In a speech delivered at a recent European Central Bank (ECB)/European University Institute seminar, Anneli Tuominen, a member of the ECB's Supervisory Board, emphasized the vital role of good governance and sound risk culture in navigating the challenges facing the banking sector today.
"We saw in the global financial crisis and in last year's banking sector turmoil that deficiencies in internal governance and risk culture can often be early warning signs of turbulence ahead," she said. Tuominen stressed the importance of individual suitability within, and collective suitability of, management bodies. At an individual level, institutions should comprehensively assess members' knowledge, skills, and dedication. At a collective level, organizations should ensure management bodies possess diverse expertise and effective challenge capacity to enable proper oversight.
"Risk culture encompasses the collective mindset and the shared set of norms, attitudes and behaviours related to the awareness, management and control of risks at all levels in a bank," Tuominen explained. "It shapes employees' and managers' day-to-day decisions and has an impact on their risk-taking behaviour." Management bodies are responsible for establishing a positive risk culture and promoting open communication, constructive criticism, and accountability within their organization, she asserted. In this direction, Tuominen reiterated the ECB's plans to issue an updated guide on governance and risk culture in the coming months, which will share best practices and address deficiencies identified through supervisory assessments.
"[G]overnance and risk culture are key elements if banks are to establish an environment in which management bodies are well suited to their tasks and can be challenged constructively," Tuominen concluded. “While this may be more difficult to assess than other elements, it is nevertheless crucial.”
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