Characteristics of Compliance Risk in Banking

Abstract

This paper examines the characteristics of the "risk of discrepancy" known as "risk of non-compliance with regulatory requirements" or "compliance risk" in the activities of financial institutions. Practice shows that this risk can be a source of serious losses for those of them who consciously perform practices and transactions with the purpose of avoiding regulatory requirements. In order to avert the risk of discrepancy financial institutions establish and maintain in their activities a function of observance of legal requirements ("compliance function"). The implementation of this function suggests building a system for risk management, a special status of the persons who are assigned to exercise control over the risk and a systematic implementation of programs for risk prevention. The risk of non-compliance with regulatory requirements is also present in the Bulgarian banking practice. Bulgaria’s accession to the European Banking Union requires that new European regulations, supervisory procedures, and other legal norms be embraced. This will test the institutional capacity of Bulgarian regulators and the ability of financial institutions to operate in a more complex regulatory environment.