UK banks have come under sharp criticism from the Bank of England (BoE) for failing to tackle the risk management blind spots exposed by the crises that have plagued financial markets in recent years.
The rebuke, which came in the form of letters to the heads of banks, highlights the importance of culture — and what some regulators refer to as risk culture — to effective risk management amidst economic and geopolitical turmoil.
"During 2022, the market reaction to Russia's invasion of Ukraine, and volatility in the nickel and long-dated gilt markets, reinforced the importance of a robust risk culture and sound risk management practices at firms," the letters said. "Despite regular messaging from the [Prudential Regulation Authority]... firms continue to unintentionally accrue large and concentrated exposures to single counterparties, without fully understanding the risks that could arise."
The BoE had previously warned banks about lapses in their risk management and governance frameworks that were exposed by the collapse of Archegos Capital.
While some see culture and conduct risks as entirely independent from financial risks, it has become increasingly clear in recent years that they are closely linked. Starling's 2022 Compendium features "Good Counsel" from Brad Karp, Chairman of US law firm Paul, Weiss, Rifkind, Wharton & Garrison and lead author of the report the firm was commissioned to prepare after its internal investigation at Credit Suisse in the wake of the Archegos crisis.
"As much as possible, financial institutions should equip and empower their risk functions to be able to avoid similar situations in the future, and should instill a strong culture of risk discipline so as to underscore the importance of risk measures firm-wide," Karp wrote. [Read More]