Financial Risk Management

CHAPTER 16Worked Example 7: Building a Conduct Risk Score

Building a Conduct Risk Score (CRS) from the conduct risk markers in Figure 21 should not be a goal per se. The customization of a CRS takes central stage in the assessment of how a firm behaves. It is obviously impossible to identify a comprehensive list of conduct risk markers applicable to all banking institutions worldwide. While Figure 21 may provide some help in building a CRS, identifying conduct risk markers is simply the initial step in building a CRS. The idea is to include into a CRS some of the main issues that are before the banking industry nowadays.

With this in mind, we develop in this section a first example of a CRS allowing a conduct risk event, once identified, to be evaluated individually based on four assessment criteria: (i) impact; (ii) warning time; (iii) duration; and (iv) reactivity. Following our own recommendation to customize a CRS, we reorganize Figure 21 according to four conduct risk pillars, each related to three conduct risk markers (misconduct event). The three‐stage method to calculate our first CRS is displayed in Figure 22.

MATCHING RISK MARKERS WITH CONDUCT RISK PILLARS

The identification of conduct risk markers (Step 1 in Figure 22) is not so easy given the huge number of potential misconduct events that can arise within a banking institution. As a rule of thumb, even though not wholly satisfactory, it is possible to start with conduct risk markers that may lead (or led in the ...