Risk briefing: learning lessons from the 2023 banking collapses

A new special report by ACCA, the global professional accountancy body, examines the impact of risk cultures in the banking industry and how financial institutions can learn from what went wrong in the lead up to the banking collapses of 2023.

The report, Risk cultures in banking: Where next?, sheds new light on the pressing need for the banking sector to adapt and innovate risk governance and culture.

A key finding of the report was that professionals should lead an image change around risk culture, framing it as something that allows many good opportunities to happen, rather than only mitigating bad things.

The report further suggests that factors of human behaviour currently do not have enough bearing when it comes to risk cultures in banking.

Understanding the role of human behaviours when it comes to risk culture is complex, but with effective leadership, policy and management, many of the operational issues that have the potential to become much bigger problems can be mitigated earlier.

“The 2023 banking collapses underlined the importance of transparency in preventing operational losses and reputational risk”

Head of risk management and corporate governance at ACCA, and author of the report, Rachael Johnson, commented: “The 2023 banking collapses underlined the importance of transparency in preventing operational losses and reputational risk at banks. A strong risk culture supports this, ensuring trust in information for resilience and prudent risk taking.

“Accountancy professionals can act as risk super-networkers, aiding teams in informed decisions and sharing knowledge. By sharing stories, they can raise risk awareness, promote new insights, and influence organisational performance, which is what effective risk cultures are all about.”

Understanding the banking collapse

The report speaks to multiple ACCA members about their experiences of working within banking industries and attitudes towards compliance and the understanding of risk. Through discussion, the evidence highlighted that a lack of dialogue between banks and regulators underpinned many of the issues around building effective risk culture.

Rather than there being unwillingness to change how risk culture is approached and managed, the issue instead appears to be how to make a risk culture successful.

A key issue appears to be one of disconnect between senior decision makers and those looking at the operational data, as well as being on the ground amongst staff and understanding their behaviours and attitudes.

“We know something needs to change about how we quantify these risks but, as an industry, we are not doing enough about it.”

An ACCA member who is an investment manager in the UK compared the accumulating operational risk losses at banks ‘like trying to extinguish forest fires’.

He commented: “The fines and reputational damage in banking have been enormous in recent years. It is as if we know something needs to change about how we quantify these risks but, as an industry, we are not doing enough about it.”

Another ACCA member added: “We see time and time again that boards and senior management are more concerned with quarterly earnings and do not pay enough attention to strategic risks and how fast they materialise into something very costly.”

Key lessons for risk professionals 

One key lesson that risk leaders should take from the research is that you cannot just create a document on what the organisation’s approach or appetite to risk is.

Instead, there needs to be a more holistic view and firms must consider how everyone in the organisation contributes to these.

Johnson says: ”Good governance is about role clarity and where accountability lies. So, you don’t just write up a whistleblowing policy and think, ‘Voila! We have a whistleblowing policy, so we are good’.

“We found so many middle managers at banks who just feel left out and not involved in things like KPIs”

“It’s how you communicate it and involve the people in your workplace, and that requires dialogue from the top down and the bottom up.

“We found so many middle managers at banks who just feel left out and not involved in things like KPIs that matter to everyone, but, let me be clear, this is the story across all sectors and regions.

“Some of the best stories were from ACCA members who talked about shadow boards and other types of inclusive, in-touch activities, rather than mandatory on-line risk training modules and tick-the-box exercises.”

How risk managers can better manage threats in the future

Risk management is not just about the ‘risk managers’, it is about how risk is perceived and operationalised around the entire organisation.

Taking on the right risks and making well-informed decisions on all levels means everyone needs to understand the values, the purpose, and the tolerance for risk if they are to build resilience and achieve the goals of the organisation.

ACCA’s report found that accountancy professionals are well-positioned to ensure there is a common language being spoken about the risks and opportunities in the post-pandemic workplace.

“We found so many of our members around the world who work at banks explaining how they are trying to frame risk as a value added”

Johnson said: “Accountancy professionals, in all their different roles across the three lines, are becoming much more interested in how to measure behaviours, rather than culture, because behaviours are something you can incentivise, monitor, and strengthen.

“We found so many of our members around the world who work at banks explaining how they are trying to frame risk as a value added rather than a firefighting exercise.

“There’s no one size fits all, because we also found banks addressing this from so many different angles depending on the type or size of the firm, the jurisdiction, but most importantly. the leadership, i.e., who is the CEO and who is on the board.”