Conduct Risk
Conduct risk refers to the risk of losses arising from inappropriate, unethical, or unlawful behavior by a financial institution or its employees.
Meaning in Practice
In practice, conduct risk includes mis-selling financial products, market manipulation, or breaches of consumer protection rules. It often arises from weak internal controls, poor corporate culture, or incentive structures that encourage excessive risk-taking. Regulators closely monitor conduct standards to protect customers and market integrity.
Why It Matters
Conduct failures can lead to substantial fines, legal costs, and reputational damage. Persistent misconduct undermines trust in financial institutions and weakens overall market confidence. Strong governance and compliance systems are essential to mitigate conduct risk.
Market Impact
Revelations of misconduct often trigger sharp declines in a bank’s share price and widening credit spreads. Regulatory investigations may increase capital or compliance costs. Broader sector sentiment can deteriorate if systemic conduct issues emerge.
Example
A bank is fined after regulators determine it mis-sold complex financial products to retail clients without proper risk disclosure. The institution faces financial penalties and reputational damage.