European banks are behavioral risk pioneers. No, really.

Problems with integrity often start from behaviors. Poor culture may drive misconduct and poor outcomes. The behavioral risk needs to be managed. Do we all agree on this? I think so. Do we know how to deal with this in practice? Not really.

“Behavioral science is fascinating, but how do you apply it to the operational reality?” – I hear this more often than not.

Guess what, it looks like the banking sector has an answer.

The decade following the financial crisis has seen much reflection by banking regulators, supervisory bodies, and firms on what went wrong and how to prevent this from happening again. Culture matters, and ignoring culture matters even more – is one of the key lessons learned. As banks onboarded on the journey to cultural transformation, risk management strategies based on behavioral science gained traction.

Interestingly, the trend so far has been more pronounced in the UK and the Netherlands – in many ways, that was driven by the local banking regulators, more on that below. The UK NatWest Group, the Dutch ABN Amro, and ING were pioneers in having dedicated behavioral teams. HSBC and Standard Chartered have recently joined the squad – along with the Royal Bank of Canada.

They now have specialist cross-disciplinary teams comprised of behavioral scientists, anthropologists, organizational psychologists, and other social scientists. Wait, what? You heard me.

Wall Street banks seem to lag behind but are coming up the curve – for example, Citi Bank is currently recruiting culture change advisors in London and New York.

So why is this behavioral dream-come-true happening in the banking sector? As mentioned previously, the global financial crisis in 2008-2009 triggered a lot of thinking as to what role a “culture of greed” played in driving excessive risk-taking in some firms and how all of this led to disastrous outcomes for customers, the market, and the society as a whole. Delving into that, it became increasingly clear that behavioral science can offer a better understanding of the drivers of employee behavior and, therefore, needs to be leveraged on top of the traditional risk management framework.

The banking sector regulatory and supervisory bodies – the UK FCA and the De Nederlandsche Bank (DNB, the Dutch central bank) in particular – have been a driving force, stressing the need for the financial services industry to achieve a cultural change. Although regulation obviously has a limited role in mandating culture, it can effectively increase attention to and expectations regarding culture and conduct and provide insights and lessons learned from across the industry. 

So essentially, what do these banks do in practical terms, and how is that different from what other industries are doing? Some top things are below:

• Behavioral risk assessments: bottom-up – to look into “what employees are doing vs. what leaders think they are doing,” and top-down – looking into employee lifecycle elements (e.g., recruitment, incentives, performance management);
• Targeted “subculture” audits (i.e., a department/location/team) instead of holistic culture assessments – because problems usually lie in the granular but not in the average;
• Training for lasting behavioral change with interventions, changing choice architecture, reinforcing experiences, and nudging.

It is absolutely indispensable that compliance professionals across the industries have an insight into that and leverage the knowledge and experience already accumulated in the financial sector.