The ECB’s Fresh Approach for Improving Culture and Risk Governance at European Banks
Traditionally, when providing guidance on risks related to culture and governance, regulators have emphasized positive attributes that banks should adopt. But in a recent paper, the European Central Bank highlighted the red flags that firms should be wary of, demonstrating the value of a so-called negative checklist.
Governance and risk culture remain insufficient at European banks, even though progress has been made in these important areas. That, at least, is the perspective offered by the European Central Bank (ECB) in a recent report.
The ECB’s “Draft Guide on Governance and Risk Culture” states that banks are expected to define their culture, including their “values and code of conduct.” While the supervisor has previously provided governance and culture guidance (emphasizing positive attributes), its latest paper yields a different spin, citing a list of red flags that could be indicators of poor culture.
Signs of Trouble
According to the ECB, risk culture can be operationalized with the help of four components: tone from the top, proper incentives, effective communication, and accountability for risks. Each component leads to expected behaviors. One example of “tone from the top” is when the board rigorously evaluates a new credit product, ensuring it meets duties of care and prudential safety standards.
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