Last week, the European Central Bank (ECB) held a stakeholder meeting to discuss its consultative "Guide on governance and risk culture." In his address to that meeting, Frank Elderson, a Member of the ECB's Executive Board, emphasized that, despite the progress made over the first decade of European banking supervision, persistent weaknesses in governance remain.
These weaknesses have both structural and behavioral root causes, such as limited diversity and ineffective oversight, and need to be addressed. Elderson explained that the new ECB Guide, based on ten years of supervisory experience, outlines expectations and best practices for governance and risk culture. Importantly, the Guide focuses not only on "tangible" governance elements, like management body composition, but also on "qualitative" aspects, like leadership, communication, and accountability.
Elderson argued that risk culture is often where early signs of trouble in banks emerge, as evidenced by past banking crises. As such, the Guide explicitly addresses what the ECB sees as the elements of risk culture, including tone from the top, challenge and diversity, effective communication, incentives, and others. "Clearly, it is for banks' leadership, not supervisors, to set the culture," Elderson noted. Still, supervisors do have a role in assessing that an organization's culture is aligned with prudent risk-taking, he said.
"[S]trong governance and sound risk culture aren't just an added perk," Elderson concluded. "Effective management bodies and sound risk culture are more important than ever, especially in the current risk environment, in which banks are facing economic, competitive, and geopolitical headwinds."
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