Re: Comments on Consultative Document “Increasing the Intensity and Effectiveness of Supervision - Guidance on Supervisory Interaction with Financial Institutions on Risk Culture”
(http://www.financialstabilityboard.org/publications/c_131118.pdf)
Dear Chairman Carney and Secretariat to the Financial Stability Board:
On behalf of the Blue Ribbon Advisory Panel of the Professional Risk Managers’ International Association (PRMIA) we are pleased to provide comments on the Financial Stability Board's (FSB’s) consultative document issued on November 18, 2013 and its subsequent guidance of December 23, 2013 “Guidance on Supervisory Interaction with Financial Institutions on Risk Culture - Questions for Public Consultation.”
(PRMIA’s Blue Ribbon Advisory Panel is made up of a cross-section of senior risk professionals. Although their collective opinion has been greatly debated and appropriately vetted, it should not be accepted as the confirmed consensus of the Association’s 90,000 members.)
Today, financial businesses interact in a global ecosystem where interconnections across sovereign jurisdictions provide an enormity of differing risk regimes in order to comply. To model and monitor this behavior will require cooperation by supervisors in the application of subjective judgments of good vs. bad behavior, or risky vs. appropriate behavior. Even judging the “tone-at-the-top” set by boards and their management has characteristics of subjectivity, requiring supervisors’ judgments.
Given such subjectivity across many jurisdictional boundaries, what we, as risk professionals, have to offer is a direction toward a quantitative floor for boards and their management from which to allow supervisors to make consistent judgments. Here we take the FSB’s lead in tying risk culture to risk appetite by suggesting a quantitative approach to risk appetite setting, and ultimately, tying those risk metrics to the enterprise risk management systems and framework of financial institutions.
In taking this approach, the Blue Ribbon Advisory Panel is hereby providing our perspective and observations based upon our collective experiences. Understanding a company’s risk taking and risk mitigating conduct is a result of each individual’s own behavior that collectively empowers group behavior, we will suggest what we term Key Risk Culture Indicators (KRCIs) for benchmarking such behavior.
The views of risk professionals about risk culture and its measurement exist between two extremes: measureable KRCIs can be identified, and a review of conduct and practices is insufficient to get complete insight into culture. If supervisors desire to assess risk culture as a part of their responsibilities, then there is concern amongst practitioners about the qualifications of supervisors to interpret any quantification of such culture deficiencies. There is also no mention of what a supervisor might do with this information. A better understanding of the intended uses of the review of risk culture would be very helpful in forming our comments.
If supervisors don’t understand how to use this review, then a “check-the-box” regulatory classification for risk culture would probably not be a helpful outcome.
The evaluation of company’s risk culture should be an iterative process since both the company’s and regulators’ understanding of risk culture evolves. A sound risk culture might appropriately be different for different financial institutions. Nevertheless, how this variance among corporate risk cultures is to be interpreted by supervisors should be somewhat consistent. Some are skeptical that an accurate risk culture assessment can be made after conversations with the board and senior management and whether the institution’s risk culture supports adherence to an agreed risk appetite. We agree with the starting point of the four principles of risk culture offered in the FSB’s Risk Paper and offer additional perspectives on more fully incorporating risk appetite into risk culture.
A review of practices may be insufficient to achieve an appropriate insight into a firm’s risk culture. The process of determining a firm’s risk appetite is an outward sign of the risk culture, but there may be many desirable risk cultures and not just one sound risk culture as suggested by the paper. In fact, the best risk culture may not be the “sound” or the “unsound” cultures that are inferred in the paper.
Our response is divided into a section on “Foundational Elements of a Sound Risk Culture” that recognizes the variability of cultures and the importance and linkages of risk governance, risk appetite and compensation. We also recognize that governance processes should be designed to support discernment of the changing business and economic environment to the adaptation of risk management practices. This can be accomplished by changing the underlying risk analytics of the risk appetite framework. In this section, we articulate and support a movement from a subjective evaluation to a more objective measurement of risk culture in order to achieve the FSB objective of “formally assessing risk culture at financial institutions.”
We are mindful that we can still differentiate cultures without risk measures, especially if we live inside of an organization. Furthermore, introducing measures of risk culture does not ensure that we will gravitate toward a strong risk culture over time. Nevertheless, we believe it is useful to articulate support of a more objective measurement.
This section is followed by the response to the “Questions for Public Consultation” dated 23 December 2013, where the four indicators of good risk culture put forward by the FSB are further expanded upon. The responses encourage development of Key Risk Culture Indicators (KRCIs) as measures of risk culture for each of the main key indicators described by the FSB:
Tone from the top (4 subcategories)
Accountability (3 subcategories)
Effective Challenges (2 subcategories)
Incentives (2 subcategories), and
In addition, we comment on other potential measures such as ethics, integrity, transparency, communication, adaptive or dynamic risk appetite, in addition to others.
We believe that if a risk culture is successfully integrated into the fabric of a financial institution, then this will lead to a risk adjusted corporate culture that will benefit the entire financial ecosystem and, in turn, lead to stabilizing the global economy. However, it will take time, probably a generation, to indoctrinate staff to the new order of risk-adjusted performance and incentives, both within supervisor ranks and at financial institutions.
We look forward to developing a comprehensive relationship with the Financial Stability Board, seeking to become a cooperative collaborator and confidential liaison in representing the risk profession. As part of our education and accreditation mission, PRMIA has issued its global Professional Risk Manager (PRM™) certification to individual practitioners and regulators throughout the world. We will continue this effort while embracing new ideas about risk culture into the curriculum.
Respectfully submitted,
Blue Ribbon Advisory Panel* (BRP) of the Professional Risk Managers’ International Association (PRMIA)
Kevin M. Cuff, Executive Director, PRMIA
*Blue Ribbon Advisory Panel members:
Mark C. Abbott
Dr. Michel Crouhy
Dr. Daniel Galai
Allan D. Grody
Edward Hida
Dr. Colin Lawrence
Dr. Robert M. Mark
Leslie Rahl
Dr. Anurag Saksena
Raj Singh
Dr. Thomas C. Wilson