Title of Dissertation:
Ethical Focal Points and Heuristics in Banking – How a Symmetric Risk Culture Fosters Sound Risk Taking and Conduct
Supervisor: Prof. Dr. Andreas Suchanek
University: HHL Leipzig Graduate School of Management
Scholarship: KSG Scholarship
Cohort: 4. Cohort, 2017-2020
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Short Abstract
In the modern, global society, the responsibility of companies and their decision-makers is becoming more and more prevalent as a topic every day. Since the financial crisis, especially the financial services industry suffered from a loss in confidence and reputational damages. As a result, banking regulation increased massively. Banks must have higher equity ratios as well as certain leverage and liquidity ratios. In addition, financial institutions are required to produce reports faster, ad-hoc and with more robust data. Nonetheless, bank scandals happened repeatedly – manipulation, misconduct and fraud where committed by groups (intra and inter organisational) as well as by individuals in financial institutions. More than $100 billion in fines were imposed on the largest financial institutions since the financial crisis, which led to a growing suspicion that ethical lapses in banking are not just the outcome of a few “bad apples” but rather a reflection of systematic weaknesses. The introduced quantitative measures did not prevent banks from those scandals which is a huge problem for the financial market stability and the global world economy. Narrowed down for this research, the understanding of some groups or individuals in the financial services sector might differ from those of the public.
A controversial issue is the extent to which corporate culture matters in this regard – and how corporate culture can be influenced or controlled by an organization’s management. Culture presumably matters because it relates to the behaviour and conduct of individuals and groups which substitutes for more explicit governance via directives, regulation and contracts. Since people construct culture and little that people do cannot be influenced, it seems likely that culture can be influenced by management. While various definitions of culture exist, banking supervisors are focusing on the financial institution’s norms, attitudes, and behaviours related to risk awareness, risk taking, and risk management or the financial institution’s risk culture.
Consequently, conduct and culture is coming to the forefront of the global regulatory and supervisory agenda. Under the new rules for operating risk, control failures hit banks twice: first, the fines will depress profits, and second, the fines count toward the losses against which the bank must hold capital. In the end, good conduct stems from good governance. That creates a culture in which people not only do the right things, but also do things right. The key research question “How to approach Risk Culture – fighting symptoms or identifying the root causes of misconduct?” addresses behavioural aspects which are directly relevant from a banking regulators view. Banks have made more progress with respect to financial than non-financial risks. For the former, banks can use stress test losses to quantify and cascade risk appetite from the group level to individual business units. However, for non-financial risks, banks need a more granular approach to make the risks tangible and to identify and deliver the right actions.
A literature research is used focusing on conceptual concepts in the academic and regulatory literature to assess the research question. The emphasis is on conceptual work supported by a case study method underlining the theoretical framework. Based on the research performed for this dissertation, the current market practice regarding risk culture are inferred by means of a top down approach to risk culture. Key challenges around existing market practice risk culture frameworks are identified by a bottom up approach to risk culture, and based on that a future proof risk culture framework is outlined aiming to better identify the root causes of misconduct.
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