Pub. 5 2015 Issue 4

Banking Supervision in July 2015 called on banking regulators everywhere to strengthen their ability to assess the effectiveness of a bank’s risk governance and “risk culture,” in guidance called “Corporate Governance Principles for Banks.” Ernst & Young noted that the guidance used the word “culture” 10 times more often than in the previous guidance on the topic in the year 2010. WHAT IS CULTURE? It’s the sum of the behaviors of people in your organization over time. “For the last two years, we’ve got increasing requests from our clients, regulators came by yesterday and said, ‘your models are fine, your governance is fine, but what do you think about risk culture?’” says Duncan Martin, senior partner at The Boston Consulting Group in charge of financial institutions in North America. Interestingly, the Basel Commit- tee also called on regulators to engage more with boards, particularly risk and audit committees. In general, the Basel Committee and U.S. regula- tors are increasing expectations for board involvement and oversight of risk practices, and for making sure the organization’s ethics and values are understood and practiced by employ- ees. “It’s clear, culture really is a board issue,’’ says Mark Watson, executive director in Ernst & Young’s financial services advisory practice. This primari- ly impacts the largest and most complex banking organizations, but some say they see the impact trickling down to commercial banks that have no invest- ment bank or trading floor. Cliff Stanford, an attorney in charge of the banking group at Alston & Bird, says he sees questions of culture come up for banks he works with, typically in the $10 billion to $50 billion asset range, usually as part of a conversa- tion about a bad result on an exam, such as a matter requiring attention. If the problem isn’t solved soon enough, regulators may ask if there is something wrong with the bank’s culture. “If there is an open, transparent sensibility about issues and concerns, regulators can see that,’’ Stanford says. “They can see if there is just a bunch of words on paper, but if they really dig, there are problems in particular business lines, reports on allocations of resources. Just by talking to people, they can get a sense of what’s going on.” There is a concern among bankers that the regulatory focus on culture will result in a one-size-fitsall regulated vision of the proper corporate culture. But Scherf says regulators “shouldn’t be telling a bank what [the] culture should be. However, we can call out where the culture has been defined and articulated and we see people operating outside of it.” Even banks below $10 billion are starting to hear phrases like “tone at the top” showing up on exams, even though few of them think of themselves as being responsible for the financial crisis. In fact, many community and regional banks pride themselves on their conservative cultures and the way they treat their clients. But they are more vulnerable than large banks because just one bad actor can bring the bank to its knees. To get a sense of what’s going on at the bank, a board member of a small in- stitution can walk through the branches and have a few conversations with people over coffee. It’s nearly impossible to do that at a big global bank with hundreds of thousands of employees in multiple countries, and where visits to the trading floor, or any other part of the bank, are usually carefully orches- trated affairs. Board members need to make a real effort to understand what’s going on at large institutions. One way that banks are doing that is by hiring consultants to do cultural studies of their institutions. A cheaper way might be to rely on existing annual surveys of employees but add a few additional questions that help management and the board get clues as to problems inside different departments at the bank. For instance, employees can be asked: Do you feel comfortable bringing up prob- lems that you see with your supervisor? Do you feel as if your colleagues are upholding the company’s values (or risk “FOR THE LAST TWO YEARS, WE’VE GOT INCREASING RE- QUESTS FROM OUR CLIENTS, ‘REGULATORS CAME BY YES- TERDAY AND SAID YOUR MODELS ARE FINE, BUT WHAT DO YOU THINK ABOUT RISK CULTURE?” —DUNCAN MARTIN, SENIOR PARTNER, THE BOSTON CONSULTING GROUP n Culture — continued from page 13 14 www.azbankers.org