Supervisors on Supervision

"We have frameworks in certain areas — risk culture, for example. That’s part of culture risk, and it’s easier to define. It includes risk appetite, but also behavioural patterns such as listening to staff or speaking up are included, although these aspects rather belong to the overall culture.”

"Every bank has different internal cultures … So when we look at a bank, we don’t just assess operational risk. We look at how people interact. Even when two German banks merge, they may not share the same culture, the same attitude towards customers, risk and staff. 

For me, culture is broader than risk culture. Culture includes mindset, values, and how you interact with others — not just risk management or business, but how you treat your staff, your clients, your landlord.

You want some basic values: an atmosphere where staff does not fear to speak up, management listening to each other, fostering an environment where ideas thrive, where people are challenged. That’s culture"

"Look at Credit Suisse. A single bank failed inter alia because of cultural issues. And it’s not just conduct — it’s broader. Conduct risk eventually moves into financial risk. That affects the bank's risk-taking capacity, and in severe cases, even its stability."

“I understand that many people may feel uncomfortable when there's too much discretion involved, where it can feel arbitrary. So, you really need some kind of framework around it. But the idea that good banking supervision can be done without discretion and rather like mathematics, like two plus two is four, that's also ridiculous.”

"In Germany, because of our history, particularly after 1945, we gave ourselves a constitution that restricted the power of public authorities, especially regarding discretion. Every discretionary decision must be based on a legal, often detailed framework. You're not allowed to go beyond this framework, and you always have to explain why and how you used your discretion.

There's a three-step legal test we follow in Germany. First: does the law give you discretion? Second: is the measure suitable, and is it the mildest option to achieve the objective? Third: is it proportionate, meaning does it balance constitutional rights fairly? Every lawyer learns this; it's foundational.

I think it makes sense to always consider how to limit discretion — not to lose it, but to retain it strategically."

As all institutions with staff coming from many different nationalities we had cultural risk at the ECB. We had 25 authorities contributing staff to banking supervision. Everyone brought a different understanding of supervisory approaches. Some followed rules to the letter. Others came from countries with legal systems used to discretion. Some escalated small issues. Others were used to more independences in their decision making. Not all of that is cultural — some is individual — but much of it is cultural too."

“Sometimes it’s not about culture — it’s just weak or overconfident people. And the culture might allow those people to stay in roles they shouldn’t be in.”

"Every bank has a mission statement — it’s full of general principles. But the real question is how well those are transferred into concrete actions and cascaded down through the organization. And supervisors should determine whether employees act according to those principles. When they don’t, how does the bank respond? That’s where it becomes easier for a supervisor to say, ‘You’re not living up to your own mission statement. You’re not treating your cultural standards seriously.’ When there’s a disregard of the cultural principles set from the top, that’s a problem. And then there needs to be a reaction from the management — that’s part of the tone from the top.”

“I think it is broader than risk culture. You can deal with risk culture much easier than with culture as a broad aspect. And as a supervisor, you cannot really set detailed requirements for how a bank’s culture should be. You can have a kind of minimum requirement — that people are listened to, that things are documented. These are general behavioural patterns. But to create an ideal culture and ask every bank in Europe to shape its own culture according to that ideal is not possible and not preferable either.”

"I’m not aware of any rule requiring banks to collect and analyze misbehavior in a way that identifies clusters of problems. That kind of cluster analysis would be helpful. Because in a big bank, with 60,000 staff, you can’t expect everyone to follow every rule. But if there are consistent, even smaller but many violations in one area, maybe that points to a weakness in communication or clarity — or even in middle management. So if you could cluster incidents intelligently, you might see systemic issues earlier — both as a manager and as a supervisor."

"From my perspective, it all ends up with the prudential supervisor. So, strong cooperation between conduct and prudential regulators is crucial. Conduct regulators sometimes see cultural issues earlier, especially through client interactions. Prudential supervisors usually look at the broader framework. But cultural issues affect both."

"Do we have a fully-fledged framework for all of culture? No. But for parts of it — especially risk culture — we’re pretty close. What we need now is judgment. How do we anchor supervisory discretion in data or general guidelines, so our decisions have a legal basis?"