In a recent blog post, Nicolas Strypstein, an Advisor at the National Bank of Belgium (NBB), highlights the growing emphasis on behavior and culture in bank governance.
"To strengthen trust in the banking sector, measures to ensure good governance of banks' activities are becoming more and more important," Strypstein writes. "Such measures are essential to guarantee the sound management of banks and maintain the confidence of their customers, the general public and the wider financial system."
Traditionally, governance has focused on formal, structural elements of internal organization and control. However, recent failures linked to risky managerial decisions have led regulators and international standard-setters, including the European Central Bank (ECB) and the Basel Committee on Banking Supervision (BCBS), to advocate for the integration of "risk culture" into bank oversight.
Behavior and culture encompass the shared values and norms that shape decision-making within financial institutions, Strypstein explains. He outlines four key dimensions: "tone at the top" (leadership style and diversity), "risk culture" (corporate values and communication), "accountability for risks" (ethical conduct and reporting violations), and "incentives" (compensation structures and whistleblowing mechanisms). These elements are crucial in fostering transparency and preventing groupthink, Strypstein argues.
The NBB does not plan to introduce new prudential regulations regarding these topics. However, it is actively assessing current practices across the industry with a view to encouraging the integration of behavior and culture into bank operations and controls. And, notably, the NBB is exploring the development of a toolbox for prudential supervisors to monitor behavior and culture-related matters in their engagements with firms. "This would allow problems pertaining to corporate culture to be identified and addressed in a proactive, risk-based manner," Strypstein writes.
By embedding behavioral factors into governance frameworks, the NBB aims to "strengthen the resilience" of banks and enhance their ability to navigate future crises. "Senior managers of banks are now expected to be attentive to issues of corporate culture and behaviour," Strypstein concludes. "The establishment of a healthy corporate culture within banks, one that incorporates behaviour-related aspects into management processes and holds senior managers to account for the risks they take, will certainly contribute to the stability of the financial sector."
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