The culture of risk governance in financial institutions

Abstract

Financial institutions increasingly need an integral and widespread culture, especially in terms of risks and relations with stakeholders, which guides corporate behaviour and organisation. When constructing this positive risk culture, financial institutions must be protagonists and not spectators. This means that risk governance professionals necessarily need to be involved in the process. In this paper, the importance of risk management in the organisational structure of financial institutions is analysed, taking into consideration the logical transition from risk culture to risk governance. The paper then examines how the main aspects of risk governance have been analysed in the recent literature in order to understand the possible relationship between bank profitability and risk. The paper finds that the governance literature has considerably developed since the outbreak of the global financial crisis, leading to the implementation of not only theoretical paradigms but also empirical analysis. Quantitative research generally makes use of multiple regression models — with or without fixed effects — but some innovative analysis techniques are also used for specific aspects of analysis such as the estimation of certain variables. The results of the literature review show a general trend towards greater attention by financial institutions to risk governance which tends to be linked to a better performance, although studies on the subject do not always agree. The importance of a well-structured, efficient and effective bank risk governance emerges as a key conclusion, although research into further risk governance analysis models is expected to continue, particularly in light of the recent international economic and financial context.