On 19 September 2023, the European Central Bank (ECB) published a speech by Frank Elderson (Member of the ECB Executive Board and Vice-Chair of the ECB Supervisory Board) entitled Treading softly yet boldly: how culture drives risk in banks and what supervisors can do about it. The speech discusses what the ECB assesses in terms of behaviour and culture in banks and the tools it uses to carry out such assessments. It also covers some of the challenges.

Key points in the speech include:

  • Culture is often the invisible hand that nudges employees towards either prudent risk management or reckless behaviour. It is the undercurrent that determines whether compliance considerations are seen as mere adornments or as important guiding principles.
  • Behaviour is the tell-tale sign of whether a bank is primed for prudent risk management or careening toward recklessness.
  • At the ECB, behaviour and culture is part of its supervision of banks’ internal governance. This means that the ECB looks at both the “hardware” of banks’ governance – their policies, management body set-up and composition – and, crucially, at the “software” – how people behave within the governance structures.
  • The ECB’s internal governance assessments lead to concrete and targeted qualitative requirements and recommendations that banks need to follow up on and implement over a certain period.
  • Boardroom observation is an important method the ECB uses to assess whether constructive challenge is taking place on boards. The ECB’s attendance at board meetings is targeted and limited and is aimed at assessing the board’s dynamic and its ability to effectively challenge the management. Often, the ECB does not see signs of constructive challenge.
  • Another way in which the ECB supervises behaviour and culture is by assessing risk culture in banks. One way in which it assesses risk culture is to look at the “tone from the top”, as this plays a crucial role in establishing a culture of prudent risk-taking within the institution. As part of its assessment, the ECB interviews board members or business line representatives to inform its supervisory judgement. For a small number of banks, the ECB have also recently started piloting some risk culture deep dives which allow it to make a more in-depth assessment.
  • The ECB is reflecting on how it can further incorporate culture and behavioural patterns into its supervisory approach to governance, and it is looking at how it could continue to enhance its supervisory toolkit and develop its expertise in these areas.
  • The ECB is currently reviewing its guide on governance and risk culture, which it plans to publish at the end of 2024. The guide will out in detail the ECB’s supervisory expectations on governance, risk management and risk culture and will include a set of good practices that it has observed across the banking industry.