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RAPPORT

Risk culture

How can you create a sound risk culture?

Why now?

Concerns about risk culture have arisen from the risk taking pre crisis and even more from the disclosures of conduct failures globally. This has led to a focus from boards and a new level of scrutiny by different types of stakeholders such as shareholders, customers, investors, rating agencies and regulators. The enhanced regulatory focus is underlined by papers from the Financial Stability Board (‘FSB’) and by changes in approach of many national regulators. To answer this new level of scrutiny, we are now seeing a range of financial institutions invest in culture-related programmes.

  • Financial institutions are defining what their current risk culture is and are understanding how culture and behaviours can be effectively managed and changed in a pragmatic, demonstrable way
  • The focus is no longer only on ‘tone from the top’, but also on how behaviours and values are embedded in the daily behaviours and decision making processes throughout the organisation
  • The focus is on the identification of levers and tools that can be adjusted to impact behaviours.

Many of the outcomes we are seeing and advising clients through are leading to deep organisational change. While progress has been made by many financial institutions, embedding risk culture throughout the institution will remain a key challenge for many years to come — cultural change does not happen overnight.

What is risk culture?

Risk culture can bedefined as the financial institution’s norms and the collective attitudes and behaviours of its people that influence risks and impact outcomes. Risk culture provides a specific lens allowing general concerns about culture to focus on risk-taking and risk control activities.

Accordingly every organisation has a risk culture. “Culture counts”. A sound risk culture is likely to lead to the right risk outcomes, while a weak risk culture may promote the wrong outcomes — for customers and/or the financial institution itself.” That is, in a nutshell, the message from the FSB ( April 2014) and key supervisors around the world.

But what makes a risk culture “sound,” and how can firms create a sound risk culture? According to the FSB, a sound risk culture:

• bolsters effective riskmanagement;
• promotes soundrisk-taking;
• ensures that emerging risks an dexcessive risk-taking activities are assessed, escalated and addressed in a timely manner.

This places risk culture at the intersection of behaviour and risk management.

What should you consider to create a sound risk culture ?

EY can help financial institutions to address this question. Our approach is aimed at identifying the organisation’s current cultural standards and behaviour and to determine improvement areas to reach the desired risk cultural levels and its behaviours. 

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