Volume 9, Issue 10, October – 2024 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT342

Strengthening Financial Risk Governance and

Compliance in the U.S.: A Roadmap for Ensuring
Economic Stability
Boris A Koffi*
Georgia State University, Atlanta Georgia, USA.

Abstract:- While US lawmakers consider loosening I. INTRODUCTION

financial regulations, this article addresses the need for
stronger financial risk governance frameworks to ensure The rules, procedures, and processes that assist in
regulatory compliance and mitigate systemic risks in the identifying the risk or risks and implementing appropriate
U.S. financial system. It provides a road map for financial corrective measures are referred to as risk governance. It helps
institutions and policymakers to enhance risk management management implement suitable risk-reduction techniques
processes and avoid failures in a volatile economic (Nhar et al., 2016). This body of knowledge offers a strong
environment. The only significant advancements in the theoretical foundation, empirical support, and a compelling
monitoring and regulation of the financial sector in the argument that many risks cannot be evaluated solely based on
United States have come from financial catastrophes. probability and effects and that regulatory models based on
Achieving sustained growth and low inflation is contingent that assumption are not only insufficient but get in the way of
upon the financial system’s stability, demonstrated by managing risk responsibly (Van et al., 2011).
well-functioning financial institutions operating without
significant difficulties. Due to the global financial crisis, Economic units incur financial risk when they bind
banks' corporate governance procedures have been themselves with loans and pledge to pay them back, or when
reexamined. Some policymakers are wondering how much they obligate themselves to finance an asset position. The two
managerial entrenchment and the board's failure to keep financial risks include; default risk and liquidity risk. In
an eye on executives may have contributed to excessive default risk, the borrowers are not usually able to repay, while
risk-taking and financial instability. The implementation liquidity risk occurs when economic units are forced to borrow
of favorable policies has been critically examined to ensure at very high rates (Dymski et al., 2008). In their review work
the suitable delivery of a stable in the United States. on risk governance, Gontarek et al. (2018) explained that the
number of bank failures in the United States increased to 387
Keywords:- Risk Governance; Regulatory Compliance; during the three years that ended in 2011, from 28 during the
Systemic Risk; Financial Stability; Policy Development. three years that preceded it. Including government borrowing
to pay for bailouts, with the total amount of debt in the world
Acronyms which has grown by $70 trillion since the financial crisis in the
Abbreviation Meaning United States rose to $237 trillion.
RegTech Regulatory Technology
U.S. United States For top executives and regulators, assessing the risk
FIH Financial Instability Hypothesis frameworks and cultures of large financial institutions is a
IMF International Monetary Fund significant task. Although evaluating based on organizational
WB World Bank results is one method, successful risk management produces
WTO World Trade Organization long-term sustainability and improved risk-adjusted
PPP Public-Private Partnership performance that is seen over decades (Sheedy & Griffin
FSB Financial Stability 2018). According to Lingel & Sheedy (2012), there is
FCPA Foreign Corrupt Practices Act evidence in the US context to bolster the risk governance
EU European Union hypothesis, which holds that risk outcomes can be predicted
by risk governance mechanisms based on public data.

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ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT342

A simple example of a traditional risk management started closely examining each nation’s macroeconomic
process would be a small group of people in the finance circumstances and pricing sovereign risk appropriately. This
department hedging currency risk or a factory floor manager rapidly heightened the possibility of the US sovereign default
keeping track of work-related injury incidents. Traditional risk and drove the price of sovereign borrowing to an almost
management involves identifying risk, measuring risk, unbearable level (Lupo 2013). The institutional realization that
monitoring, and possibly reporting risk, but with little household decision-making. is becoming increasingly
formality, structure, or centrality (Lundqvist 2015). According financialized and has shifted the focus of U.S. regulatory
to Pirson et al. (2011), there was a significant concentration of policy away from the traditional worries about bank stability
the US subprime and prime mortgage market, with 25 (Bieri 2015).
companies controlling 90% of the whole market. With a single
board, the 25 businesses functioned as hierarchies under The rapid and intricate advancements in technology
central control. typically require assistance from traditional regulatory
frameworks built for conventional financial systems to stay up
II. IMPROVING REGULATORY COMPLIANCE TO to date. Because of this mismatch, the regulatory landscape is
ENSURE ECONOMIC STABILITY fragmented, which puts consumer protection and financial
stability at risk (Bibitayo et al., 2024). Even though the term
Adherence to laws, rules, and regulations pertinent to a financial stability is used often, it is surprisingly unclear what
firm is known as regulatory compliance. In the financial economic stability regulation aims to accomplish. Some
industry, regulatory compliance guarantees the honesty and people may believe that financial stability means the financial
openness of financial institutions, protecting stakeholders' markets are stagnant and ossified; proponents of this theory
interests and preserving the financial system's stability may oppose financial stability regulations because they aim to
(Bibitayo et al., 2024). It is important to consider how stop all risk-taking within the financial system (Allen 2018).
regulatory modernization relates to and differs from the
frequently mentioned "financial modernization." Legislation The financial instability hypothesis (FIH) is based on the
that eliminates earlier structural limitations on financial observation that capitalist economies occasionally undergo
intermediaries symbolizes financial modernization. Legislators asset inflations and deflations, which can worsen the financial
have given the financial modernization movement a lot of system as a whole. To put it simply, FIH maintains that
attention, especially in the US (Schooner et al., 2003). financial system stability eventually leads to destabilization
(Duff et al., 2018).
The United States invests a lot of money, particularly at
the federal level on gathering data on the advantages and  Challenges of Regulatory Compliance in the US Economy
disadvantages of regulation. However, it is by no means the The U.S. President’s Working Group on Financial
only nation eager to create regulations that are more effective Markets gave an overview of the causes of financial
and efficient (Hahn & Litan 2005). The global financial crisis instability. The causes are; the collapse of market discipline by
has led to changes in banking regulation and supervision, but participants in the mortgage securitization process; defects in
their implementation will depend on national policies in each credit rating agencies' evaluations of subprime mortgages;
country. These changes may or may not have an impact on inadequate risk management at major financial institutions;
bank risk-taking depending on the institutional and financial and a failure on the part of financial institutions to address
environment in which the banks operate (Ben Bouheni F., these risk management deficiencies (Pan, 2010). To address
2014). these challenges, the concept of Regulatory Technology
(RegTech) has emerged as a crucial element in modern
Strong socioeconomic interests and values have always financial systems. RegTech leverages advanced technologies
existed, allowing economic actors to act any way they choose to improve regulatory compliance processes, making them
until the money breaks. These same forces have occasionally more efficient, accurate, and adaptive. By automating
blocked the necessary changes that would have improved compliance tasks and enhancing data analytics capabilities,
regulation and oversight in the United States (Tymoigne, RegTech solutions can help financial institutions manage risks
2009). Nevertheless, the Federal Reserve Bank of New York more effectively and ensure adherence to regulatory standards
calculates that the aggregate risk-weighted common equity (Bibitayo et al., 2024).
ratio of the largest US banks increased from approximately 7
% in the years before the financial crisis to approximately 13 The Gramm-Leach-Bliley Act of 1999 was passed by the
% as of the end of 2017 (Tarullo 2019). United Kingdom and the United States. These laws address a
few prevalent issues with financial regulation in the twenty-
Following Das et al. (2003), it is possible to argue that first century. They include broad globalization, tenacious
the existence of a financial system that can effectively allocate rivalry, sophisticated industry consolidation, and ceaseless
funds to investment opportunities over an extended period technical advancements (Schooner et al., 2003). However, the
without experiencing significant disruptions is the primary FSB has been assigned a key role in fostering global financial
cause of financial stability. For the first time, financial markets stability rather than serving as a band-aid solution to the crisis.

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ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT342

According to U.S. Treasury Secretary Timothy Geithner, the volume, and business activities (Bunea et al., 2009). The
IMF, WB, and WTO should have been the "Fourth Pillar" of central bank is frequently tasked with handling these risks on a
global economic governance, and the FSB should have national scale. However, these kinds of risks are difficult for
followed suit (Pagliari, 2012). central banks to analyze with the traditional models and
analytical tools they currently employ (Gray et al., 2007). The
The FSB will bolster the institutional underpinnings of degree of financial stability varies greatly over time and
global regulatory cooperation if these obstacles and priorities among nations. Since 1997, the asset portfolios of North
are effectively addressed. Its primary function would still be to American banks have seen a sharp increase in correlations and
facilitate transgovernmental networks, with ultimate authority volatility. However, as banks’ capitalization has grown over
for financial regulation and supervision continuing to rest time, the systemic risk in the North American banking system
firmly at the national level, rather than developing into a has reduced (Lehar, 2005).
potent international organization (Helleiner 2010). The risk-
adjusted balance sheet is the fundamental analytical tool since Furthermore, by transferring risk to more reliable
it illustrates how vulnerable the company’s assets and financial organizations, innovations may improve the
liabilities are to outside “shocks” (Gray et al., 2007). efficiency with which risks are distributed within the financial
system. Because of the increased system liquidity throughout
The process of comprehending, estimating, and the risk transfer process, stability may also rise (Buston et al.,
effectively controlling unexpected degrees of unpredictability 2013). The adoption of new technology or regulations will
in the financial consequences for business is known as risk unavoidably cause creative destruction both inside and across
management. Reducing risk to a manageable level at a enterprises when it comes to transition risk. While the rise and
reasonable cost involves the steps involved in choosing and fall of products or enterprises is a standard aspect of the
putting mitigation measures into place. The word "acceptable" modern economy, transition risk is suggestive that the scope
is crucial in this context. It needs to be defined using a risk- and rapidity of economic transformations could exceed the
reward framework that takes into account the asset's worth as historical speed of change that the financial industry is
well as the potential long- and short-term losses (Paquette et accustomed to. Furthermore, adverse consequences may vary
al., 2010). by region and industry, even if macroeconomically the rise in
green sectors balances the fall in emissions-intensive sectors
Financial stability allows for the unrestricted use of the (Brunetti et al., 2022).
organization’s resources, reflects a consistent surplus of
income over expenses, and supports the continuing process of III. COMPLIANCE AND ETHICAL STANDARDS
product development and sales. As a result, the primary
component of an organization’s overall stability is its financial Many in the United States see policies like the Foreign
status, which is defined as the ability to balance an Corrupt Practices Act 4 as well-intentioned attempts to make
organization’s financial resources and loans with its creditors, US businesses adhere to impractical ethical standards that the
owners, and budget (Drobyazko et al., 2020). Conversely, rest of the world rejects. Equitable dealing appears to be a trap
financial instability has the potential to hinder economic for the unsuspecting or the credulous, as much as commerce
activity and lower economic well-being. The pressures placed (Micheal et al., 1996). The private sector provides services
on households and businesses as a result of dysfunctional that complement and enhance military capabilities, not replace
financial markets or key institutions could hurt the real them, and this is how the United States and many other
economy by preventing capital from flowing to worthwhile nations rely on it. To meet these needs, the industry is in place.
investments and possibly leading to credit crunches (European It is included to assist in making strategic decisions rather than
Central Bank, 2007). to make them (Brooks et al., 2012).

In the wake of the Great Financial Crisis, Risk The FCPA was enacted in reaction to revelations of
management, detection, and mitigation of risk has taken center several claims made in the 1970s that American companies
stage, particularly Systemic risk. The Federal Reserve, the had bribed foreign officials. The first revelation concerned the
European Banking Authority (EBA), and domestic and defense aerospace corporation Lockheed Corporation, which
international regulatory supervisors have been leading the way was shown to have bought politicians in numerous nations
in the design and implementation of stress tests to provide including Italy and Japan to favor their military aircraft in
supervisory evaluations of capital adequacy and capital deeds that went back to the 1950s (Mensah & Chiang, 2019).
planning at systematically significant banks (SIBs) (Taskinsoy, Depending on the industry, organization location, and size of
2020). the company, different compliance standards may apply.
Critical components of an effective compliance program
It is believed that generally speaking, banks face credit, include routinely conducting audits, gathering all required
operational, and liquidity risks. However, the types and documentation for transactions, and ensuring all implemented
degrees of risks to which an organization may be exposed internal policies and procedures are followed. Proper ongoing
depend upon several factors such as its size, complexity, education and training for the company's leadership is crucial

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ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT342

to creating a strong compliance program (Bezuidenhout, relatively high degree of efficacy due to the global alignment
2022). of incentives in the wake of the crisis and this dual governance
innovation (Knaack 2015).
While simple compliance programs stop illegal activity,
complicated programs address issues like Proposals for regulatory reform in the US, EU, and other
customer happiness, staff morale, and public image. The major jurisdictions have focused on more rigorous oversight
current trends of public commitment, business environmental of financial institutions by regulatory supervisors, which calls
and social responsibility, and ethical awareness are all for real-time information access, improved understanding of
ingrained in compliance management (Benedek, 2012). the global operations of financial institutions, and a wider use
Enforcing effective corporate governance is crucial for of discretion on the part of these supervisors (Pan 2010). A
financial institutions. It should consider all facets of this sort case study of how municipal dynamics can influence
of business, where risk is a daily occurrence and accurate asset international relations, and American regulation of foreign
and liability assessment should be an ongoing activity. Since financial institutions may provide insight into other nations'
depositors make up a sizable portion of the banks' funding experiences during the 2008 financial crisis and the United
obligations, the credit institution should specify what its States' during earlier ones (Kean et al., 2018).
obligations are to them (Nicula, 2012).
The integrity of the entire financial and economic system
The U.S. Sentencing Commission's 1991 Guidelines for depends on their financial stability, even though they use this
Organizational defendants, which prescribed more lenient business model to pursue profitability and value
sentences and fines to companies that had taken steps to maximization. The integration of AI into national financial
prevent employee misconduct, are largely responsible for the policy is not only strategically significant but also a critical
proliferation of legal compliance mechanisms that address step toward ensuring long-term economic stability in an
ethics or conduct issues in formal documents, which many US increasingly unpredictable global environment. The use of AI
companies have adopted (Arjoon, 2005). Coherence within a for economic forecasting, risk management, and decision-
set of regulations that are both sufficiently bureaucratically making will continue to reshape the landscape of modern
developed to allow for their development, implementation, finance, providing a path forward for businesses, regulators,
and enforcement, as well as comprehensive enough to offer and policymakers (Jodian and Boris, 2024). Systemic hazards
closure, is necessary for self-regulatory autonomy (Cata can arise from the banking system's interconnections with
Backer, 2011). other financial sectors and the economy (Raouf 2017).

 Global Coordination of US Financial Regulation Better cooperation among regulators is therefore the
Coordination of international policy is important to cornerstone of this preparedness strategy, with the aim that it
investors and financial firms since cross-border regulatory will result in enhanced trust and coordination during a future
discrepancies can benefit them or hurt them. The expenses of crisis. The emphasis on creating avenues for collaboration and
foreign financial transactions are increased by even minor information exchange explicitly addresses the shortcomings in
mismatches. Furthermore, regulatory disparities might further coordination between US and UK regulators during the
protectionist objectives by impending market access for situation surrounding Lehman Brothers (Riles, 2014).
outsiders and protect the territories of local competitors
(School et al., 2008). Ahdieh et al. (2015) stated that IV. RISK MANAGEMENT FOR POLICY
beginning with a thorough understanding of the global DEVELOPMENT
endeavors of the U.S. Securities and Exchange Commission,
particularly its goals of greater harmonization in securities Risk is defined as an event's potential influence or
law, Braunger contends that theories of outcome on an organization's assets and the ensuing fallout.
“transgovernmentalism” fall short of addressing the The balance between expected and unforeseen effects defines
complexity of contemporary global financial regulation. and categorizes risk, not the risk itself. "Value at risk" is the
term used in economics to describe this statistical measure that
There have historically been two primary justifications determines the impact of a loss based on the likelihood of it
for harmonizing financial regulatory laws between nations. happening (Paquette et al., 2010). The United States' initial
The first is the well-known issue of a regulatory "race to the attempts to include environmental services in laws
bottom," which is the propensity of legislators to forego strict and initiatives aimed at appreciating services that could be
regulations to provide domestic banks a competitive edge over easily exchanged in a market as well as creating markets for
their counterparts in other jurisdictions. The second problem is such services (Schaefer et al., 2015).
"leakages," which are instances where banks can create
subsidiaries in other countries with less stringent restrictions Edge & Liang (2017) discovered that although there has
to get around local laws (Kharroubi 2021). State-of-the-art been a sharp increase in central bank financial stability reports
theories of global governance anticipate that financial and risk communication since 1996, the results did not seem to
regulation reform will be implemented globally with a be improving. Additionally, if members are currently using

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ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT342

their current instruments to fulfill their other existing demand. PPPs offer the comparative benefit of boosting
requirements, they might not be able to accomplish new design efficiency, raising service quality, and lowering overall
financial stability goals. In comparison to two different tools project costs and delays because of the synergies between
for the two aims, Edge & Liang (2017) simulate welfare costs construction and maintenance. This is in addition to drawing
where monetary policy is the only means of achieving price in private capital (Prats 2019).
stability and credit spread moderation.
Towards a Framework for the Governance of
Treasury management tends to be an important technique Infrastructure, a paper released by the Organization for
viable in managing risks in this world of increasing Economic Cooperation and Development (OECD) in 2015,
cyberattacks on financial institutions. To effectively counter encapsulated the sentiment of an advancement in economic
this threat, financial institutions must implement a stability through the incorporation of PPP. Additionally, the
comprehensive risk management technique, among which is emphasis on infrastructure and the general desire for global
the Repo risk management technique (Boris and Jodian, economic expansion go hand in hand (Hodge et al., 2017).
2024). Within a regulatory community that replaces the state PPP arrangements received investments totaling 469.82 billion
and its organs with corporations, investors, consumers, US dollars between 2015 and 2019, which were split among
nongovernmental organizations, and the media, the largest 1,917 projects. They cover the use of facilities by the public
enterprises can now satisfy their regulatory preferences and sector or users, and they are signed by parties from the public
impose their own rules due to the freedom of capital and and private sectors. Payments are scheduled during the
operations (Cata Backer, 2011). For businesses operating in all contracts’ lifetime (Lima et al., 2021).
industries, risk management is unquestionably essential to
both short- and long-term financial performance since it One major barrier to efficient service delivery in many
allows for the reduction of losses from poor risks and the developing nations is corruption in the public sector.
facilitation of gains from positive ones. Financial Corruption permeates every aspect of life, from launching a
intermediaries are crucial to the economy and financial system new business to obtaining a passport to visiting a doctor, and it
because they transmit savers' money to businesses and can impede the fair distribution of goods and services to
families that need to borrow it, collecting deposits and residents. Different forms of corruption include hospital staff
supplying credit to the real economy (Raouf 2017). pilfering medications intended for charitable donations,
officials asking civilians for bribes to carry out basic tasks,
The policy of counter-cyclicality is essential in and bureaucrats getting paid for work they don't accomplish
overcoming pro-cyclical patterns of behaviors in economic (Heydari et al., 2021).
and financial regulation, likewise, inappropriate financial
regulation due to liberalization within and across countries On the other hand, the model (PPPs) is regarded as a key
should be thoroughly checked and corrected (Griffith-Jones & tool for completing mega projects worldwide. The PPP model
Ocampo 2011). Employing data from the United States, we is increasingly used to carry out large-scale infrastructure
discover that, in contrast to non-financial companies, there is a projects that were previously exclusively supported by the
greater correlation between shareholder-friendly corporate government ( Akomea-Frimpong et al., 2021). To comprehend
governance and stand-alone and systemic risks for banks. This the many project stakeholders' particular views of risk and
result is in line with the theory that banks, as opposed to non- how their interactions can yield varied project outcomes,
financial companies, should be the primary recipients of a practitioners on PPP projects would need to adopt an
financial safety net (Anginer et al., 2018). interpretative technique. This would require them to interact
closely with the stakeholders (Loosemore & Cheung 2015).
Although most businesses can function normally with the
support of a framework for financial stability, some businesses Furthermore, notable focus has been paid to stakeholder
may even benefit from the instability. Corporate governance is collaboration as a means of improving risk management. The
also subject to voluntary adoption, barring specific legislative effective operation of risk management is also seen to depend
limits (Lupu, 2015). on reporting and communication about risks both inside and
across organizations. Likewise, it has been argued that
 Incorporating Public-Private Partnership into Risk sustained support for the risk management role from all parties
Governance involved is crucial. Since PPP projects' objectives and
A PPP is characterized as a contract between a private requirements are closely tied to risks, which must be examined
party and a public sector institution, wherein the private party from a life-cycle perspective, a thorough assessment of risks
assumes substantial financial, technical, and operational risk in and requirements is required, especially when adequate risk
the project's design, financing, construction, and operation assessment is only achievable through the use of the right
(Nel 2013). PPPs can take many different forms, but the most tools and techniques (Mazher et al., 2022).
popular kind is long-term contracts in which the private sector
finances, constructs, and/or maintains the infrastructure while
also taking on the risks related to its availability and/or

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Volume 9, Issue 10, October – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT342

V. CONCLUSION [9]. Bibitayo Ebunlomo Abikoye, Stanley Chidozie

Umeorah, Adesola Oluwatosin Adelaja, Oluwatoyin
Leveraging technology breakthroughs, adjusting to Ayodele, & Yewande Mariam Ogunsuji. (2024).
emerging risks, developing an accountable culture, and taking Regulatory compliance and efficiency in financial
a forward-thinking approach are all necessary to strengthen technologies: Challenges and
financial risk governance and compliance in the United States. innovations. World Journal of
In a constantly changing global financial market, this roadmap Advanced Research and Reviews, 23(1), 18301844.https:
which emphasizes sophisticated risk management, regulatory //doi.org/10.30574/wjarr.2024.23.1.2174
modernization, and a robust compliance culture is crucial to [10]. Bieri, D. S. (2015). Financial Stability Rearticulated:
maintaining economic stability. Overall, our review indicates Institutional Reform, Post-Crisis Governance, and the
that although financial stability committees are intended to New Regulatory Landscape in the United States
foster increased cooperation, their inability to directly Financial Stability Rearticulated: Institutional Reform,
establish macroprudential policies will prevent most of them Post-Crisis Governance, and the New Regulatory
from significantly improving financial stability. Effective risk Landscape in the United States.www.gfurr.vt.edu|+1540
management techniques are, therefore, essential in 2318320Electroniccopyavailableat:https://ssrn.com/abstr
maintaining an economically stable nation: the US as a case act=2432209
study. Likewise, PPP projects have been analyzed as a major [11]. Bezuidenhout, S. (2022). An explanation for the
tool in fostering the ability of US organizations and emerging shift from compliance culture to ethical culture
institutions to adopt the systems thinking approach through in the financial industry (Doctoral dissertation,
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[12]. Brooks, D., & Streng, H. (2012). The stability operations
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