Risk Culture as a Means of Mitigating Conduct Risk

Thomas Kaiser and Tatjana Schulz write in their contribution to the book “Social Credit Rating” about the similarities with and differences to the China Social Credit System: Banks around the world have been exposed to numerous cases of misconduct at individual as well as on a systemic level, inflicting harm on single customers and the society as a whole. This includes inappropriate product design (e. g. securitizations which led to the financial crisis), large-scale market manipulations (LIBOR and other reference rates) as well as other fraudulent activities (e. g. creation of accounts without the knowledge of the affected clients).

“Regulatory bodies have reacted with a broad range of requirements and recommendations. A key tool in fighting misconduct”, Thomas Kaiser and Tatjana Schulz write, “is the strengthening of risk culture as an institution’s norms, attitudes and behaviours related to risk awareness, risk-taking and risk management, and the controls that shape decisions on risks.”

They see implementing risk culture frameworks as a means of influencing behaviour of employees to mitigate those risks in individual banks and thus ultimately to improve the reputation of the banking sector as a whole. While banks have made progress in designing those frameworks, the maturity of this particular discipline is still at a moderate level and full-scale implementation is not yet common.

The China Social Credit System also aims at improving behaviour of individuals and corporations by setting clear expectations and measuring compliance with those, the authors say: “Chinese authorities have gathered substantial experience with this methodology during pilot implementations and are refining the approach further during the rollout throughout the country. A comparison of those two approaches leads to suggestions on what the two approaches could learn from each other.”

Prof. Dr. Thomas Kaiser has been working in risk management for more than 20 years. He is Director in the Financial Services division of KPMG AG Wirtschaftsprüfungsgesellschaft in Frankfurt / M. and honorary professor for risk management at the Goethe University Frankfurt. After studying business administration in Saarbrücken and completing a doctorate in the field of financial econometrics in Tübingen, Prof. Kaiser held a managerial role in risk controlling at four major German banks. He is co-editor of the Journal of Operational Risk and the author of numerous essays and books on risk management topics.

Tatjana Schulz works for KPMG AG Wirtschaftsprüfungsgesellschaft in Munich. As a psychologist with a focus on risk research and a banker with many years of experience in the financial services sector, she deals with the qualitative elements of risk management at KPMG. Among other things, she supports the audit teams in the areas of operational risk and risk culture and has valuable insights into the current state of implementation of the regulatory requirements in the German banking landscape.

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