Why Governance & Risk Culture Matter Now
Effective governance is crucial for sound decision-making in banks, ensuring safety and stability in the financial system. Previous bank failures and global financial crisis highlighted the need for banks to address the root causes of their governance issues. Deficiencies in internal governance and risk culture can act as early warning signals for potential financial difficulties, emphasizing the necessity for robust governance and risk culture frameworks.
A central element of this framework is the Risk Appetite Framework (RAF), which sets out the level and types of risks a bank is willing to assume. The RAF should be fully integrated into the bank’s governance, guiding strategic decisions and supporting a sound risk culture throughout the organisation.
ECB has increased its scrutiny and stated that financial institutions’ progress on risk culture has generally not been sufficient. Where the 2016 SSM Supervisory Statement primarily set out basic rules, the 2024 ECB Guideline establishes a foundation for profound, culture-driven governance that aligns with today’s risks and supervisory expectations. At the same time, the EBA and Dutch Central Bank (DNB) have also sharpened their focus, raising the bar for a robust risk culture. Banks face a clear challenge: how to evolve their governance model into a forward-looking, integrated strategy that goes beyond box-ticking. The ECB’s guide calls for transformation, ensuring that risk management practices are fully integrated across the organisation.