Effective Risk Culture in Banks: Responsibilities and boundaries of the Risk Management
Effective Risk Culture in Banks: Responsibilities and boundaries of the Risk Management

Author(s): Eugenia Schmitt
Subject(s): Business Economy / Management, Governance
Published by: Masarykova univerzita nakladatelství
Keywords: risk taking; corporate governance; risk management; Value at Risk; banking regulation;
Summary/Abstract: The Financial Crisis of 2007-09 showed, that a not appropriate risk culture as well as deficiencies in the risk management played a major role in banking failures. To establish a “good” risk culture has become an object of focus by regulators. They are focusing on the bank’s norms, attitudes and behaviors, linked with the risk taking and risk awareness. There is not an ideal, how banks should manage their risk taking, but it becomes clear, that the enterprise-wide risk oversight should be improved, the chief risk officers’ role in corporate governance should be strengthened. Effective risk culture contributes to the bank’s ability to act with risk changes. Because taking risks is a part of the bank business, there still will be a chance, even if a small one, that some undesirable outcomes will appear. A good risk management contributes to avoid unpredictable and unwanted developments. The appropriate risk management framework must be designed in accordance with the banks optimal risk level and the business strategy. To change a risk culture in a bank is not an easy task, because it requires not only improvements in risk measurement, governance and communication process. Behavioral aspects should also be taken into account. The cycle of an appropriate risk level setting in line with the business strategy, risk taking in line with value-growth opportunities and timely, transparent and honest communication of risks should be reconsidered. The risk management should gain a higher weight in the decision-making process. This paper provides an explanatory framework for the setting the right risk level and discuss the responsibilities and boundaries of risk management in the new light of the current regulatory environment. It shows, that risk management is closely related to governance structure and business model.

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