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Financial institutions are increasingly investing in programmes to understand and manage their risk cultures, finds new report

Despite near universal agreement that the organisational risk culture of banks and other financial institutions (BOFIs) played a major role in the global financial crisis, a new report has found that there is still no clear consensus on how such risk cultures can be effectively managed. Yet there is considerable activity and BOFIs are now starting to identify ways of making risk culture more visible and manageable.

Risk Culture in Financial Organisations: an interim report’, published today (Thursday 8 November) by the London School of Economics and Political Science (LSE) and University of Plymouth, looks at how BOFIs have sought to address the problems of risk culture identified in the fallout of the financial crisis.

The authors interviewed 15 corporate risk officers and senior managers from nine major financial organisations. Their answers indicate that although risk culture is difficult to render manageable, change programmes are underway and companies are experimenting in varying ways.

“Although a number of interviewees agreed that risk culture is the most invisible and most important issue which fails to get enough attention in good times, the initial interviews do reveal an abundance of experimentation in the form of risk culture workstreams and change programmes” said Professor Mike Power, director of the Centre for Analysis of Risk and Regulation at LSE.

“In contrast to public debates which emphasise values and the need to change mindsets, we found that banks and other financial institutions appear to be focusing less on these matters and more on improving management practices and information structures. The setting of limits and boundaries via clear authorities for first line activity, and the monitoring of these limits was a universal aspiration in all our respondent organisations.”

The researchers also found that critical issues in risk culture appear to be being played out in the gap between what are called first and second lines of
defence. This suggests that the distinctions between lines of defence, which many take for granted, may not be helpful in advancing the debate about risk culture.

Improving risk culture was also seen by Corporate Risk Officers as a matter of improving the organisational footprint of the risk management function. This was more than just rolling out ERM systems but involved expanding the reach of informal risk processes, information sharing and escalation, and representation on key committees.

Finally, the report highlights a key concern about the role of documentation, with individuals arguing that regulatory requirements may affect risk cultures in unintended ways.

Risk Culture in Financial Organisations: an interim report by Professor Mike Power, director of LSE’s Centre for the Analysis of Risk and Regulation, Professor Simon Ashby, University of Plymouth, and Tommaso Palermo, post doctorate fellow at LSE was officially launched at an event hosted by The Chartered Insurance Institute on November 8. The research project’s final report will be published next year.

Click here to read the full report


Posted on Thursday 8 November 2012