Supervisors on Supervision

“[The work done on culture is] never enough. I sense that professional supervisors tend to be more comfortable with quantitative and prescriptive rules because they are easier to measure and report. Culture is harder; it's subject to interpretation.” 

“Risk culture is when the board or senior management defines the risk appetite — how much risk the institution is prepared to take — and then sets quantitative benchmarks to stay within those parameters. It’s top down. Culture risk is about whether the board is fully sensitive to the risks the bank is exposed to. It emerges from the bottom up.”

If society could only have one of two things — a set of rules or a strong culture — which would you choose? I would always choose culture.”

“As fee and non-interest income have become more important for banks, and as the community needs help managing its wealth, culture has become very important. 

The bank isn't just risking its own capital; it's advising or enticing customers to buy products to earn a fee. The more volume they generate, the higher their income, which creates an inherent potential for mis-selling.

We introduced many reforms to ensure banks would not sell financial products to unsuitable customers, including complicated processes and safeguards. But to me, in my heart, it's still about the culture.

Conduct supervision is very simple. It’s ensuring your staff adhere to a single principle: is this a product you would be prepared to sell to your grandmother or your brother? If you have doubts, you should think twice. Beneath this simple, almost joking, principle is a very profound philosophy. It's culture. If you don't know what you're selling, don't sell it. If you know a product is very risky, you wouldn't recommend it to your close friends or relatives. 

A culture based on the simple logic of not selling something to a customer that you wouldn't sell to your own mother or brother is timeless. It doesn't matter if it's Bitcoin or some new product 20 years from now; the philosophy remains the same. 

Would a bank's management be willing to use the common-sense "grandmother" approach? If they do, then the bank won't do enough business, it won't generate enough profits, and people won't get paid bonuses. That's the difficulty.”

“Non-financial risks will eventually have financial consequences for the banks. Reputational damage can have very real and significant financial consequences. It could be misconduct, mis selling, or IT insecurity. If a bank's system is attacked by hackers, even if it recovers, depositors may move their money, and that could cause a run on the bank.”

“Whether [global standards for culture] metrics themselves would be of ethical help is less relevant than the fact that they would stimulate debate and discussion among central banks and top supervisors. It's a good idea because it keeps the topic from losing steam.”

“Conduct is the actual practice or behavior you can observe, whereas culture is the set of values that guides thinking and behavior. You would rarely find a board that condones bad ethics. The problem is not that directors are bad people; most of them are decent. The problem is that they are often not able to influence the management or the culture of the bank.”

“Culture is a complex matter. Although it should be prescribed from the top down, practicing it requires bottom-up acceptance. The incentive system plays a huge part in this. The board can set appropriate risk parameters, but if the bank continues to reward excessive risk-taking, managers will take excessive risks.”

“I favor a two-track approach: introducing sensible rules that seek to prohibit/restrain excessive risk taking or behavior that would jeopardize the interests of the customers, alongside with efforts that cultivate the appropriate cultural values within the bank from top down.”

“Supervisors look to the board, as the highest governance authority, to do the controlling. But in reality, many boards are unable to monitor this closely or influence behavior to align with what the board has aspired to.”

“I don't want to see [culture] metrics becoming just another quantitative tabulation of so called objective parameters. Culture is hard to measure.”

“Prudential concerns are easier for both supervisors and banks to understand. They know what prudential safety is about. In contrast, conduct is a perennial problem.”