How can supervisors and banks promote a culture of strong governance and ethical behaviour?
Abstract
This paper elaborates on the centrality of governance, culture and ethics for banks’ strategic planning and decision-making. Good governance, risk culture and ethical behaviours help promote a more sustainable business model over the full business cycle and during periods of structural change. This is especially relevant in a rapidly changing financial landscape, where banks should ensure that their governance and control frameworks embrace existing and emerging risks, such as anti-money laundering, IT (information technology) risk and cyber and non-financial risks. Governance, culture and ethics are neither observable nor measurable directly as they comprise mainly qualitative elements. From the supervisor perspective, this calls for the development of specific tools to identify the more tangible factors that characterise the soundness of a bank’s governance and culture. The paper describes the approaches developed by European Central Bank (ECB) Banking Supervision on this issue since its inception. The paper also provides an overview of the progress and challenges faced by banks in the areas of governance and culture, five years after the implementation of the Single Supervisory Mechanism. Overall, banks have already introduced several improvements in the design of their governance and culture frameworks. In particular, their awareness of governance and the importance that they attribute to it have also increased over the past years. Banks, however, still need to make efforts in order to ensure that these improvements are implemented efficiently and effectively across the organisation and contribute to strengthening their risk culture. The journey towards improving governance and culture in banks has been a long one. Supervisors will continue promoting progress in governance and risk culture through peer benchmarking, clarification of sound practices and continuous industry dialogue. To this end, some concrete examples of bad and good practices in the areas of governance and culture are presented at the end of this paper.
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Author's Biography
Stefan Walter is Director General of the Directorate General Micro-Prudential Supervision I at the European Central Bank (ECB), responsible for the supervision of the most significant banking institutions in the Single Supervisory Mechanism. Previously, he was Principal at Ernst & Young (EY), where he led EY’s global bank regulatory practice. From 2006 until 2011, Stefan was Secretary General of the Basel Committee on Banking Supervision. Before joining the Basel Committee, he held different senior positions at the Federal Reserve Bank of New York. Stefan holds a master’s degree in Banking and Finance from Columbia University and a BA from the University of California, Berkeley.
Florian Narring is an Adviser within the Directorate General Micro-Prudential Supervision I at the European Central Bank (ECB). He coordinates supervisory work in the areas of governance, risk management and culture. Prior to joining the ECB in 2014, Florian worked as a supervisor at Autorité de Contrôle Prudentiel et de Résolution. He earned a master’s degree in science of management from HEC Paris as well as a master’s research degree in money, banking and finance from Université Paris 1 Panthéon Sorbonne.
Citation
Walter, Stefan and Narring, Florian (2020, March 1). How can supervisors and banks promote a culture of strong governance and ethical behaviour?. In the Journal of Risk Management in Financial Institutions, Volume 13, Issue 2. https://doi.org/10.69554/RLSR2317.
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