E&M

Conduct risk—the risk that intentional or negligent behavior by bank management and staff will result in unexpected losses—has yet to be clearly defined, despite growing attention from regulators and supervisory authorities. This article traces its causes, distinguishing between technical risks on one hand and behavioral and cultural risks on the other, and examines the practical difficulties of managing conduct risk: quantifying damages, assigning responsibility along the organizational hierarchy, and ensuring that sanctions are effective. The argument here is that managing conduct risk requires clear rules as well as a change in corporate culture, supported by training and a control framework that can be integrated with existing control mechanisms.