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A failure to manage financial risks among banks triggered the 2008 Financial Crisis, costing Americans more than $10 trillion. The next crisis may well follow from their failure to manage “conduct risks.”

The standard method for addressing conduct related risks in the banking sector is an exercise in what might be called “applied hindsight”: we identify and inspect misconduct only after it has taken place or is discovered to be well underway. Over the last decade, this too-little-too-late approach has led to hundreds of billions of dollars in punitive fines levied by governments and industry sector regulators, notwithstanding the billions that the banks have spent annually on their governance, risk, and compliance control infrastructures.

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