Contributions to the Supervisors on Supervision Stocktake
Should culture, and the conduct proclivities it may promote or discourage among employees, factor into supervisory engagements?
“It has long been recognised that deficiencies in governance and risk culture can be early indicators of potential financial risks.”
“As threats to the financial system continue to evolve, and operational or reputational risk events in individual entities have the potential to migrate ever faster into financial losses, a sound governance and risk culture are essential foundations for a more resilient system.”
What are the consequences for failing to consider the influence of culture in assessments of governance effectiveness?
“The international consensus of various reports into the events of March 2023 was clear: ‘the first and most important source of financial and operational resilience comes from banks’ own risk management practices and governance arrangements’ and ‘poor risk culture’ was a key factor.”
Why have some jurisdictions invested in and leaned into culture supervision while others have not?
“Since the Royal Commission into Misconduct, APRA has strengthened its supervisory framework to assess governance and risk culture more explicitly. It has also enhanced its enforcement approach to empower supervisors to require entities to act before financial soundness is threatened.”
What have we learned from past approaches to culture risk governance and supervision?
“In APRA’s experience the most important indicator of whether change is embedded is evidence of a self-sustaining culture of continuous improvement.
A successful transformation moves the dial from a reactive and complacent culture to a mindset of ‘chronic unease’ that values constructive challenge and continuous improvement.”
“In a world where complex non-financial risk is growing rapidly, global regulators are increasingly recognising that the key to viability is not only to require more capital and liquidity, but also for supervisors to require good governance and a sound risk culture.”
How can supervisory bodies move to embed culture risk into supervision and governance frameworks?
“APRA’s supervisory risk assessment process considers: governance, culture, remuneration and accountability risk for every entity, alongside more traditional risk types, with more detailed assessment for the largest entities.”