Managing Risk for Financial Institutions With Contract Intelligence

The recent banking crisis stunned the finance world, raising questions of economic stability and leadership decisions. As government agencies work through the next steps, business leaders are examining the factors that led to these crises and doubling down on their own risk management processes.

Legal, operations and risk roles within the financial sector continue to evolve in light of new regulations, emerging technology and shifting social and political factors. “These professionals must leverage contract data at both an aggregate and granular level to build more effective risk management strategies and remain compliant with internal policies and external regulation,” said Jake Sussman, Chief Operating Officer and Founder at Evisort. 

Considering the myriad of risk factors financial institutions must balance, a well-planned contract management strategy can play a vital role in managing multi-tiered risk, including: 

Financial Risk

There has always been risk associated with trusting funds to a bank. However, in light of the chaos surrounding recent bank failures, government agencies are placing a heightened importance on a financial institution’s security and stability. Questions concerning a bank’s overall health, investments, protection protocols and monitoring schedule need to be taken into account to avoid major losses. 

Before committing funds, legal teams will benefit by fully investigating a banking partner. Counsel should pay special attention to certain provisions related to risk monitoring in future contract agreements to protect their organizations.

Compliance Risk

Every financial institution is required to abide by applicable laws and regulations governing privacy, consumer protection and security. When a crisis occurs, though, special circumstances may arise.

The FDIC has recently appointed bridge banks to assume the deposits and obligations of Silicon Valley Bank and Signature Bank. Although the bridge bank is authorized to receive the existing vendor contracts the banks held, that doesn’t apply to contracts that contain limits on transfer. 

While contracts should be written to permit the FDIC to access facilities and examine services provided by those specific institutions, current financial institutions may find themselves in hot water if they lack the ability needed to easily determine whether or not their agreements contain non-transfer clauses.

Compliance risk also increases when organizations enter into agreements with third-party providers, such as call centers or international entities. According to Sussman, “It is imperative to have easy, searchable access to these contracts in order to ensure organizations are following specific requirements of both domestic and foreign regulatory laws on an as-needed basis.” 

Reputational Risk

Perception is reality when it comes to managing reputations. Financial institutions must consider that their customers’ trust may waver if they feel the bank is not operating securely or responsibly. 

Operational Risk

From deliberate fraud to inadvertent processing mistakes, from system disruptions to lack of timely communication, financial institutions are subject to high penalties when operations go wrong. 

Looking at the SVB example, many companies signed contracts with the bank that contained language preventing them from safely diversifying their banking services and risk. When the bank failed, those organizations were left fearing millions of their dollars would be frozen or lost forever. 

Contract Technology for Financial Institutions

As legal professionals work to reduce and manage risk, they need to leverage new technology that enables better visibility and access to actionable financial data locked within their contracts. 

Emerging technologies, such as generative AI, machine learning and optical character recognition (OCR), can be used to accelerate regulatory audits, expedite negotiation cycles and evolve risk management strategies.

“After contracts are ingested and analyzed, AI and OCR technology can extract key financial data, such as terms of service, limitations of liability and termination dates, to give legal professionals within financial institutions deeper visibility into the information within those agreements,” explained Sussman. “They can then use that contract intelligence to develop stronger, more effective risk mitigation strategies and efficiently improve contract negotiation strategy overall.” 

Being able to easily access and report on data contained in contracts is key to future-proofing projects across financial institutions, both those that are initially identified and those that teams may not see coming. By leveraging AI and other emerging technologies, organizations can speed and streamline processes, account for internal and external risk factors, and protect themselves during difficult times.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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