The role of top executives, especially CEOs, in shaping a bank’s risk culture and behavior has been underscored in recent research led by Prof Alper Kara from Brunel University London and Dr Artur Semeyutin and Dr Said Kaawach from the University of Huddersfield. This study examines how executives’ attitudes toward risk-taking impact a bank’s financial stability.
The study, prompted by Metro Bank’s recent capital level concerns, delves into the significance of a bank’s risk culture, elucidating that CEOs’ expressions about risk can serve as an early warning sign of potential financial instability. The findings suggest that a more relaxed attitude toward risk might foreshadow potential bank distress.
Although Metro Bank currently operates normally and customer deposits remain secure, its struggles with regulatory capital levels have raised apprehensions. The bank’s recent request to reduce its capital levels was rejected by regulators, leading to increased scrutiny and prompting the institution to seek additional investor funding.
The research stresses the critical role regulators play in maintaining financial stability, especially in the aftermath of the 2008 global financial crisis. The study highlights the importance of a strong risk culture within banks and its correlation with potential insolvency, citing instances where poor risk culture mirrored banks’ eventual collapse.
Analyzing the unscripted comments of CEOs during conference calls, the researchers used machine learning algorithms to gauge their attitudes toward risk culture dimensions. The study revealed that a weaker risk culture, reflected through negative expressions related to risk, could indicate a higher probability of bank insolvency due to insufficient capital.
This research underscores the impact of top executives’ attitudes on risk culture within banks, emphasizing their responsibility as role models. Executives’ views on risk cascade throughout the organization, influencing the entire risk management approach and potentially affecting the financial stability of the institution and the broader sector.
As financial regulators maintain stringent oversight and scrutiny post-reforms introduced after the 2008 crisis, the study amplifies the importance of nurturing a strong risk culture within banks. It urges executives to be mindful of their influential status in shaping risk culture and emphasizes the need for responsible risk management.
