Risk culture change essential to prevent more bank failures, says accounting body

Banks must urgently rethink their approach to risk culture to prevent further Credit Suisse-style collapses, according to a February report published by the Association of Certified Chartered Accountants, a global professional accountancy body. 

The report — Risk cultures in banking: Where next? — reveals that current behaviours, particularly a lack of accountability, are major blind spots. The report highlights the role that behavioural science and accountancy professionals have in embedding new approaches to risk culture.

Rachael Johnson, the ACCA’s head of risk management and corporate governance and the author of the report, said improvements are needed after conducting more than 100 one-on-one interviews and hosted dozens of roundtables to get a sense of whether banks have learned lessons from the collapses of March 2023.

For example, the report revealed that nearly a third of accountancy professionals do not believe their organisation’s risk culture “is aligned with what it says it does in publicly stated commitments”, such as annual reports.

“Time and time again boards and senior management are more concerned with quarterly earnings and do not pay enough attention to strategic risks and how fast they materialise into something very costly,” said an ACCA member quoted in the report. Another said that “the fines and reputational damage in banking have been enormous in recent years. It is as if we know something needs to change about how we quantify these risks but, as an industry, we are not doing enough about it”. 

“There is bound to be more collapses; we can already see it with US regional banks teetering on the verge of insolvency — but it could be the big fish as well,” said Johnson.

‘Rulebook addiction’

Mirea Raaijmakers, an independent consultant who established and then led the Dutch central bank’s supervision programme for behaviour and culture said that banks put too much emphasis on regulations rather than implementing behavioural changes.

“Just after the global financial crisis, across the industry everybody seemed to agree that behaviour was the root cause — but the reflex of the majority of the industry was to focus on the governance of formal mechanisms,” she said. “With the collapse of Credit Suisse and SVB there is the realisation that we need to do something different.”

While corporate governance principles exist for banks, the ACCA report underscores the limitations of relying solely on externally mandated rules. Instead it calls for a rethink, “since no regulatory capital measure seems to be available for reputational risk”, which exists “well outside the classical Basel-regulatory categories”.

The report also highlights that investment in internal behavioural expertise remains relatively rare. A handful of banks, namely ABN Amro, NatWest and ING, have created behavioural risk management teams, but these are the exceptions to the rule. 

Raaijmakers, who set up the team at ING after her role at the Dutch central bank, said she sees some evidence of banks moving from being “addicted to rulebooks and formal mechanisms” towards a more integrated approach. “It is transitioning, but it is far too slow,” she said.

Behavioural science 

Johnson said she sees a need for accountancy professionals with behavioural sciences expertise. “What jumped out at me was the extent to which accountancy professionals are really looking at the need to measure the behaviours behind risk — and it’s not just at the big global banks,” she said.

The ACCA report suggests shifting the emphasis from standardised capitalisation requirements to a more integrated approach. This means leveraging accountancy professionals’ unique position within banks to always seek alternative information sources, dig deeper and engage with other functions to gain multiple perspectives on data. 

“Accountancy professionals can act as risk ‘super-networkers’, aiding teams in informed decisions and sharing knowledge. By sharing stories they can raise risk awareness, promote new insights and influence operational performance, which is what effective risk cultures are all about,” said Johnson. 

Raaijmakers said: “In the banking industry, [they] should embed behavioural science much more seriously than they’re doing now. In my view, a lot of those teams are positioned on a more operational level, when I think they should have been much more strategic.” This means risk behaviour teams should be reporting directly to the chief risk officer, or even the CEO, she said.

“ESG is top of mind in the banking industry,” added Raaijmakers. “And the human factor is also a crucial part of making sure that the banking industry stays on the right side. If banks really want to transition and transform and drive ESG forward, this requires a fundamental behavioural change: you have to include it in your everyday decision making.”

Boosting accountability 

At the heart of any new approach is accountability, said Johnson. “The lack of accountability was a big blind spot in all the corporate failures we have seen; not just Credit Suisse and SVB, but Wirecard and even The Post Office. If you want to instil ethical thinking across your organisation, you must eliminate the fear factor and foster a more ‘hands-on’ culture,” she said. 

Johnson said she sees merit in Confide, a new venture co-founded by the former head of legal for Asia-Pacific at German payments company Wirecard, Pav Gill, who exposed the accounting fraud that led to its 2020 collapse. Confide is a platform that enables secure anonymous channels for risk disclosure with an in-built audit trail, a feature that sets it apart from other platforms that, according to Gill, represent “glorified inboxes”. 

“This new platform is a game-changer because it not only helps employees who want more dialogue, but also the companies themselves, their investors, regulators, auditors, and ultimately their customers who want to know what is really going on,” said Johnson. 

Gill said he believes that Confide would have helped people just like him have the confidence to raise concerns and bring good governance into everyday conversations. He said that the digitalisation of internal investigations not only leads to costs and time savings, but faith in the whistleblowing channel.

“Drawing from my own experience as head of legal and compliance and as a whistleblower, I have created [within Confide] an ‘early detection tool’ aiming to prevent future Wirecard-like situations. Confide gives a safe space to report wrongdoing, mitigating against the risk of potential media leaks,” he said.