Developing effective and sustainable risk cultures in banks

May 2014

Since its inception in 2009, the Bank Governance Leadership Network (BGLN) has discussed the progress and challenges in improving risk governance in banks and the efforts of boards and supervisors to assess its effectiveness. Ultimately, the objective of this work is to embed risk management into all aspects of bank operations, i.e., to instill an appropriate risk culture throughout the organization. 

Many of the challenges that continue to plague the banking industry have been cast as issues of culture. Recently, Christine Lagarde, managing director of the International Monetary Fund, asserted that little had changed: “While some changes in behaviour are taking place [in banking], these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.” In this context, banks have been considering some core questions about their purpose and objectives in order to address potential cultural issues. In answering these questions, “bank boards should set very clear objectives and nourish the development of a strong culture,” to ensure that they “transform aspirations into practicalities through culture.” A core part of improving risk governance is the need to define risk objectives through risk appetite statements and to align the broader risk framework with the risk appetite. A persistent challenge has been to ensure that work on risk appetite is truly embedded in the businesses and that core risk objectives are understood and are driving behaviors at all levels.  

Supervisors are increasingly focused on assessing risk culture in financial institutions as the ultimate test of whether improvements to risk management and governance processes have been effective. It is not just a “soft” issue: as one executive remarked, “Risk culture is critical to what we do. It’s probably our greatest safeguard as an organization.” And although one executive said, “It’s critical that [a strong risk culture] is embedded in the DNA of the firm,” he went on to say, “That’s not going to happen overnight.”  

The BGLN has been actively discussing risk culture over the last year. During that time, Tapestry and EY have spoken with over 50 leaders in the banking and supervisory community (a list of participants engaged in this work is included in the Appendix), including a roundtable meeting in New York in March 2014. This ViewPoints captures the essence of these discussions, and aims to provide context for executives, boards, and supervisors to think about instilling, monitoring, and sustaining effective risk cultures in banks. This ViewPoints includes a discussion of the following critical points:

  • Risk culture is an increasingly prominent part of supervisors’ assessment of risk effectiveness 

  • Effective risk cultures share some key attributes 

  • Banks and supervisors are refining approaches to understanding and assessing cultural effectiveness