EY - Banks report dramatic changes in risk culture

Shifting focus: Risk culture at the forefront of banking

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Our fifth annual risk management survey, completed in cooperation with the Institute of International Finance (IIF), finds banks focusing more closely than ever on culture and conduct.

More than eight in 10 global systemically important banks (GSIBs) and two-thirds of all banks surveyed report they are actively changing their risk culture. This sharpened focus is the result of numerous regulatory breaches and misconduct issues, such as Libor and product missellings, that have shocked the industry over the past several years.

These problems have shaken boards' certainty about prevailing enterprise risk culture. An overwhelming 93% of GSIBs agree that weak oversight and controls led to the failures.

The situation has had a significant financial impact. One-quarter of survey participants report a loss of more than US$500 million in the past five years related to operational failures.

Key findings
  • Banks are focusing more closely on culture and conduct.
  • That focus is driving stronger risk governance structures.
  • Banks continue to struggle to embed risk appetite across the enterprise.
  • Non-financial risks are gaining scrutiny.
  • Basel III regulations continue to drive fundamental changes.

Changing the risk culture

Most respondents agree that risk culture is a strategic asset that can be deliberately changed and effectively enforced from the top down. The survey found several specific practices that are emerging to strengthen risk culture:

  • 86% of banks report that severe control breaches will trigger serious disciplinary actions.
  • 68% say they are increasing accountability regarding risk roles and responsibilities.
  • 58% are aligning compensation with risk-adjusted performance metrics.

Other findings

Balancing a sales culture with a risk culture is crucial.

A majority of banks (56%) say that striking a balance between a sales-driven front-office culture and a risk culture is their key challenge.

Still, there is intense pressure on the front office to drive performance. Nearly eight in 10 banks have reduced target ROEs since the crisis, and more than half reduced them further last year. Yet 72% of banks report investors are rejecting these lower ROEs.

Embedding risk appetite is critical, but very difficult.

More than half of banks agree that embedding risk appetite is an important mechanism for changing the risk culture. However, nearly six in 10 report difficulty moving firm-wide risk appetite into their businesses, and 70% struggle to link business decisions to risk appetite.

Basel III requirements are impacting profitability.

Nearly two-thirds of banks agree that the combined liquidity and capital changes under Basel III will have a significant impact on the cost of doing business.

As a result, 43% are exiting lines of business that are no longer sufficiently profitable, and 12% are exiting geographies. As for GSIBs, 82% report they are still evaluating portfolios.