BCBS: Supervisors Should Scrutinize Culture

At the 23rd International Conference of Banking Supervisors last week, delegates from banking sector supervisors and regulators across more than 90 jurisdictions endorsed the Basel Committee on Banking Supervision's (BCBS) revised “Core Principles for Effective Banking Supervision.”

The BCBS embarked on a review of the Core Principles in April 2022, aiming to incorporate changes reflecting advancements in supervision and regulation, structural shifts impacting banking systems, and insights garnered from Financial Sector Assessment Programs (FSAPs). FSAPs are reviews conducted by the International Monetary Fund (IMF) and World Bank into the resilience of a country's financial sector. The BCBS initiated a consultation on the now-finalized revision in July 2023, to which we at Starling Insights offered comments.

The revisions primarily aim to:

• Embed learnings for mitigating financial risks and to strengthen the macroprudential aspects of supervision;
• Promote operational resilience;
• Reinforce corporate governance and risk management practices; and
• Address new and emerging risks, including the digitalization of finance and climate-related financial risks.

A key aspect of these efforts will be an increasing attention to governance and culture. "Reflecting evolving risks and broader medium- and long-term trends, it is critical that banks institute a sound risk culture, maintain strong risk management practices and adopt and implement sustainable business models," the document reads.

The Core Principles now feature guidelines for the supervision of bank culture, recognizing its importance to risk management and resilience by integrating it into two core principles: CP14 on corporate governance, and CP15 on risk management processes. These additions are in the form of new "essential criteria" — guidelines for effective supervision that can be used in self-assessments and FSAPs. 

In CP14, these new criteria include that supervisors determine that the "bank's board approves and oversees implementation of the bank's strategic direction, risk appetite and strategy, and related policies, establishes and communicates corporate culture and values." And CP15 requires supervisors to determine that banks "have appropriate risk management strategies that have been approved by the bank's board." Supervisors must also verify that the board ensures that “a sound risk culture is established throughout the bank, to promote the development and execution of its strategy.”

"While responsibility for designing and implementing sustainable business strategies lies with a bank's board, supervisors have an important role to play, as assessing the robustness of banks' risk culture and business models is a key component of effective supervision," the BCBS wrote.