ABSTRACT

This paper discusses the violation of applicable firm guidelines by individuals employed by a bank or financial institution and suggests specific metrics to identify and prevent such behavior by means of appropriate, effective operational risk management. Since the actor is usually socially inconspicuous, and since the associated financial damage does not necessarily have to be verifiable through classic valuation methods (eg, financial statements), we feel that it is very difficult for banks and financial institutions to uncover such behavior. Nevertheless, in order to be able to react to this latent risk, we apply modern, basic criminological assumptions to analyse the relationship between the multiple causes of the risk and their effects in the underlying risk origination process. The analysis is performed based on Schneider's model, which is used to describe the criminal behavior of socially inconspicuous individuals. Based on the result of that analysis, we design a specific conceptual risk indicator that approximates the underlying risk exposure by means of a linear function. We then operate the developed risk indicators through a dashboard, tracking the development of each valid indicator value through time. The effectiveness of the measures taken to counteract the risk can be derived from the development of the displayed indicator value and the related trend.