Why Culture Matters
Regulators and industry participants alike acknowledge the importance of organisational culture in banks as a crucial factor in preventing scandal, unexpected losses and even insolvency. 'Risk Culture' has been identified as being a key driver of employee behaviour and causal factor related to undesirable outcomes in banks. Analysis of cases such as NAB, HBOS, Barclays, JP Morgan Chase, Royal Bank of Scotland and Lehman Brothers identified risk culture as an underlying causal factor.
According to the global industry association, Institute of International Finance, 'It is critical for governance to embed a firm-wide focus on risk. The recent market turbulence has provided clear evidence that effective cultivation of a consistent "Risk Culture" throughout firms is the main enabling tool in risk management.' Regulatory statements since the crisis of 2008 have repeatedly referred to Risk Culture as an area of focus in the post-crisis environment. The Financial Stability Board (FSB) has provided guidance on supervisory interaction with regard to Risk Culture. The FSB highlights both the requirement for supervisors to formally assess Risk Culture at financial institutions, and the difficulty of this undertaking.
Culture matters to banks because human behaviour is sensitive to context. Culture guides behaviour by defining norms of what is and isn't acceptable. Behaviour is kept in check by social circumstances because we don't want to lose the approval of those around us. Organisational psychologists argue that shaping culture (values, goals, assumptions) is the pre-eminent task of leaders. A 'rules' or 'compliance' based approach to risk management is fundamentally flawed; no set of rules is sufficiently comprehensive to cover every situation and devious, highly-motivated people can (as evidenced by the well-known cases referred to above) circumvent rules. Arguably a strong Risk Culture will be more effective in ensuring that the organisation's objectives are reached.