Shaping Risk Culture in Financial Institutions

 

By Sarah Tennyson, Senior Director, Moody’s Analytics

Rick Culture -01 

Working at the boundary of systems, processes, skills, behaviours and culture, there is a growing need for applied psychology to help organizations take practical action to respond to regulatory and market imperatives for a holistic approach to risk management.


Financial institutions around the globe face a regulatory imperative to build an organisational culture that supports holistic risk management and sustainable risk/reward ratios. The European Banking Authority (EBA), the US and the UK regulators all urge banks to measure and report on an integrated view of the different types of risk incurred in their businesses. Investors, rating agencies, governments and the media have also increased their focus on the impact of cognitive and social factors on risk decisions. 

The benefitst of a holistic approach to risk management

Aside from the external pressure, an holistic approach to risk management has obvious benefits for the institution itself, for example in lower provisioning for bad loans and more effective allocation of scarce capital.  An effective risk culture helps front line bankers ask the right questions, listen to the answers, understand the banks requirements and appetite for risk and therefore gives them an opportunity to manage and mitigate those risks from the start of the negotiation with the client.

The chllenges of shaping risk culture

One of the challenges for those responsible for shaping the culture within financial institutions is that, to date, no criteria for what constitutes a desirable risk culture have been published. We have found Edgar Schein’s definition and his three pillar model of organisational culture, to be useful and adaptable to help banks approach the task of shaping a culture of holistic risk management.

In a recent survey by the Institute of Risk Management, ‘Risk Competence’ was ranked among the weakest aspects of risk culture in their respondent organisations[1]. Training programmes can be a quick win for the change initiative; many banks recognise the need to upgrade the skills and knowledge of their people to match the sophistication of their new systems. What L&D must do is break traditional learning silos such as:

  • Technical vs soft skills
  • Separated training for the three lines of defence
  • Separate training for different types of risk
  • Segregated systems training vs the ability to interpret and use the output

Conclusion

In order to achieve changes to the culture, individuals within the organisation must ‘unlearn’ existing habits before they can embed new ones. For example, implementing a belief that “risk is everyone’s responsibility” in an organization where there has traditionally been a strong divide between control and commercial teams requires people on both sides to shift their self-image to incorporate more of the attitude and function of the other. This shift requires an additional layer of learning focusing on meta-cognitive abilities such as reflection, critical thinking and mindfulness, which is different from the expert-learner paradigm dominant in technical knowledge or an analytical skills courses. 


[1] Institute of Risk Management, Risk Culture Resources for Practitioners, October 2012. 

 

About the author

Sarah TennysonSarah Tennyson is Senior Director-Global Faculty Head at Moody’s Analytics. She applies her psychology background to create solutions that inspire change and growth in people in order to improve performance in organisations.

She has designed and delivered programmes from graduate to senior management level and the variety of her assignments has enabled her to understand and work with the challenges facing financial services professionals around the world.  Sarah graduated with a first class honours degree in psychology and holds an MSc in Occupational Psychology.

Hear Sarah speak

If you've enjoyed this article and would like to hear more about shaping risk culture, Sarah will be speaking speaking at the ABP's November London Local Event on Tuesday 10th December 2013, 6-8pm, University of Westminster.

In this session Sarah will demonstrate how Schein’s organisational culture framework can be used as a practical guide to shape a culture of holistic risk management and share how she helps clients to combine competence development and attitude change with systems and process improvements.

To book or find out more about this event click here.