ICYMI: Earlier this year, the Bank of England appointed Andrea Enria, past-Chair of the Supervisory Board at the European Central Bank, to its Prudential Regulation Committee.
In written evidence submitted to the House of Commons Treasury Committee regarding his appointment, Enria stressed the importance of sound culture and governance in supporting financial stability. "If we look back to the major episodes of failures at financial firms, we can always identify a root cause in poor culture — especially risk culture — and ineffective governance," he wrote. "This was the case for Credit Suisse, which had experienced a series of loss events without being able to fix the cultural issues that eventually led to its crisis."
However, culture is also a uniquely difficult matter to supervise, Enria lamented. "It is not easy to show evidence of an inadequate risk culture, as most frequently poor behaviour and decision making are driven by internal noncodified norms, behaviours and attitudes," he explained. "Hence the first challenge is to develop a thorough analysis that triggers reflections within and actions by the firm's board and senior management, thus effectively driving cultural and organisational change."
In oral evidence presented to the Treasury Committee last week, Enria discussed how emerging AI and technology tools might allow for more effective culture risk supervision. "I know of tech companies, for instance, that are developing artificial intelligence mechanisms based on the use of metadata," he said. "[T]hey look at the dynamics of communication inside the firms to understand how relevant certain functions are and the status of different functions internally ... We should all be trying to understand how these types of tools function and whether they could bring value added to supervisory work."
For more from Andrea Enria, don't miss his In Focus interview from our 2024 Compendium, in which he argued that supervisory efforts must increasingly focus on matters of governance and culture to prevent future bank failures. ▸ Read More
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