Financial Risk Management

Introduction

There's a new boss in town and its name is conduct risk: failure to adequately assess and monitor the risks associated with highly risky strategies, practices contrary to the interests of clients, market collusion, regulatory reporting infractions, foreign currency rigging and money laundering. These are just some of the conduct breaches major banks worldwide have been fined for, and it is not over yet. Welcome to the amazing and worrisome world of misconduct in the banking industry!

In the past 10 years, around 70% of banks' operational losses have been connected to misconduct risk (also known as conduct risk). In its Global Risk 2021 report, the Boston Consulting Group mentions that in 2020, banks in Europe and North America paid $13 billion in penalties. Cumulative penalties since 2009 now total $394 billion. In February 2019, the Head of the International Monetary Fund (and Current Head of the European Central Bank), Christine Lagarde, warned: “a decade on from the financial crisis, bad bankers have not learnt from the 2008 crash, with compensation levels reaching record highs on Wall Street and in other financial centers”, and thus the financial industry needs an “ethics upgrade”.

What went wrong? This question is not easy to answer, but the idea that risk management should no longer be exclusively about developing complex mathematical models and equations is gaining momentum within major financial institutions. New approaches, perspectives and initiatives ...