Risk Culture and the Role Model of the Honorable Merchant

Abstract

Abstract:The current discussion about a "risk culture" in financial services was triggered by the recent series of financial crises. The last decade saw a long list of hubris, misconduct and criminal activities by human beings on a single or even a collective basis in banks, in the industry or in the whole economy. As a counter-reaction, financial authorities called for a guidance by a "new" risk culture in financial institutions based on a set of abstract, formal, and normative governance processes. While traditional risk research in economics and in banking was focused on the statistical aspects of risk as the probability of loss multiplied by the amount of loss, culture is a paraphrase for the behavior in collectives and dynamics of organization found in human societies. Therefore, a "risk culture" should link the normative concepts of risk with the positive "real-world" decision-making in financial services. This paper will describe a novel view on "risk culture" from the perspective of human beings interacting in dynamical and intertemporal commercial relations. In this context "risk" is perceived by economic agents ex−ante as the consequence of the time lag between the present and the uncertain future development (compared to a probability distribution calculated by observers ex−post). For all those individual decisions-to be made under uncertainty-future "risk" includes the so-called "normal accidents", i.e., failures that will happen at some uncertain point in time but are inevitable, and the only questions are when failure will happen and how to maintain function in the first line of defense. Finally, the shift from an abstract definition of "risk" as a probability distribution to a role model of "honorable merchants" as a benchmark for significant individual decision-making with individual responsibilities for the uncertain future outcome provides a new framework to discuss the responsibilities in the financial industry.

Banks’ risk culture and management control systems: A systematic literature review

“…On a conceptually basis, several scholars develop and discuss comprehensive frameworks to foster banks' risk culture, which highlight learning from failure, organizational resilience and corporate governance as more general aspects, but also individual responsibility and supervision (which are related to action controls), remuneration systems (which constitute results controls) as well as training, recruitment and knowledgeable leaders (which are components of personnel controls) (Bott & Milkau, 2018;Cordery, 2007;Drennan, 2004;Drummond, 2002;Gontarek, 2016;Jackson, 2015;McConnell, 2013;Srivastav & Hagendorff, 2016;Wood & Lewis, 2018). Young (2011) adds the concept of high-reliability organizations to the discussion.…”

“…To cease dysfunctional developments with respect to risk culture, scholars stress the importance of embedding risk culture in an overall fitting organizational context (e.g., Bott & Milkau, 2018;Gontarek, 2016;McConnell, 2013;Wood & Lewis, 2018). In order to achieve this goal, literature provides many instruments which can be categorized into one of the discussed management control categories, e.g.…”

A Theoretical Framework for Enterprise Risk Management and Organizational Performance

“…Risk culture gained prominence among professionals after the 2008 global financial crisis (GFC) (Bott & Milkau, 2018). Its weakness played a vital role in this financial crisis as well as more recent London Interbank Offer Rate, Payment Protection Insurance and "London Whales" scandals (Ashby, Power, & Palermo, 2014).…”

“…The realization of a sound ERM is dependent on the embedment of an organization's risk management framework into its structure, processes, and culture (IRM, 2012). The 2008 GFC created an increase in the advancement of risk cultures in organizations and the need for financial authorities to ask financial institutions for direction and guidance on its management to recover from financial instability (Bott & Milkau, 2018;Marshall, 2016). According to the Financial Stability Board -FSB (2014), "A sound risk culture consistently supports appropriate risk awareness, behaviors, and judgment about risk-taking within a strong risk governance framework.…”

Determining Probabilities for a Commercial Risk Model of Czech Exports to China with Respect to Cultural Differences and in Financial Management

“…Commercial risk assessment relevant to this article is particularly addressed by financial market research studies focusing on rating, solvency and credit risk (Amat et al, 2017;Skoglund & Chen, 2017;Belás et al, 2012) or on credit risk transfer in the supply chain ( Jorge et al, 2017). An alternative view on client-related risk was presented by Bott & Milkau (2018) describing "risk culture" from the perspective of people "interacting in dynamic and intertemporal commercial relations". In terms of the present paper, however, the major drawback of the above-mentioned and other secondary sources is too narrow focus on commercial risk manifestations.…”