Why do banks fail? Is a poor risk culture accountable in part?

Given the Financial Reporting Council’s new code and guidance on risk management, this is an interesting article by Simon Samuels in the FT.

Although I do not strictly agree with the comment that “the overall risk culture…explained their divergent fortunes”, the concept that risk needs to be better understood and calculated within a bank, and across all financial services, is one the industry as a whole is taking very seriously.

We continue to see internal audit departments tackling the question of how to audit and monitor culture, as well as heads of strategy focusing on how to better compensate sales staff so as not to incentivise excessive risk beyond the parameters that a bank has set – and that includes reputational risk. The article is asking nothing that the industry has not already questioned, but it does further the debate as to how regulation should interact with these organisations.

As far as risk management is concerned, one of the most important comments in this article; regardless of the example given, is that the culture at some banks is not what encourages challenge at the top table. Improving this is something that we have certainly seen at Board and ExCo, the ability to challenge and the courage to say ‘no’ to a peer or Executive is something that is now being demanded of a CRO by those others around the table. The CRO in question needs to challenge appropriately which means they need the ability to build strong relationships and to influence, both formally and informally.

This is prompting high competition within the financial services to attract the level of CRO whom is able to sit at this Executive table and command the respect of their peers so that challenge (even if unwanted) is observed.

A CRO needs a high level of EQ and judgement as well as the backbone to stand up for what sets the correct risk culture within their organisation; and to get the business to engage with this! Equally important are the Non-Executives; they also need to be able to push back and at least one should have a risk background.

You can read the full article by clicking here.