Contributions to the Supervisors on Supervision Stocktake
What does culture mean in the supervisory context?
“I would focus on a broad definition, encompassing all the internal norms, incentives and mechanisms driving the organisation, at all levels, and determining the risk profile and the conduct of the firm in the medium to long term.”
Should culture, and the conduct proclivities it may promote or discourage among employees, factor into supervisory engagements?
“I am a prudential supervisor, so I look at culture with the perspective of its influence on the build-up of risk at a firm and on its safe and prudent management.
The distinction between financial and non-financial risks is misleading in this context. If something is wrong in the culture of a firm, it will sooner or later materialize in financial consequences in ways that might be difficult to foresee.
My belief is that, by looking at cultural aspects, we can identify at an earlier stage signals of behaviours that could, at a later stage, impact on the financial situation of a firm.”
If culture is important to supervision, then what factors make it challenging to assess?
“I believe the idea that supervisors should just intervene when financial indicators are deteriorating would simply mean that they would be entering the picture when the problem is beyond repair.”
“Supervisors are overwhelmed by tasks linked with checking compliance with a very complex regulatory framework, which leaves very little time for focusing on cultural issues.”
What role does culture play in governance failures that ultimately require supervisory attention?
“I regret that the focus on remuneration has been almost exclusively incorporated in rules, so that supervisors in most cases check compliance with the rules rather than asking themselves how the remuneration policies of firms affect behaviour of key function holders and staff in general.”
What are the consequences for failing to consider the influence of culture in assessments of governance effectiveness?
“We have seen plenty of firms that showed very healthy capital and liquidity ratios, low non performing assets, sometimes even decent profitability, before entering in very disruptive crises. The spring 2023 turmoil provides plenty of examples.”
How is supervision made more challenging by a reliance on judgment?
“The most difficult aspect for me is the dialogue with the firm. This is an area where supervisors are expressing their judgment, but often lack hard evidence to substantiate their views.
If the supervisory assessment resonates with the board and senior management, then the firm takes ownership of the cultural issues and shortcomings can be remediated — often also with changes in key people. But if the firm does not recognize itself in the picture painted by the supervisors, then it is very painful for the supervisor to promote the necessary change.”
What tools, metrics, and data collection capabilities are currently available to support culture risk governance and supervision? What is working and what does this hold for the future?
“My hope is that the development of new technologies and the use of AI in supervisory processes could help reduce the time devoted to assuring core compliance and free supervisory resources for focusing on culture.
AI tools could also hopefully help in focusing supervisory attention on culture, as this is an area where firms frequently reject supervisory judgment and having some evidence on internal norms and behaviors would help supervisors.”