Supervisors on Supervision

“There is broad agreement that culture is an important driver of institutional performance. However, for the most part, our assessments are implicit. There is no explicit or quantitative measurement. The question therefore arises as to whether we need to be more systematic and consistent in our assessments of culture (both of our own and other organisations).”

“Risk culture is a subset of an organisation’s overall culture, but with a specific focus on values, beliefs, knowledge, attitudes, and understanding about risk. The overall culture of an organisation influences its risk culture by shaping how employees perceive and respond to risk.”

“Risk culture, which is an important component of effective governance, has long been recognised as a key driver of effective risk management at the level of regulated financial institutions and in supervisory authorities. 

Throughout its 50 years history the Basel Committee has put great emphasis on this concept — most notably through the recently updated Core Principles for effective banking supervision.”

“Thinking about how best to achieve sound supervisory outcomes has received increasing attention from a number of supervisory agencies in recent years. Good supervisory outcomes are largely influenced by risk culture, particularly factors such as willingness to act, persistence, and intelligent risk-taking. These intangible qualities are pivotal in enhancing supervisors’ ability to promote safety and soundness of banks and the banking system. 

Governance and risk culture always start from the top of the organisation — in this respect, supervisory agencies are no different to regulated firms. 

In the context of supervisory agencies, this means that the actions and support shown by senior management are vital in establishing a tone from the top that empowers supervisors to take prompt and decisive actions. This should include articulating supervisory risk tolerance, acknowledging that intervention is expected as part of the supervisory process, and supporting supervisors in taking risks and making judgement calls around the timing, force and nature of interventions.”

"Without confidence in the supporting analytics, taking difficult decisions under uncertainty will be even more challenging. Technology may be able to help and should be promoted, but I don’t expect it will be a panacea.”

“A strong supervisory risk culture needs to be built on high quality data and rigorous internal analysis. While supervisors bear the ultimate responsibility for implementing supervisory decisions directly with the bank, it is crucial that they are backed by specialist units that provide support in terms of risk analysis and early risk detection. This empowers supervisors and supports confidence in the individual supervisor and the supervisory authority.”

“A sound risk culture encourages open dialogue at all levels of an organisation and welcomes challenge. This is applicable to both regulated firms and supervisory authorities. The key messages that drive the behaviours leaders are trying to instil in an organisation should be kept simple, repeated often, and lived throughout the organisation. It is important to avoid high-level platitudes that no one really believes.”

“While the risk issues for supervisors are different to those faced by regulated firms, accountability is central to embedding any desired risk culture. 

For supervisory agencies, this requires clear accountability and escalation channels, as well as effective internal governance and communication processes. Embedded in these processes are decisions around the degree to which supervisory decisions are automated or allow some discretion. Ideally there should be clear supervisory processes that embed within them an element of discretion, facilitate timeliness by not being too rigid or complex, and which have the right checks and balances along the way.”