Management of behavioral risk in the first line of defence

Jürgen Bott and Udo Milkau

Abstract

Events in the last decade (such as the financial crisis, the settlement of legal claims against banks and criminal activity in the form of rogue trading) have underlined the importance of nonfinancial risks for banks, ie, risks other than market or credit risk. Approaches to dealing with nonfinancial risk range from risk governance to the methodology of modeling risk. The behavior of decision makers has been identified as a new type of risk: behavioral risk. However, less attention is paid to behavioral risk management in the first line of defence. This paper discusses key features of fighting behavioral risk in the business line of operations as the central hub for all transactions in a bank. Starting with examples such as best practice in aviation, it will examine different possible solutions, from training single subject-matter experts to communication at enterprise level.