Strengthening supervisory assessments of risk culture

In examining the lessons of the Global Financial Crisis, prudential supervisors quickly recognised that risk culture had been a critical determinant of financial success or failure. Prior to the crisis, an excessive focus on short-term financial success (the ‘what’) without sufficient regard to the way in which results were generated (the ‘how’ and the ‘why’) allowed excessive risk-taking to go unaddressed — with significant costs ultimately borne by shareholders, employees, creditors and taxpayers.

National authorities, and international standard setting bodies, have therefore devoted considerable effort over the past decade to improving supervisors’ capacity to understand and assess how the risk culture within an organisation influences its risk profile. However, unlike the traditional areas of prudential focus like capital and liquidity, where frameworks and metrics for risk measurement are well-established, assessing the behaviours, mindsets and motivations of people — both individually and collectively — is much more difficult.