Answer to Question #233625 in Marketing for lacchey

Question

·        What do you understand by ‘risk culture’? (relate to the main risks in the banking sector) ( 300 words)

Answer 1

Risk culture refers to the values, beliefs, knowledge, attitudes, and understanding about risk shared by a group of people with a common purpose. In the banking sector, risk culture refers to the norms, attitudes, and behavior related to risk awareness, risk-taking, and risk management and controls those shape decisions on risks. Bank returns are highly dependent on the risk profile and management of risks within the banking operations and the general information technology platforms. Banks that have sound risk culture have generally high returns. A higher sound risk culture is correlated with a higher bank's ability to manage its loan portfolio, with a significant negative impact on loan loss provision on gross loans.

Banks face various risks such as credit risks, market risks, operational risks, moral hazards, liquidity risks, business risks, reputational risks, and systemic risks among others. There are risks that fall within the bank’s management control and their management determines the appropriateness of the risk culture. Other risks are beyond the control of the bank management such as market risks and the bank's readiness to handle the risks determines the safety of the bank. A good risk culture provides open and upward communication about risks, sharing of knowledge and best practices about risks, continuous process and improvement, and a strong commitment to ethical and responsible business behavior.

Risk culture in the banking sector can be improved through regular refinement and adequate reporting to the board about risk controls, integration of the risk management into decision making, enhancing ethical performance scorecards, reliability of the risk team as the most trusted advisors, and creation of the conducive working environment for them without threats exposure. In this regard, the bank will be able to reduce the credit default risk, concentration risk, and liquidity risks. The key elements of risk culture involve risk competence, motivation, relationships within the organization and how the organizational environment is structured, and what is valued.