Risk Management

Risk cultures can make or break banks

A report by ACCA examines the impact of risk cultures in the banking industry and how financial institutions can learn from what went wrong in the lead up to the banking collapses of 2023. Head of risk management and corporate governance at ACCA, and author of the report, Rachael Johnson offers her views.

The report, Risk cultures in banking: Where next? sheds new light on the pressing need for the banking sector to adapt and innovate risk governance and culture. A key finding of the report is that finance and accountancy professionals should lead an image change around risk culture, framing it as something that allows many good opportunities to happen, rather than only mitigating bad things.

The report further suggests that factors of human behaviour currently do not have enough bearing when it comes to risk cultures in banking. Understanding the role of human behaviours when it comes to risk culture is complex, but with effective leadership, policy and management, many of the operational issues that have the potential to become much bigger problems can be mitigated earlier.

The 2023 banking collapses underlined the importance of transparency in preventing operational losses and reputational risk at banks. A strong risk culture supports this, ensuring trust in information for resilience and prudent risk taking.

Rachael Johnson, Head of risk management and corporate governance, ACCA

Accountancy professionals can act as risk super-networkers, aiding teams in making informed decisions and sharing knowledge. By sharing stories, they can raise risk awareness, promote new insights, and influence organisational performance, which is what effective risk cultures are all about.

The report speaks to multiple ACCA members about their experiences working within banking industries, attitudes towards compliance and the understanding of risk. The evidence highlights that a lack of dialogue between banks and regulators underpins many of the issues around building effective risk culture.

Rather than there being unwillingness to change how risk culture is approached and managed, the issue instead appears to be how to make a risk culture successful. The key issue from the UK members spoken to in the report appears to be one of disconnect between senior decision makers and those looking at the operational data. In addition, being on the ground amongst staff and understanding their behaviours and attitudes was noted as being of key importance.

An ACCA member who is an investment manager in the UK compared the accumulating operational risk losses at banks to being ‘like trying to extinguish forest fires’. He commented: “The fines and reputational damage in banking have been enormous in recent years. It is as if we know something needs to change about how we quantify these risks but, as an industry, we are not doing enough about it.”

Another ACCA UK member added: “We see time and time again that boards and senior management are more concerned with quarterly earnings and do not pay enough attention to strategic risks and how fast they materialise into something very costly.”

The role of behavioural factors in risk culture is a key takeaway from the report. It discusses the dynamics of risk being more about human behaviour than mathematical models or process design flaws, and it includes 10 action points for banks, highlighting how stronger partnerships between risk, support units, and accounting functions can make a profound difference.

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