Risk Culture in Financial Organisations

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Although there is widespread consensus that problems of ‘risk culture’ contributed to the financial crisis there is less agreement on what ‘risk culture’ actually is and how it might be managed by financial institutions.

This project intends to increase our understanding of ‘risk culture’ and effect a knowledge transfer from academia to business by focusing on the ‘cultural drivers’ (e.g. the rate of expansion in operations, approaches to oversight and assurance, level of employee discretion and the framing of risk) which influence the risk taking and control activities of banks and other financial institutions (BOFIs). The intention is not to presume what a ‘good risk culture’ looks like but to investigate the often competing aspects of organisational culture which can drive both risk taking and its mitigation. We aim for collective knowledge production – working together with CROs and other relevant actors to arrive at a shared view of the cultural factors that drive risk taking and avoiding within BOFIs.

The objectives of the project are as follows:

To provide a bottom-up view of risk culture, analysing in a practical way the ‘cultural drivers’ in the cultures of BOFIs which are risk-relevant.
To benchmark results obtained from a representative sample of organisations, providing an overview of common themes, unique aspects and areas of disagreement in the characteristics of BOFI risk cultures.
To develop a useable ‘risk culture instrument’ that can be used by CROs and others to manage their institutions’ risk cultures in a more explicit manner.

The interim report was published on 8 November 2012. To read the full report, please click here.

Please click here to read the ESRC article titled "Researching risk in financial organisations" from 5 December 2012.

Risk Culture in Financial Organisations Project have published a Thinkpiece for CII on 20 May 2013. To read the Thinkpiece, please click here.

Press release - Risk Culture in Financial Organisations publish final report: 30 September 2013

Joint research from LSE (Professor Mike Power and Dr Tommaso Palermo) and Plymouth University (Dr Simon Ashby) published today dispels ‘myths’ that poor or deviant risk culture in financial institutions is mainly responsible for recent scandals. The report, Risk Culture in Financial Organisations, says that current debates misleadingly equate risk culture with greater precaution and risk aversion. It challenges the notion that there is a clear distinction between ‘strong’ and ‘weak’ risk cultures. Professor Mike Power comments, “The risk cultures of financial organisations are full of trade-offs, and how they manage those trade-offs is fundamental. This clearly includes, but is not restricted to, the need to balance risk and return. In addition, we find that ‘good’ risk culture is as much about organisational clarity and confidence in making these trade-offs, as it is about the level of risk taken as such, or indeed about ethics.”The report also questions the direction of certain financial sector reforms, including the significant focus on issues such as governance, ethics and incentives.

To read the full press release, please click here.

The final report is available here and the Executive Summary is available here.

Professor Mike Power (LSE)
Dr Simon Ashby (Plymouth Business School)
Dr Tommaso Palermo (LSE)

CII
CIMA
ESRC
Lighthill Risk Network

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