Behavioral Risk – The Quiet Threat No One Sees Coming

Behavioral Risk – The Quiet Threat No One Sees Coming A Perfect Audit. A Flawed Culture. Not long ago, I walked into a senior management meeting at a well-respected institution where everything looked perfect on paper. Their compliance checklist was pristine. Their risk controls ticked every box. The auditors had just given them a clean bill of health. Yet, within three months, the firm found itself on the front page—embroiled in a scandal involving rogue trading and falsified client reports. What failed? Not the systems. Not the documentation. Culture failed. Behavior failed. This wasn’t a technology gap or a policy oversight. This was behavioral risk—the threat posed by human decisions, incentives, blind spots, and silence. And it’s the most underestimated risk in modern finance. What Exactly Is Behavioral Risk? Behavioral risk refers to the risk of misconduct, poor judgment, or unethical decision-making by employees—even in the absence of malicious intent. It’s not always about bad actors. Sometimes it’s good people making poor choices under pressure, fear, or misaligned incentives. Remember Wells Fargo’s 2016 scandal? Thousands of fake accounts were opened, not by fraudsters, but by employees chasing unrealistic sales goals. The incentive structure was flawed, oversight was lax, and a toxic “deliver-at-all-costs” culture turned good intentions into bad behavior. That’s behavioral risk at work. Story: The Silence That Cost Millions In one of my early transformation projects, we introduced a new control framework. It looked solid on the surface. But something didn’t feel right. The team seemed tense. When I asked if there were concerns, most stayed quiet. Until one brave junior analyst pulled me aside. “Honestly,” she whispered, “we’re skipping the validation steps. Management says they’re too time-consuming and wants us to just sign off.” We were missing a behavioral breakdown in real time—pressure to deliver > process integrity. We paused, investigated quietly, and confirmed it. No fraud, no ill will—just a culture of fear, silence, and impossible deadlines. We revamped not just the process, but the environment. We held listening sessions, adjusted KPIs, and introduced an anonymous feedback mechanism tied to our risk dashboards. That’s how you fix behavioral risk: you make people feel safe to speak. Why Traditional Controls Miss the Mark You can’t mitigate behavioral risk with policies alone. People don’t read policies when they’re overwhelmed. And they don’t report misconduct when they think their job is on the line. Tone at the top matters. But echo in the middle matters more. Middle managers shape day-to-day behavior more than any CEO ever could. If they reward speed over accuracy, or silence over escalation, risk thrives in the gaps. According to the Harvard Business Review, organizations that embed psychological safety are 27% more likely to detect early warning signs of misconduct. That’s not just good ethics—it’s smart risk management. Behavioral Risk Meets AI and Surveillance Many firms now use AI to detect potential behavioral red flags: Email sentiment analysis Voice tone detection in call centers Chat logs scanned for insider trading signals That’s powerful—but it’s not enough. You can’t fix culture with algorithms alone. AI may flag the symptom, but it’s leadership that must cure the cause. The Role of Training—and Its Limits Many institutions rely on mandatory training to combat misconduct. But if training is boring, disconnected from real-life pressures, or seen as a chore, it’s ignored. The most effective behavioral risk programs I’ve seen? Use interactive scenario-based training Tie real-world events to personal accountability Involve leadership in live discussions, not just e-learning modules You need hearts and minds, not just compliance clicks. Behavioral Risk = Reputational Risk Remember: it only takes one incident to damage trust. Ask Boeing. Ask Credit Suisse. Ask any firm whose internal behavior became external headlines. Behavioral risk isn’t just an internal matter—it directly impacts reputation, shareholder confidence, and regulatory scrutiny. Final Thought: Culture is the Ultimate Control You can’t fully automate human integrity. That’s why leaders need to do more than monitor. We must model. We must ask uncomfortable questions. And we must build environments where doing the right thing isn’t just safe—it’s celebrated. Because in the end, the most dangerous risks are the ones we’re too afraid to talk about. About the Author Laksh Vaswani is a financial services executive, award-winning author, and global transformation leader specializing in risk, compliance, and regulatory governance. With over two decades of experience, he has guided financial institutions through operational crises, regulatory exams, and cultural transformations. Laksh is a recipient of the International Achievers Award and a vocal advocate for ethical leadership and behavioral resilience. Share this article :

Final Reflections from the Front Lines of Finance

Final Reflections from the Front Lines of Finance The first time I truly understood risk, it wasn’t from a textbook. It was early in my career. I was shadowing a senior executive at a global bank when a rogue trading incident hit the front pages. Overnight, billions vanished. The mood in the office shifted from confident to cautious. You could feel the air tighten. I asked him quietly, “What happened?” He didn’t say much. Just looked up and said, “Someone somewhere believed it wouldn’t happen here.” That one line stuck with me. Because that’s how risk works — quietly, invisibly, and then suddenly, all at once. We All Work in Risk. Whether We Know It or Not. Over the course of this series, we’ve talked about operational risk, reputational damage, innovation, compliance, audits, MRAs and MRIAs, regulatory exams, even moments of crisis when resilience is tested on train tracks — literally. But here’s the truth behind all of it: Risk isn’t a department. It’s a mindset. It’s in every decision we make — from the new product we launch to the shortcut we consider, to the silence we allow in meetings when we should have spoken up. And if there’s anything I’ve learned in 20+ years navigating the world of financial governance and transformation, it’s that the most dangerous risk is the one we think we’ve already covered. Lessons in Humility (and Humor) Let’s be honest — no one wakes up excited to do a Risk Control Self-Assessment. No one dreams of drafting a Volcker Rule attestation. And when a regulator says “we’d like to discuss your resolution planning framework,” your heart doesn’t leap with joy. But these aren’t just check-the-box exercises. They’re stories. They’re scars. They’re proof that we’ve tried, failed, improved, and evolved. Like the time we submitted a 400-page RCSA and forgot to include cyber risk. Or when a junior analyst flagged an unencrypted server and saved us from a headline we never want to read. Or the time we got it all right on paper — only to fail the cultural test that no audit could catch. Risk, at its core, is human. And so the solutions have to be human too. Courage, Not Control, Is What Makes Great Risk Leaders In every story we’ve explored, from managing operational resilience to navigating innovation with regulators breathing down our necks, the leaders who stood out weren’t the ones who played it safest. They were the ones who were honest about uncertainty. They created space for hard questions. They told their teams, “I don’t know either — let’s figure it out together.”They resisted the urge to sanitize risk reports and instead exposed the real issues, even if it meant a tougher conversation with senior management. They understood that risk is not just something to “manage” — it’s something to lead through. So, What Do We Do Now? If you’ve read this far, you’re probably someone who takes governance seriously. Someone who knows that trust is built over time — and lost in seconds. So here’s what I’ll leave you with: If you’re building risk frameworks, build them with curiosity, not just compliance. If you’re leading through uncertainty, prioritize clarity over perfection. And if you’re mentoring others, teach them that risk isn’t something to fear — it’s a lens for better decisions. Because at the end of the day, whether you’re a risk officer, a CEO, a product lead, or a startup founder — you’re in the business of decision-making under uncertainty. That’s all risk really is. And that’s what makes it powerful. About the Author Laksh Vaswani is a global financial executive, transformation strategist, and best-selling author with more than two decades of experience helping organizations navigate complex risk landscapes. A mentor, thought leader, and recipient of the International Achievers Award, Laksh has led risk and compliance efforts at major global institutions across the U.S., Europe, and Asia. Through The Risk Chronicles, he shares lessons from the trenches — not to preach, but to invite others into the ongoing conversation of building better, stronger, more ethical organizations. Share this article :

When Firewalls Fail — The Human Side of Cyber Risk

When Firewalls Fail — The Human Side of Cyber Risk The Wake-Up Call That Came at 3:12 AM A few years ago, I received a call no operations executive ever wants to get.“Laksh, we’ve had a breach.”That was it. Six words. But behind them were two thousand frozen screens, a ransomware note, and one innocent click from a colleague trying to download a “secure attachment” from what appeared to be a trusted vendor. As much as we had trained staff and layered our tech stack with the latest SIEM tools and threat detection software, the reality hit hard: Cyber risk is not just an IT problem—it’s a business resilience problem. Lesson 1: People Are the First—and Weakest—Firewall We had invested millions in cybersecurity. And yet, our breach came not from some sophisticated zero-day exploit, but from someone clicking a phishing link sent during peak business hours. It reminded me of the famous quote by Bruce Schneier: “Amateurs hack systems, professionals hack people.” We had overlooked something simple—our people were overwhelmed with alerts and compliance training fatigue. We needed engagement, not just education. So, we rolled out gamified phishing simulations, lunch-and-learns with real cyber stories, and even made password reset day a mini-office event. Outcome? Click rates dropped. Awareness rose. People were no longer passive gatekeepers—they became active defenders. Lesson 2: Not All Data Is Created Equal Post-breach, we conducted a data prioritization audit. Turns out, we were “protecting” some files like nuclear codes… and leaving truly sensitive ones less guarded. Here’s the thing about data: volume ≠ value. So, we redesigned our controls using data classification frameworks like those recommended by NIST and ISO/IEC 27001. Critical data was encrypted, monitored, and access-controlled. Non-sensitive material was moved to less critical environments—less complexity, less exposure. Lesson 3: You Can’t Outsource Accountability Many of us trust our vendors with our most sensitive data—from payroll processors to cloud providers. But cyber risk doesn’t vanish when you outsource it. In fact, third-party vendors account for over 60% of data breaches, according to a Ponemon Institute study. We learned this firsthand when one of our cloud vendors suffered a breach. They were compliant—but their subcontractor wasn’t.We had to answer for it. So, we built a Third-Party Cyber Risk Framework that went beyond just reviewing SOC reports. We conducted due diligence, required evidence of multi-factor authentication (MFA), and introduced breach notification SLAs. Trust, but verify. Then verify again. Lesson 4: Don’t Just React—Rehearse Back to that 3:12 AM call. One silver lining? We had rehearsed this exact scenario during our Business Continuity & Incident Response tabletop exercises.Because of that, teams knew their roles. Legal drafted statements, PR was briefed, IT isolated servers, and clients were proactively informed before the headlines hit. We discovered that what mattered most was not just how we recovered, but how transparently and swiftly we communicated. Looking Ahead: Cyber Risk Is a Moving Target The cyber threat landscape is evolving—AI-powered attacks, deepfakes, nation-state hackers. You can’t eliminate cyber risk, but you can build cyber resilience. Resilience isn’t about having the best tech. It’s about: Creating a culture of awareness Investing in real-time detection and response Practicing recovery before you need it Embedding cyber strategy into boardroom conversations, not just IT updates As regulators like NYDFS, OCC, and SEC tighten cybersecurity standards, leaders must rise beyond compliance checklists and build organizations that are agile, secure, and responsive. About the Author Laksh Vaswani is a global financial services executive, best-selling author, and recipient of the International Achievers Award. With over two decades of experience in regulatory transformation, risk governance, and operational resilience, he has helped institutions navigate complex cyber threats and regulatory expectations across North America, EMEA, and Asia. Laksh is a passionate mentor, speaker, and thought leader in financial innovation and risk management. Share this article :

When the System Blinks: Understanding and Managing Technology Risk in Financial Services

When the System Blinks: Understanding and Managing Technology Risk in Financial Services One late afternoon, in a well-known financial services firm, a routine end-of-day batch job failed to kick off. A simple scheduling error, it seemed. But that single misfire led to an overnight reconciliation backlog, delayed settlements, and an early morning call with a regulator who’d noticed the delayed reporting. That was the moment we learned: in today’s digitized financial landscape, technology risk isn’t just a back-office concern—it’s front-page news waiting to happen. Technology risk refers to the potential for losses stemming from the failure of systems, software, networks, or third-party tech services. It may be triggered by outdated infrastructure, coding errors, cyberattacks, third-party failures, or even well-meaning automation that no one quite tested properly. The consequences? Reputational damage, financial loss, and regulatory scrutiny. The Chain Reaction Nobody Wants Several years ago, I worked with a global asset manager undergoing a cloud migration. It sounded exciting. The cost savings and scalability benefits were all there. But what wasn’t on the slide deck was how many business-critical applications still depended on legacy architecture that wasn’t cloud-compatible. In one instance, a reporting tool that pulled position data for risk oversight failed to retrieve accurate feeds after the cloud switchover. The result? Inaccurate risk reports sent to internal committees and a scramble to recall and correct them before external eyes got involved. What did we learn? The importance of technology change governance. Before any major tech overhaul, every upstream and downstream dependency needs to be mapped, tested, and retested. Simple rule: if it can break, it probably will—unless you’ve planned for it not to. Cyber Risk: The Ever-Present Shadow No article on tech risk is complete without mentioning cybersecurity. And it isn’t just about firewalls and encryption. A breach can come from an innocuous email attachment. At another institution I advised, a phishing email compromised an employee’s credentials. No big deal, right? Wrong. The compromised ID had access to a dormant third-party file transfer protocol (FTP) server still linked to live customer data. That one oversight turned into a multi-month breach investigation. We took action quickly: reviewed all privileged access, killed off dormant accounts, revamped endpoint monitoring, and launched mandatory cyber-awareness training. But we also rewrote our third-party risk policy to emphasize identity lifecycle management and data minimization. Regulations and Frameworks: A Compass, Not a Crutch Regulators have taken note. The NYDFS Cybersecurity Regulation (23 NYCRR 500), GDPR, and FFIEC guidance all outline expectations for managing tech risk. Yet compliance with these laws shouldn’t be the ceiling—it should be the floor. One client of mine adopted the NIST Cybersecurity Framework as a strategic blueprint. By pairing it with FAIR (Factor Analysis of Information Risk) modeling, we quantified risk exposure in dollar terms. This helped the board better understand why we needed a budget increase for endpoint detection and response. Dollars and metrics speak louder than fear. The People Side of Technology Risk Technology risk is never just about the tech. People build, maintain, and use systems. And people are fallible. At a mid-sized bank, a developer wrote a script that bypassed a manual review step to speed up processing. It worked. Until one day, it didn’t. The script ingested corrupted data, which went unchecked, leading to a cascade of reconciliation issues across six business lines. It took days to untangle. This incident led to our “Human Factors in Technology Risk” initiative. We didn’t just audit the code. We started asking: Why did the developer feel the need to create a workaround? Was it a culture that celebrated speed over controls? Were teams empowered to report fragilities? These are cultural questions as much as operational ones.   What Financial Institutions Must Do Map Dependencies – Understand how your systems connect, where the single points of failure lie, and who is accountable for each. Simulate Failure – Run tabletop exercises. Pull the plug (figuratively) on a major system and see what happens. Be surprised in a safe setting. Invest in Culture – Tech awareness, ownership of controls, and a psychologically safe environment to report issues are just as vital as tools and policies. Benchmark to Frameworks – Use NIST, COBIT, ISO 27001, or FFIEC not just for compliance but to drive maturity. Vendor Vigilance – Third-party risk is first-party risk in disguise. Have your vendors been tested? Audited? What’s their incident response time? About the Author Laksh Vaswani is a senior financial services executive and technology risk advisor with over 20 years of experience guiding institutions through digital transformation, regulatory compliance, and operational resilience. A best-selling author and International Achievers Award recipient, he is passionate about building governance frameworks that don’t just satisfy regulators, but make institutions stronger, safer, and smarter. Share this article :