Corporate culture is a relatively new matter of interest for financial institutions . However, it deserves increasing attention within the more advanced academic debate, as well as among experts, professionals, and policy makers.
Banks are realizing that culture is a sort of āmissing linkā in the understanding and governance of individual and social behaviors within corporate organizations, and that it has been long overlooked or taken for granted. At the same time, regulators, and supervisors are convincing themselves that sounder banking culture and conduct represent important value drivers also for other relevant stakeholders. In fact, the financial crisis was seriously exacerbated by an inadequate risk culture in the financial sector. In other words, there was a deep cultural problem under the decisions and behaviors that brought to the crisis. And several cases of misconduct and scandals can be fully explained only in light of the same cultural weaknesses in banks and other financial companies.
We believe that the academic literature addressed with delay (with few exceptions) the topic of corporate and risk culture in financial institutions . This delay is due to perhaps the fact that this research field requires a multidisciplinary approach. Studies on risk and on risk culture followed for a long time two highly different paths, with few interconnections, because of the high level of specialization, which increasingly characterizes scientific knowledge .
This explains why many authors did not approach the subject at all or, when they did, started every time from scratch and referred only to their individual wealth of knowledge. We believe that an interdisciplinary approach adds value to the investigation of risk culture in banks. In the present economic and financial context, no regulator, no professional family, no discipline alone is able to assess beforehand and react to risks, as well as to social and individual misbehaviors, because these overcome the traditional boundaries of knowledge , best practices, and controls.
Our book deals with risk culture in the banking sector. We adopted a broad and thorough perspective, based on the academic research and field experience carried out by a large group of authors. All of them were involved for a long time in exploring the topics examined in this volume, which were also discussed at international level in academic and professional conferences and seminars.
The book is divided into two parts. Part I, āGeneral view: theory and toolsā, is dedicated to the theoretical grounds of risk culture and the tools aimed at assessing and measuring it. This part is composed of eight chapters.
In Chap. 2 āRisk cultureā, Alessandro Carretta and Paola Schwizer explain why corporate culture matters. A suitable culture implies that people āmake useā of the same assumptions and adopt behaviors inspired by the companyās values; this enhances the market value of the company identity . The authors define risk culture, its scope, drivers, and effects. Risk culture is central to banks as it influences their risk-taking policies, and behaviors are a direct expression of it. But how can a really ānewā culture be developed and spread in a bank today? Such an overreaching process of cultural change involves several actors: bank shareholders, management, bank staff, parliament, the government, the legal system, supervision authorities, the media, the education system, and customers. They all have in some way contributed to the present unsatisfactory situation with small or large measures of responsibility or negligence. What is important today is that all these forces are involved in a joint effort to bring in a new banking culture, acceptable to banking authorities on the one hand, and to clientele on the other. And importantly, banks themselves need to take an active role in this new cultural change centered on them.
Marco Di Antonio, in Chap. 3 āRisk culture in different bank businessesā, highlights that the nature of the business is one of the determinants of risk culture and can lead to subcultures in large diversified financial institutions . Key factors in explaining business-driven risk culture are the two following: Structural factors, i.e., activities performed and their embedded risks, nature, and role of customers, the economics of business; and contingent factors, such as competition, regulation, strategic orientation , etc. The former are intrinsic and quite stable characteristics of the business. The latter instead can change over time, but indirectly affect risk culture and its evolution.
Alessandro Carretta and Paola Schwizer, in Chap. 4 āRisk culture in the regulation & supervision frameworkā, support and discuss the regulatory approach to risk culture. The increasing attention to risk-taking and effective risk management requires a regulatory intervention in order to promote the inclusion of strategic choices regarding risk appetite and risk tolerance , as well as risk culture among the elements being assessed by supervisors. The challenge for supervisors is to strike the right balance between carrying out a more intensive and proactive approach, while not unduly influencing strategic decisions made by the institutionās management. On the other hand, rules alone cannot determine a final change in corporate culture . Therefore, it is essential that authorities maintain a certain distance to banksā strategic and policy choices in order to support the growth and consolidation of an appropriate risk culture, tailored to individual business models and corporate characteristics.
Risk culture is a fundamental element of internal governance . Doriana Cucinelli, in Chap. 5 āInternal controls and risk culture in banksā, outlines that corporate culture was at the heart of regulation on the internal control system since the very beginning. Regulators moved from the concept of ācontrol cultureā, stated by the Basel Committee on Banking Supervision in 1998, to ācompliance cultureā (affirmed in the provisions issued in mid-2000) and recently, in the wake of the crisis, to ārisk cultureā. Only where a bank can define and disseminate values of integrity, honesty, and attention to the risks among all levels of the organization, can the internal control system effectively achieve its objectives.
Daniele Previati, in Chap. 6 āSoft tools: HR management , leadership , diversityā, discusses the main theoretical and empirical findings of different streams of knowledge that are directly or indirectly linked to the role of people in establishing and changing risk culture in financial institutions . He goes back to basics and identifies (both theoretically and practically) some key issues and research paths integrating risk culture, people, and organization design in the financial services industry. He finally draws a research agenda for the future, stating the need for a renewal of organizational and behavioral analysis about RC.
Nicola Bianchi and Franco Fiordelisi, in Chap. 7 āMeasuring and assessing risk cultureā develop a new approach to measure risk culture at the bank level and empirically analyze the link between their risk culture measure and bank stability. Although a weak risk culture was one of the drivers of the banking crisis, there is no empirical evidence about the relationship between bank risk culture and stability. Bianchi and Fiordelisi fill this gap: focusing on the FSB framework, they provide evidence that the Tone-From-The-Top feature is the most significant component of the risk culture and this is associated to a greater banksā stability.
Chapter 8 āImpact on bank reputationā, by Giampaolo Gabbi, Mattia Pianorsi, and Maria Gaia Soana, presents an empirical analysis of the impact of risk culture on financial institutions ā reputation. The authors investigate how sanctions imposed by supervisors for risky behaviors (considered as a proxy of poor risk culture) determined abnormal returns of two Italian banks sanctioned for misbehavior. The results show that the net impact on capitalization of the banks was larger than the impact of the sole operational losses , thus detecting a reputational effect.
Vincenzo Farina, Lucrezia Fattobene and Elvira Anna Graziano, in Chap. 9 āThe watchdog role of the press and the risk culture in the European banking systemā,show the role played by mass media in controlling banksā risk-taking behaviors and in shaping their risk culture. They construct a media attention index based on the news coverage about banking risk issues, processed through the text-analysis technique. They relate this index to the asset quality of European banks, finding a positive although weak correlation with NPLs , which could, however, be only a reflex of some specific bank episodes in various countries.
The second part of the book, āGood practices, experiences, field & empirical studiesā, includes a set of relevant contributions on risk culture focused on the individual business areas...