Since the 2008 recession, we’ve seen years of mostly low inflation, declining interest rates, and healthy stock markets. As inflation and rising interest rates are starting to affect the market in 2022, all signs are indicating that the economy is heading in a downward direction. Banking and the economy are at a turning point, and the state of the market heralds troubling changes. A recent Mckinsey report states that “ 81 percent of leaders expect a recession”.
The 2008 Compliance Hangover
Before the financial crisis of 2008 and the Great Recession that followed, compliance was seen more as an onerous expense than as a crucial step in ensuring consumer protection, systemic risk management, and fiscal safety. Senior management and the board were frequently under-engaged in compliance-related matters, decision-making processes were often diluted and conflict-ridden, and compliance governance lacked appropriate transparency.
The financial crisis of 2008 originated in the United States as a result of the collapse of the U.S. housing market. The crisis exposed gaping holes in earlier compliance systems, and we learned the hard way that a strong state of compliance aids operational and financial resilience. As a result, the last decade has seen significant strides in the compliance arena. Security frameworks are in a continuous development process and mandated security requirements are causing institutions to brace themselves with strong postures to face inevitable receding economic tides with resilience.
With all the bolstering that has taken place since 2008, things are sure to play out very differently this time. But unlike the previous recession period, the Federal Reserve will be more constrained in its ability to reduce interest rates to stimulate investment and consumption and lower unemployment. In today’s environment, steep inflation, rapidly rising interest rates, lower lending volume, and more pressures on businesses will put a new kind of spin on regulatory compliance during recession.
How Do Recessions Impact Compliance
The effect of recession and compliance is derived from these concepts:
- Risk Environment
During economic downturns, there is often a rise in criminal activity, much of which will have an impact on cyber security. Increased fraud volume is typical, as are criminal activities of extortion and ransomware attacks.
- Cost Drivers
Businesses cut out non-revenue-generating activities. Compliance, as a regulatory responsibility, is often a target for financial curtailing, leading to potential legal friction with regulatory bodies.
- Regulatory Change
Regulators often reconsider mandated standards that may have prevented or mitigated the economic crisis. For example, in response to the financial crisis of 2008, Presidents George W. Bush and Barack Obama enacted several legislative measures to counter the recession’s impact, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA).
The current crisis is having – and will continue to have – effects along these lines too, although shaped by its unique features and wider political and geo-political contexts.
Criminals can take advantage of health fears, regional conflicts, or target the vulnerable via cybercrime under the cover of increased online activity.
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Dancing in the Rain with Compliance
Knowledge of an oncoming financial slump and the ensuing period of anticipation allows businesses to reassess their state of compliance and ensure they are fit for the challenge ahead. Acing a recession is not about waiting out the storm. Success lies in learning how to dance in the downpour. Preparation and prevention are key to weathering the recession.
Following are a variety of steps companies can take to proactively enhance their recession plan.
- Regular risk assessments are a good place to start. They will aid in determining the risks the company faces and how to minimize and mitigate them. These risks may fluctuate over time due to the unpredictability of an economic downturn. To keep the organization’s business and legal goals in sync, any changes to the risk profile of the company must be routinely notified to the board. Maintaining awareness of any changes to the organization’s risk profile will also allow for the timely adaptation of policies and procedures as new hazards arise.
- A well-funded compliance effort should still be prioritized despite potential pressures on legal and compliance teams to minimize expenses and personnel. Businesses must decide on a recession checklist that lists how to best deploy their resources while preserving sufficient framework compliance.
- When outsourcing or using third-party services, adhere to all internal procedures and policies. Some of these may need to be modified to align with the economic forecast. It will be important to pay close attention to any financial hardship that potential third parties may be going through or are likely to suffer.
- In applying for grants or subsidies, as well as bidding for government contracts, due diligence in any interactions with government officials will be crucial, and compliance professionals must ensure that the adequate requirements for entering into these agreements are in place.
- Never underestimate the power of education and training. When employees and third-party service providers understand the importance of compliance, a culture of compliance is more attainable. Customized sessions should be provided to stakeholders whose functions expose them to greater risks. The balance between encouraging growth and progress and pushing for compliance should trickle down from the top of an organization.
- Despite the financial difficulties and hurdles a global downturn presents, the business’s duty to act ethically should not be compromised. While businesses focus on reaching their commercial objectives and remaining financially viable, the importance of communicating values and how to conduct business compliantly should not be forgotten.
Minimize Recession Risk with Centraleyes
With a wide range of potential economic outcomes on the horizon, system resilience can be built through this process:
- Identify: Understanding the challenges and opportunities recessions cause.
- Respond: Mitigate challenges while capitalizing on opportunities in real time.
- Adapt: Long-range planning to tide over economic unrest builds stronger and better posture in the long run.
You need a recession plan to protect your business, starting with a solid risk and compliance platform. The Centraleyes automated risk and compliance platform serve as a hub for agile decision-making, helping you prepare for turbulent times ahead. With our powerful risk register, you can easily assess and quantify recession risk to estimate the severity of a nearly certain gloomy forecast and generate actionable insights to guide you through compliance requirements.
A pivoting economic turn is a moment that requires true leadership. The best-performing companies don’t wait for that turn to happen: they act with proactivity and courage in the face of economic uncertainty. The period we find ourselves in now can be a prime opportunity to fortify core resilience and flourish, while competitors anticipate waiting out the storm.
See how Centraleyes transforms your risk and compliance management.
Start Getting Value With
Centraleyes for Free
See for yourself how the Centraleyes platform exceeds anything an old GRC
system does and eliminates the need for manual processes and spreadsheets
to give you immediate value and run a full risk assessment in less than 30 days
