it. It's all so interconnected today. How do you pull it apart?

Claire Williams (39:48):
Well, on that note, that's about all the time we have. Up next, we have a fireside chat interview with Citi's Christina Moore. Thank you everybody and have a great rest of your conference.