ECB's new guide on governance and risk culture

ECB's New Governance Guidelines: Why Banks Must Act Now to Address Deep-Rooted Risk Culture Issues" The recent 2023 Supervisory Review and Evaluation Process (SREP) results reaffirm the ECB's longstanding concerns regarding governance and risk culture shortcomings in European banks. The newly proposed Guide on governance and risk culture offers deeper insights into these issues, particularly regarding risk culture, remuneration, and the evolving requirements under CRD6. The ECB's conclusion is clear: governance issues stem from deeper behavioural and cultural drivers that need to be addressed. This goes beyond policy and process fixes, signalling that a cultural shift is needed within banks. Sadly, there seems to be an increasing focus on the (useless and outdated) three lines of defence. This is an obstacle to building an effective risk culture in banks. The introduction of a fit and proper framework under CRD6, with a January 2026 compliance deadline, adds urgency. Experience from the UK's SMCR regime suggests that banks should begin preparations early, ensuring clarity in roles and responsibilities across management bodies. Additionally, the ECB's growing emphasis on emerging risks—such as those arising from digitalisation and geopolitical developments—further underscores the need for a forward-looking risk culture. Institutions must be proactive in identifying and managing these risks by aligning internal expertise and accountability. Failure to address these issues in a timely manner could prove costly. With the ECB empowered to use Periodic Penalty Payments for non-compliance, banks that delay governance and culture improvements face increasing financial risks. Now is the time for banks to take these guidelines seriously, assess gaps, and begin addressing the root causes of governance deficiencies. At a loss of where to start? Find help here: https://lnkd.in/enSBa2Xh

Economic downturns and shifts can quickly impact credit portfolios, often without prior warning. While predicting the exact timing of an economic downturn may be difficult, tracking these macroeconomic factors alongside your internal metrics can provide a proactive defence against potential impacts. Are you factoring in economic indicators in your strategy? Proactive risk management involves aligning model parameters with evolving economic realities. By embedding economic trends into your risk framework, you not only protect your portfolio but also enhance its ability to capitalize on opportunities during recovery phases. How are you incorporating economic forecasting into your credit risk strategy? #EconomicIndicators #RiskModeling #ProactiveStrategy

Auditing Risk Culture Key highlights include: The role of regulators: How organisations like the European Central Bank (ECB) and international think tanks such as the Group of Thirty (G30) have influenced risk culture. Supervisory expectations: The importance of board dynamics, “tone from the top,” and embedding cultural values throughout the organisation. Challenges in auditing risk culture: Insights into the complex task of auditing risk culture, considering both quantitative and qualitative factors. A strong risk culture is not just a regulatory expectation but a necessity for financial stability, impacting everything from responsible decision-making to the timely escalation of risks. This paper provides a comprehensive look at how banks can foster a robust risk culture. #audit #internalaudit #risk #compliance

In December, ICGN commented on the European Central Bank’s (ECB) draft guide on governance and risk culture. ICGN agrees with the ECB that “governance and risk culture are essential features of any well-functioning organisation”. We support the emphasis in the draft ECB Guide on effective board oversight. Investors rely on strong and independent boards of directors. We believe the practical examples included in the draft Guide are particularly beneficial, helping make the content more relatable to institutions as they work to enhance their governance practices. Investors will also be able to point out to the best practices highlighted by the ECB when engaging with banks in their portfolio. We also support the focus on culture. We agree that the “tone from the top” and an environment of open communication and transparency, where employees are encouraged to report concerns or issues without fear of retribution, is crucial for effective risk management, and for long-term value creation. This is something ICGN emphasised in our latest Investor Viewpoint on workers’ voice in corporate decision-making and in a previous Viewpoint on the board’s role in overseeing culture. You can find these publications here: https://lnkd.in/de283gnP   #governance #corpgov #stewardship #investors #assetowners #assetmanagers

My latest GARP CRO Outlook column examines how the work of Kahneman and Tversky has impacted the way we think about managing risks. While data and modeled-based insights are critical to understanding many risks banks and other institutions face, ultimately we're on a fool's errand to think that we can ignore the underlying behavioral influences of boards, management teams, customers and even policymakers on risk. The world is not as simple as classical economics would have us believe which complicates the way we measure and manage risks. https://lnkd.in/ecww5jbW

The granularity of the ECB’s guidance on risk culture is what distinguishes it most clearly from its predecessor. While hardly a new topic – indeed the governance module of the SREP already includes an assessment of banks’ risk culture – the ECB clearly sees the need to spell out its expectations in more detail, having cited severe deficiencies in risk culture as a primary driver of some banks’ deteriorating governance module scores in the 2023 SREP. The ECB sets out four components of a sound risk culture: ·     tone from the top and leadership ·     a culture of effective communication, challenge and diversity ·     accountability for risks ·     incentives (including remuneration) The four components are now closely aligned with the Financial Stability Board’s 2014 supervisory guidance on assessing risk culture, and use terminology consistent with CRD and existing EBA guidelines, so should already be familiar to banks (albeit with an important added emphasis on diversity). While the guidelines are comprehensive in their coverage, the ECB downplays the importance of recruitment (and onboarding), which can have a critical role in establishing a sound risk culture or, equally, can propagate a poor one. #riskculturelab #riskculture https://lnkd.in/dGi6YHYn

𝐇𝐢𝐧𝐭𝐬 & 𝐍𝐞𝐰𝐬 “𝐓𝐡𝐞 𝐢𝐦𝐩𝐚𝐜𝐭 𝐨𝐟 𝐄𝐂𝐁 𝐁𝐚𝐧𝐤𝐢𝐧𝐠 𝐒𝐮𝐩𝐞𝐫𝐯𝐢𝐬𝐢𝐨𝐧 𝐨𝐧 𝐂𝐥𝐢𝐦𝐚𝐭𝐞 𝐑𝐢𝐬𝐤 𝐚𝐧𝐝 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐥𝐞 𝐅𝐢𝐧𝐚𝐧𝐜𝐞" Find out more: https://lnkd.in/dZkavnjK This paper provides a first empirical analysis of the impact of the European Central Bank’s (ECB’s) climate-risk-related supervisory efforts on (i) climate risk exposure and related risk management of banks; and (ii) on the induced shifts in banks’ portfolio choices with regard to additional #greenfinance. From 2020 onwards, the ECB has introduced various measures to enhance climate-risk-related supervisory efforts. Authors' identification strategy exploits the fact that the ECB’s efforts on climate supervision has only been introduced for selected #banks within the European Union i.e., the Significant Institutions under the Single Supervisory Mechanism. #ECB #BankingSupervision #ClimateStressTest #GreenLending #SustainableFinance

Risk culture looks set to remain a central element of the ECB’s approach to bank governance. Indeed, it could well be listed as a formal ECB supervisory priority for the coming years, with the risk culture deep dives announced by Elderson serving as a model for on-site inspections at a wider population of banks. Ahead of any supervisory audits, banks should consider first performing their own risk culture assessment, to understand in detail the state of their current risk culture and identify any shortcomings. In parallel, banks should review their internal processes and records. This should only be seen as an exercise in gathering evidence to demonstrate the health of their risk culture tosupervisors. More importantly, it should be regarded as a powerful tool for management to fully understand the culture throughout the bank and drive continuous improvement in their risk culture and governance. #riskculturelab #riskculture https://lnkd.in/d-FAukXJ

Just finished the course “Emerging Financial Risk Management”! Check it out: https://lnkd.in/gnHxKVFy #banking #risk #riskmanagement #financial #aml #kyc 

Here is my latest opinion piece, published yesterday in the Financial Times' Banking Risk and Regulation. In this article, I set politics aside to examine the US election from a risk management perspective. It highlights three key lessons for risk professionals: - Robust crisis management is non-negotiable. The crisis tipping point occurred during the June Biden–Trump TV debate. Caught in what risk managers call a "crisis vicious spiral"—a toxic sequence of denial, shock, and panic—the Democrats failed to enforce decisive leadership or implement a credible backup plan. - Model risk is dangerous. The overwhelming evidence shows that the vast majority of leading polls were wrong. For the first time in 50 years, all major polls underestimated one candidate while overestimating another, indicating a systemic error. When models systematically overestimate a candidate’s chances, as they did for Harris, they can misdirect the campaign and hinder decision-making. - Think twice about third-party risk. Conventional risk management wisdom advises against outsourcing critical services. Yet European countries have long relied on US military power to address global geopolitical issues. Trump’s presidency exposed the very real possibility of the US ending this "service agreement" and withdrawing its defence umbrella, leaving European countries unprepared to manage their own security or assert global leadership. These lessons from the US election extend far beyond the political arena. Whether in politics, business, or international relations, the ability to anticipate, adapt, and take responsibility will define success in an increasingly unpredictable world. Please read the article here: https://lnkd.in/eHBFt-zb  #riskmanagement  #uselection #crisismanagement #modelrisk #thirdpartyrisk