Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 136

Good risk culture and how to recognise it

Risk culture in financial institutions has never been more important for their role of supporting steady economic growth. But how do you know good risk culture when you see it? We asked ten of the world’s leading experts what they think the most important signals are. It’s not always what you might think.

The trouble with risk culture is that you see it only when it fails. And even then it can be hard to be sure that the risk culture itself was in some way lacking, or whether it was just plain unlucky. Spotting good – and bad – risk management and risk culture before a crisis hits is even harder. For Crisis Wasted? Leading Risk Managers on Risk Culture, we asked ten global risk managers what they thought the hallmarks of good risk culture are, and what progress has been made since the crisis of 2007-09 to improve it. A revealing, warts-and-all view of how risk management decisions are taken in large financial organisations is the result.

While most agree that a strong risk culture is one that permeates the organisation, the overall verdict is that progress is decidedly mixed. Two questions stand out.

  1. Chief Risk Officers are commanding more status within organisations, but has this translated into influence and effectiveness?
  2. It is now commonplace to note the increased emphasis on risk culture, but has this given us better risk management, or just more regulation and longer risk reports?

A corner office does not guarantee good risk culture

The skill of the risk manager is a mix of art and science. Technical competence is a must-have, but so are common sense and street-smarts. John Breit finds that:

 “For me it was more about who’s making money, and why is he is making money, and can he explain to me in an intuitive way how he is making it?”

Yet, much new regulation emphasises risk measurement over risk management. Objective, uniform risk indicators have obvious appeal, but statistics can conceal as much as they reveal. Risk managers generally agree that some quantitative risk reporting is essential, but they also agree that it is only a minor component of the much bigger job of managing risk, and it can even have a negative impact on risk culture. The best risk management practitioners agree that people management, the ‘soft’ skills: behaviour, governance and accountability, are key to good risk management. Sir Michael Hintze is clear:

 “The point that I think has been missed is the fact that it is probity, it is to do with behaviour rather than models. And I think there is a transparency point that has been missed.”

But this is exactly the part of the risk management job that is being squeezed out. Worse, reducing risk management to a mechanical operation carries the danger of turning it into a box-ticking exercise – the opposite of any sensible understanding of a good risk culture. When statistics displace common sense, risk managers, despite their status, add less real value and can easily be ignored or even shown the door, for example because they voice disagreement with the firm’s strategy.

Regulatory reporting is not risk management

It is both unsurprising and understandable that investors and taxpayers, who pay the price when things go wrong, demand tighter regulation of risk-taking activities. But more regulation by itself is no panacea, and may even make things worse if it is not properly thought through.

Regulators and supervisors, for their part, do the best they can to guard against the worst outcomes. But with limited resources at their disposal, often the most they can do is to mandate more, and more detailed, risk reports.

Ever more extensive stress tests and longer risk reports are thus the most visible of regulatory reforms; and organisations are duly churning out ever more reams of risk data. But much risk reporting is mandated without thought to who will bear the costs of preparing and collating it, how it will actually be used, or indeed, if it is useful at all. Paul Bostok is sceptical:

“I don’t know how many pages of forms would give you the information that you get from meeting somebody face to face and asking some pertinent questions.”

Regulators, who receive the reports, struggle to keep up and make sense of them, often with resources intended for much more limited responsibilities. Richard Meddings sees this as a real weak link in the system:

“The regulatory world is full of very able people, though I do worry there are not enough of them for the scale, size of the agenda they have in front of them.”

One reason why regulators and supervisors rely so heavily on risk reporting is because they find it hard to quantify, and even harder to aggregate, things like behaviour, governance and accountability.

Meanwhile, organisations are devoting more resources to preparing risk reports, while the costs of doing so are inevitably passed on to consumers and investors in the form of higher bank charges and poorer returns. Worse, fewer resources are available actually to manage risk. This diversion of resources from risk management to reporting has real consequences for the economy, as Adrian Blundell-Wignall points out:

“… real investment and the productivity growth, that is needed to make bonds and equities worth something in 50 years’ time, isn’t happening.”

Risk culture affects regulators too

Regulators are doing the best with the resources they have, but to pretend that this is good enough to avert, or even dampen, the effects of a future crisis is to hold one’s head in the sand.

The evidence points to the need for regulators to deploy soft management skills in tandem with selective, targeted risk statistics and to ask pointy questions. Only by deploying that enlightened mix of art and science can they hope to understand properly the risk profiles of organisations.

The danger is that constructive risk culture gives way to risk reporting, which in turn can easily dissolve into box-ticking. The risk experts we interviewed agree that this does nothing to address the pressing issue of restoring the ability of the financial system to meet its social obligation of facilitating economic growth. Indeed, by engendering a false sense of security, it could be doing quite the opposite.

 

Frances Cowell is a specialist investment risk consultant working with R-Squared Risk Management in Paris and London. Matthew Levins is a risk consultant who directed risk practices for leading firms such as Commonwealth Bank of Australia and Bankers Trust Australia. More details on their website, www.riskculture.today.

 

  •   27 November 2015
  • 1
  •      
  •   
banner

Most viewed in recent weeks

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Latest Updates

Shares

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

Investment strategies

Making a case for the 40 year mortgage

The housing debate tends to focus on prices, interest rates and deposits. Yet an overlooked feature of the mortgage itself could help buyers enter the market sooner without abandoning prudent lending standards.

SMSF strategies

Red flags to watch out for when considering an SMSF

Thinking about an SMSF? Before you sign anything, learn how to spot the difference between genuine advice and a sales pitch, understand the real costs, and avoid the compliance mistakes that attract ATO attention.

Investment strategies

Not all income is created equal

Market conditions are shifting as familiar yield sources quietly lose momentum. Australian public credit may be the most compelling source of income in today's market but many investors haven't noticed the shift. 

Investment strategies

The market paid for change, not comfort

Reporting season has delivered a clear message: the market is no longer paying simply for quality, resilience or an earnings beat. It is paying for change in earnings expectations and the outlook ahead. 

Investment strategies

Will AI destroy investor capital?

Some of history's most important innovations changed the world while leaving investors much poorer. As trillions pour into AI, a familiar pattern may be emerging, one that rewards society far more generously than capital.

ASX reporting season: Signals, surprises, stock stories

August reporting season delivered strong earnings and bigger-than-expected dividends, but beneath this, a more nuanced story emerged. First Sentier Investors’ David Wilson and Christian Guerra unpack the key trends.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.