Page 22 - Layout 1

Banking
The Bank Cultural Revolution
Research (PwC and the London Business School, 2015) suggests that over- emphasising punishment for bad behaviour can also create a climate of fear. An unintended consequence of this could be that it may lead to more unethical conduct in financial services. This research argues that generating excitement about winning is the key to more ethical and better innovative behaviour in banking.
Recent experiences have reaffirmed the importance of banking supervisory regulation and the need for it to have a sig- nificant degree of independence. They have also confirmed that supervisory regulation must reflect the macro-economic role of banks (hence the rise of anti-cyclical capital adequacy buffers) and the reality of bank market anomalies, like the Too Big To Fail (TBTF) problem. The latter also reflects another apparent lesson that market discipline unaided cannot cover off all the needed prudential targets that responsible banks should observe - hence, the need for regulatory-directed stress tests.
Risk culture
Risk culture and risk appetite are key components of a bank’s corporate culture. As with most areas of corporate culture, there are continuing debates about the essential elements of a strong risk culture
of senior management. Recent survey evidence (EY/IIF, 2014)
confirms that banks worldwide are now engaged in a risk culture revolution. Examples of these latter changes include the importance of top management ownership and its driving forward of the required new risk management systems and technologies.
Overall, important stakeholders (like society and Basel regulators) have strongly reinforced the need for this risk culture revolution. Survey evidence on banks’ experiences during the financial crisis confirmed the overriding importance of a disciplined, top-down and risk-orientated management. Also especially important are aligning the board, the leadership team and the banking business units around a shared understanding of risk culture. Risk culture has to be built from the top.
ALM
There is a widespread view that getting a risk appetite framework established has to be central in constructing a strong risk culture. A major challenge in strengthening the risk culture is striking the right balance between a sales-driven front office culture and a risk-focussed Asset and Liability Management (ALM) one. Developing the required systems data and forward-looking risk metrics are also crucial in achieving these aims.
The risk culture revolution in banking is far from easy, but it is a necessary part of the developing post-crisis environment. The new bank business models are being shaped by it. Ultimately, the best insurance for the sustainability of free market banking is the quality and professionalism of bank staff, and those who run the organisations. The recent intensification of the risk culture revolution in global banking is reflective of the new, emerging post-crisis business model.
www.charteredbankermba.com
By Professor Ted Gardener, Chartered Banker MBA Programme Director, Bangor Business School
Two of the major challenges facing the banking industry today, are improving its risk management governance and changing the kind of risk culture that strongly characterised many banks up to the 2008 financial crisis. Of these, the most fundamental and pressing need is developing a more acceptable, responsible and professional risk culture. A quiet banking revolution has been underway for some time across the globe that addresses these key concerns.
Basel 3
The new Basel 3 rules were immediate and predictable responses to the 2008 crisis. These were needed and they have re- emphasised inter alia the fundamental importance of key bank prudential resources like capital adequacy and liquidity. They have also served to explicate and refine the
‘ When bank regulation becomes overly constraining, incentives may develop for banks to move into
shadow banking
importance of the required techniques, like and how these might best be embedded stress testing, to evaluate capital and and integrated into wider strategic and
liquidity adequacy in banks. At the same time, regulators and other
key stakeholders in banks have to be careful about what they wish for. History has shown that excessively burdensome and restrictive bank regulations can help encourage the very events that they target to reduce or moderate (like contagion risks and systemic crises).
When bank regulation becomes overly constraining, incentives may develop for banks to move into shadow banking – busi- ness that is unregulated and which may lead to the build-up of new systemic risk potentials.
operational models. Nevertheless, there is a wide consensus that getting the risk culture right is an essential foundation for effective risk governance.
Fundamentally, it boils down to how managers behave – their attitudes to evaluating and managing risks, and how they balance such risks against the respective profit return. It is about their risk appetite – how much and what kinds of risk the bank is prepared to take, and embedding this risk appetite and the respective risk culture throughout the entire organisation. Risk culture and risk appetite have to be a priority
22
Gibraltar International
www.gibraltarinternational.com
‘