The Importance of Risk Culture and Incentive Compensation

Banks’ risk management, governance, broader ethical standards, and compensation practices are important. That’s what the regulators are trying to communicate to the board of directors. Deloitte Global reported the result of its recently conducted survey: 60% respondents claimed that their board are already established and embed the risk culture of the enterprise and promote open discussions regarding enterprise’s risk. The incentive compensation plans due to consider alignments of risk with rewards are being reviewed by 63% of directors.

Referring to the Deloitte’s article, financial institutions need to work harder in order to meet heightened regulatory expectations because the level of misconduct in several financial institutions has raised high enough to potentially create systemic risks. As a response, banks are starting to establish new oversight committees, offices, and policies. To examine financial institutions whether they have created a new culture or not, regulators are eagerly looking beyond the quantitative measures of market, credit, and liquidity risk. The regulators are considered as aggressive especially because there are only half of respondents that took the responsibility of their institution’s risk management program to review compensation plans in assessing its impact on risk appetite and culture.

The good thing is 85% of respondents claimed about the significant progress compared to two years ago: their boards of directors are currently willing to take extra time to oversight of risk. The boards are also being more involved in providing risk oversight and it seemed likely to be continues for the next times. There is a potential indication in the upcoming times that regulatory change along with the incentive compensation will be applied widespread.