Discover Risk Culture with Mohammad Fheili

Mohammad Fheili – fheilim@jtbbank.com
The Collective
Will & Ability
to Manage
Risk.
The Collective
Will & Ability
to Manage
Risk.
How To Build A Healthy Yet Contagious
May 18th & 19th 2016
Movenpick Hotel

Mohammad Fheili
“Over 30 years of Experience in Banking.
mifheili@gmail.com (961) 3 337175
 Risk & Capacity Building Specialist.
 Trainer in Risk & Compliance
 University Lecturer: Economics, Risk, and Banking
Operations
 Currently serves in the capacity of an Executive (AGM) at
JTB Bank in Lebanon.
 Served as:
• An Economist at ABL,
• Senior Manager at BankMed
• Senior Manager & Chief Risk Officer at Group
Fransabank
 Mohammad received his college education
(undergraduate & graduate) at Louisiana State University
(LSU), and has been teaching Economics and Finance for
over 25 continuous years at reputable universities in the
USA (LSU) and Lebanon (LAU).
 Finally, Mohammad published over 25 articles, of those
many are in refereed Journals (e.g., Journal of Money
Laundering & Control; Journal of Operational Risk;
Journal of Law & Economics; etc.) and Bulletins.”

 All Organizations need to take Risks to
achieve their Goals.
 The Prevailing Risk Culture within an
Organization can make it significantly
Better or Worse at Managing these Risks.
 Risk Culture significantly affects the
organizational capability to take strategic
risk decisions and deliver on
Performance Promises.
It’s never been about the
presence of a Risk Culture
nor the absence of!
Risk is there; like it or
not!
How Do You Do Things (&
Think) Around Here?
There are MANY Risks but ONE Risk Culture!

Where Should We Go To Look For Risk Culture?
Board of Directors? Staff: Every Day Fire Fighters?

Then We Should Go Look For Risk Culture In
Every individual comes to an
organization with his/er own
personal Perception of Risk.
Every individual comes with
his/er own Inventory of Moral
Values and these have a great
influence over the decisions
they make on day‐to‐day basis.
The Man In The Mirror . . .The Man In The Mirror . . .

Risk Culture
It’s About the Way we do things (& Think) around here. . . !
Do we anticipate problems, and guard against them preemptively?
Cushion

Risk Culture
Do we make the efforts to identify Key Risk Areas and Introduce the
necessary Internal Controls to prevent potential problems?

Risk Culture
Do we anticipate a Fall and lend a helping hand if need be?

So What Do We Mean By Risk Culture?
Risk Culture is a Term
describing:
• The Values,
• Beliefs,
• Knowledge and
• Understanding
About risk shared by Employees
with a common purpose
(Organizational Performance).
Culture is more than a
statement of Values – it relates
to how these translate into
concrete actions.
How Culture works in Practice:
• The Culture of an Organization arises
from the repeated Behavior of its
members.
• The Behavior of the Organization and its
Constituent Individuals is shaped by
their underlying Attitudes.
• Both Behavior and Attitudes are
Influenced by the Prevailing Culture of
the Organization.
Culture is subject to cycles which can self‐
reinforce in either virtuous, or vicious,
circles.

Risk Culture
Personal
Predisposition
of Risk
Personal Ethics
Behavior
Organizational
Culture
Every individual comes to an organization with their own personal
perception of Risk.
People vary in all sorts of ways and this includes their predisposition toward
Risk. Two specific Traits:
1. The extent to which people are either:
 spontaneous and challenge convention or
 organized, systematic and compliant.
2. The extent to which people may be:
 cautious, pessimistic and anxious, or
 optimistic, resilient and fearless.
Organizations need to pay attention to the ethical profile of
those working in their business.
Every individual comes with their own inventory of moral
values and these have a great influence over the decisions
they make on day‐to‐day basis.
Three ethical consciences, significantly influencing individuals’
Decision Making:
1. Ethic of Obedience (Rule Compliance, Spirit of
the Law, etc.)
2. Ethic of Care (Empathy, Concern, Respect, etc.)
3. Ethic of Reason (Wisdom, Experience,
Prudence, etc.)

Risk Culture
Personal
Predisposition
of Risk
Personal Ethics
Behavior
Organizational
Culture
Individual values and beliefs and
attitudes toward risk contribute to
and are affected by the wider overall
culture of the organization.
It is useful to consider Organizational
culture in relation to two key
dimensions:
1. Sociability: People Focus (based on
how well staff get on socially)
2. Solidarity: Task Focus (based on
goal oriented and team
performance)

Risk Management Is Everybody’s Business
Staff Business Unit Senior
Management
Assessment &
Follow Up
Acceptance or Mitigation
of Identified Risks
Follow Up on Decided
Actions
Oversight &
Control
Reports to Enable Senior
Management Appraisal
Identification
Reporting
Registration of Incidents
and Monitoring of the
Internal Control
Environment
Problems with Risk Culture
are frequently found at the
root of organizational
scandals and collapses.
Every individual
comes to an
organization with
his/er own
personal
perception of
Risk
It Starts Here
Risks

Risk Management & Associated Culture
The Chief Risk
Officer
Your Risk Culture Can Be
Characterized as:
 Participative Risk Management
 Autocratic Risk Management

Participative
Risk
Management
Full and
Consistent
Communication
& Coordination
with all Business
Units
Involve Everyone
Culture is subject to cycles which
can self‐reinforce in either
virtuous, or vicious, circles.

Autocratic
Risk
Management
I Know
what to
do, and I
will do it
all alone.
My way or
the
highway!
Involve Everyone

An effective Risk Culture is one that enables and rewards
individuals and groups for taking the right risks in an
informed manner.
Risk Culture (It is there!)
Effective(Result Oriented)
Enables(Risk is not Crippling; Wrong Culture is!)
Rewards (Individuals & Groups)
 For Taking(Mostly Intentional risk‐taking behavior)
 The Right Risk(Calculated Risks)
 Informed Manner(Data is required: Facts not Perception).

Non‐Identifiable Risk
Non‐Identifiable Risk
Financial Institution’s Risk Population
What is Normally Used in
Risk Identification:
• CIP
• KYC
• DD
• EDD
• Complete Credit File,
EAD, LGD, PD, UL, EL,
etc. and Proper
Follow Up
• Comprehensive &
Consistent Data about
the Market
• Etc.
Identified &
Identifiable
Risks
Many Tools For Data Collection

Increasing Our Understanding of
Potential Outcomes
Increasing Evidence on Probability of
occurrence
Ambiguity
Uncertainty
Ignorance
A Bank is expected to
collect ALL needed data
to move closer to Risk
Management and Away
from:
 Ambiguity,
 Ignorance, and
 Uncertainty.
The Fallacy . . .

Near misses, loss = 0
0 < Losses < Threshold
Losses > Threshold
After The Problem Has
Been Generated
Before The Problem Has
Been Generated
Look for
Early
Warning
Flags
Identify
Problems
in Progress
Research
Historical
Events
FocusFocus
Data Must Be Made Useful . . .

Fire FightingFire Fighting
ProactiveProactive
ServiceService
ReactiveReactive
ValueValue
Risk in DIFFERENTIATOR role
Risk in ENABLER role
Risk in SUPPORT roleWrong Risk
Culture
Right Risk
Culture
The Question is NOT:
• Do Organizations Need Risk
Culture?
But it is:
• What Kind of Risk Culture do we
Need?
Relatively Mature
Organization
Primitive Organization
The question is whether that
culture is effectively Supporting
or Undermining the longer‐term
success of the Organization. . . .
Culture Eats Strategy if … !
The question is whether that
culture is effectively Supporting
or Undermining the longer‐term
success of the Organization. . . .
Culture Eats Strategy if … !
If The Job Is Done Right, Risk Management Create Value . . .

 Many Organization have been concentrating
most, if not all their energies on surviving in the
changed environment by stemming losses,
cutting costs and stabilizing their revenue base.
 Where attention is paid to risk, the focus is more
often than not on improving existing risk
management systems and models rather than
tackling the underlying culture.
Failures (e.g., Fraud, etc.) have their origin in flaws
in unique organizational cultures that allowed
particular risks to take root and grow. Culture Eats
Strategy!
Otherwise, Culture Eats Strategy . . .

The
Collective
Will &
Ability to
Manage
Risk
Risk Culture IllustratedHow We Do Things Around Here . . .

R.I.S.K.
A Boat in the Harbor is Safe, But That is Not What Boats Were Made For
A Truthful Statement of Risk Culture

Consequences:
Losses
Risk
Event:
Loan
Default
 Dried up Cash Flow Sources: Client’s business
received a bad hit.
 Collaboration between the Bank Employee and
the Client in the provision of inflated figures
(Sales, Revenues, Cash Flows, …) leading to a
false‐favorable credit decision.
 Over‐worked, and Under‐Staffed Business Unit
leading to overlooking some critical changes in
business circumstances of the Client.
 Incompetent Credit Analysts Gave False
Recommendation which led to a False‐favorable
Credit Decision.
 Poor/Inadequate Follow‐up and Reviews by the
Branch/Relationship Manager rendering the
process handicapped in capturing “Warning
Signals”
Causes
• Kick off Loan Workout and
Recovery ‐ Beware of shortcuts:
Accepting Cash in settlement of a
nagging Bad Debt
• Recovery is a Function of the
Quality of the Credit File and the
Legality of Accompanying
Documents
• Losses (Total or Partial)
• Etc.
?
Probe Carefully about the
Root‐Causes of this . . .

Acquisition/
Credit
Specific
Customer
Service
Collect And
Review
Data
Credit
Review
Assess
Collateral
And Risk
Document
Approval
&
Pricing
Sales: Bank-Client Interface Financial & Risk Analysis: Understanding Risks Processing
Establishing
Contact
Evaluate first
customer info
Customer
Meetings
Debriefing
Request
documents
Obtain data &
information
Completeness/
plausibility
review
Follow up
Review document
Follow up with
Loan Officer /
Account Manager
Standardized
Credit Rating
Document on
other credit
related factors
Inspect
Object
Determine
Loan-to-value
Evaluate
Exposure
Data is
Sufficient
Complete
Loan
Application
Prepare
Credit rate
Handover
Credit File
Follow Up
Data is
Complete
Approval by
Decision
Makers
Check Compliance with
Authority Structure
Prepare Contracts
Get Signatures
Provide Security
Disbursement Review
Disbursement
Monitor &
Report
Resolution
Loan/Asset Life Cycle
Credit Approval Process
Implement
On the
Credit
Decision
In the Process of Producing a Credit Decision; Do Analysts focus only on Credit Risks, or they
look into other risks (Market, Operational, Interest‐Rate, Liquidity, AML Risks?
Culture is subject to cycles which can self‐reinforce in either virtuous, or vicious, circles.

Flying From “Beirut” To “Paris” Is a ‘Service’; Just Like Opening a Saving/Checking
Account. Descent Below Safe Altitude is an Incident (With Zero Losses this time);
overlooking a step in Due Diligence …. BUT . . .
Minimum Safe Altitude (MSA)
IncidentAccident

Brilliant
Surgery!
Well Done!
Shame the
patient died.
Outcomes
Fear of AML Violation Penalty (i.e., Outcome), the FI
decides not to serve the client (i.e., Decision) sparing itself
the pain of Enhanced Due Diligence.

The Culture of Compliance

Client is Engaged
Compliance Cycle
Service Cycle
st1Client
Interface
Interface
End
CIP, KYC, DD, EDD, …
AML Compliance (Regulator Decides)
Client Engagement is Constrained by AML‐
Compliance. The Bank is Responsible & Accountable
Customer Satisfaction (Customer Decides)
Client Engagement is Driven by: The Potential for Revenue:
Interest Income, Commissions & Charges; and a Word‐of‐
Mouth Free Marketing
Both Cycles Are Ongoing
Processes; None is a Destination
by itself
Branch
From Here on it’s Relationship
Management
A Serious Risk Culture Failure:
IF “Satisfaction” Ends Up Competing with
“Compliance” ….
Which means “Service Cycle” can’t be
compatible with the “Compliance Cycle”!

…and this may
include all types of
Risks a Bank may
Face
De‐Risking is Yet Another Form of Risk Culture Failure

Level Of Maturity in AML Compliance
Nature & Extent of Efforts Deployed
DD
EDD
RBA
Due
Diligence
Enhanced Due
Diligence
Risk‐Based Approach to AML
Compliance
Enhancing Compliance Capabilities …
AML Cost
Skills Needs
Know‐How
AML Analytics
Those Enhanced AML Compliance Steps:
 Are clear indication of a desire, on the
part of the FI, to continue on serving
the Client.
 Otherwise, the FI would engage in
Derisking.
Enhance AML Compliance require:
 The Use of Technology:
Quantification/Data‐Rich vs.
Judgment/Opinion‐Rich
 Increase reliance on Technology: Less
Human Intervention;
 Increase exposure to Technology
Failures: Different Sets of Skills are
required.
 Reliance on Technology may Reduce
Frequency But Increase Impact.
Being Pragmatic About Compliance?

RiskManagement is a Decision & a Choice.
Compliance
With Regulatory Guidelines & Rules
 Pillar 1 is More
Attractive.
 Standardized Approach
in Credit & Market Risks
 Basic Indicator
Approach in
Operational Risk.
 Advanced Approaches
… No Way!
 ICAAP only if Required
by Regulator; and the
bare minimum.
 RCSA Marginalized.
 IFRS 9 ………a
nightmare!
 Pillar 2 is at the top
of Risk Management
Priorities.
 Advanced
Approaches are
Effectively Explored.
 ICAAP required by
Management as a
Desired Self‐
Assessment Tool.
 RCSA is Essential.
 IFRS 9 is a welcomed
wakeup call.
 Etc.
Risk Culture Failure: Regulatory Compliance is Competing with
Risk Management

Basel I
Basel II
Credit Risk
Credit Risk
Market Risk
Operational Risk
1986 proposed
1999 proposed
1988 effective
2007 effective
Basel III
Credit Risk
Market Risk
Operational Risk
Capital Quality
Additional Buffers
Liquidity: LCR, NSFR
2009 proposed
Kick Off in 2011
Amendments
Amendments
Basel 2 ½
Basel 1 ½
Amendments
Basel 3 ½
Basel IV
2017 Anticipated
Or Not
Kick Off in 20??
• Capital Requirements
• Liquidity Requirements
• Disclosure Requirements
• National Divergences
• Risk Sensitivity
• Use of Internal Models in
Decision Making
• Total Risks = Credit Plus
Market Risks
• Internal Models Emerged
• Later on, Tier 3 Capital
• Enhanced Pillar 2, 3
• Complex Securitization
obtained higher Risk Weights.
• Trading Books
Tequila
Crisis
Asian Market
Crisis
Shadow Banking
Crisis
Regulator’s Risk Culture
The Basel
Accord with a
history of
Incomplete
Implementation
The Signal it Sends
has much to do with
Regulatory Risk
Culture.

The World of Finance Has
Changed.
Nothing Is The Same . . . And The Culture Has Been
Dramatically Altered.

People
Come
First
Data
Come First
The Risk of Not taking
account of that in the
Transformation Process.
 Interfacing with
Clients
 Delivery Channels
 Product Features
 Customer Needs &
Wants
 Service Proliferation
 Staff Skill Level
Requirements
 Agility
 Etc…

Your Life Begins At the End Of
Your Comfort Zone
Coping With a Rapidly Changing Banking
Environment
Your Life Begins At the End Of
Your Comfort Zone

Credit Risk
Market Risk
Operational Risk
Reputational Risk
Business Risk
Strategic Risk
. . . Other Risks
Let’s
Explore
Risk
Stay and
Risk
Extinction
Comfort ZoneCoping With
Changes

Foundation
Emerging
Established
Dynamic
Optimized
Fragmented
Awareness
Building
Consensus
General
Awareness
Responsive
Intuitive
Individual/ Silo
Focus
Process Focus
End-To-End
Monitor and
Measure
Responsive
Fully
Integrated
‐Ad‐Hoc
Implementation
‐Limited Awareness of
Risks & Outcomes
‐Relatively Risk Averse.
‐Risk Tools available but
not fully embedded
‐Awareness of
Outcome‐Focused
Objectives
‐Developing Risk
Awareness
‐Risk perceived as a
Process.
‐Functional Risk
Framework
Implemented.
‐Shift in Focus – Risk
Viewed Positively.
‐Key Risk Behaviors
embedded.
‐General Awareness of
Risks & Outcomes
‐Focus on Continuous
Improvement.
‐System facilitates risk
versus outcome
analysis & Response.
‐Regulatory delivery is
assured.
‐Key Risk behaviors
evidenced within
Industry.
‐Risk & Outcomes
drive all activity.
‐All stakeholders
recognize, understand
and support approach
including firms.
‐Organization wide
understanding of Risk
Tolerances and
treatment.
Timeline
Maturity

MAXIMIZE PROFIT subject to:
RISK , REGULATORY, Compliance,
Reporting, Etc. Constraints
RISK .  . .
 Default
 Liquidity
 Maturity
 Others . . .
REGULATORY . . .
 Basel I
 Basel II
 Basel III
 Basel IV (In the making)
 Sanctions Rules
 USA_FATCA Requirements
 AML, Etc. . . .
Uses of Funds Sources of Funds
 Reserves
 Loans
 Securities
 Other
Investments
 .  .  .
 All Types of
Deposits
 Borrowings
 Other
Sources
 Equity
 .  .  .
Off-Balance Sheet
With every Dollar
in Service a
Typical Bank
Solicits, it MUST
satisfy all these
Regulatory
Constraints first!
VERY COSTLY!
Legal Issues .  . .
Who can best help the Bank
recover some of the cost of
Compliance?
Yes, YOU – Branches.
 You can Increase Traffic:
• More Clients
• More Transactions
which can be
achieved Through
cross‐selling
 Follow up Diligently on
the settlements of Loans
(and ‘Bien Trouvé’,
Updated Financials, Site
Visits, etc….)
 Reduce Loss‐Events.
 Promote the Bank
through your Social
Networks.
Formulating Effective Responses to Constraints
Risk Culture
Matter

Health‐Check
Your Risk
Culture Yes You Can . . .

Evaluate The Current Risk Culture
• Look for hidden and sub‐cultures
• Use several techniques to surface all cultures
What is the Impact of the current Risk Culture?
• What are its strengths and weaknesses?
• Is this the right culture for our future?
What would Improve Your Risk Culture?
• Are there Regulatory or other external drivers to consider?
• What changes do we have to make?

The High‐Risk End of the Continuum . . .
• Poor Communication: A culture where warning signs of both internal or external risks are not shared.
• Unclear Tolerance: A Culture where the Leadership does not communicate a clear risk appetite or fails
to present a coherent approach or strategy.
• Lack of Insight: A Culture where the Organization fails to understand the Risks it is running or believes
that such an understanding is the preserve of Risk Specialists.
• Over‐Confidence: A culture where people believe that their organization is insulated or even immune
from risk because of its superior position or people.
• No Challenge: A Culture where individuals do not challenge each others’ attitudes, ideas and actions.
• Fear of Bad News: A Culture where Management and Employees feel inhibited about passing on bad
news or learning from past mistakes..
• Indifference: A culture which discourages responding to situations or fosters apathy about the
outcomes, either due to bad faith or incompetence..
• Slow Response: A Culture where the Organization perceives external changes but reacts too slowly or is
in denial about innovation or the likely impact of change.
• Beat The System: A culture where Risk Appetites are misaligned with the organization’s Risk Profile,
leaving room for the conception and implementation of inappropriate activities.
• Gaming: A Culture where individual units take risks or embrace projects which could benefit the unit,
but are out of line with the Organization’s Risk Appetite.
Transparency of
Risk
Acknowledgement
of Risk
Responsiveness To
Risk
Respect For Risk

Poor
Unclear
Lack of Insight
Over Confidence
No Challenge
Fear of Bad News
Indifference
Slow
Gaming
Beat the System
Communication
Tolerance
Level Of Insight
Level Of Insight
Communication
Tolerance
Level of Care
Speed of Response
Cooperation
Adherence to Rules
High RiskBeware of the Weak End of the
Continuum!

Evaluate The Current Risk Culture
• Look for hidden and sub‐cultures
• Use several techniques to surface all cultures
What is the Impact of the current Risk Culture?
• What are its strengths and weaknesses?
• Is this the right culture for our future?
What would Improve Your Risk Culture?
• Are there Regulatory or other external drivers to consider?
Plan & Implement Your cultural change
Monitor & Adapt to Changes
• Are we achieving the outcomes we expect?
• What do we need to change now in light of our progress so far?
Cultural Change requires a
Sustained efforts as the culture
needs time to adapt new norms.
How easily can we adapt this
culture change approach to
international situation?
Continuous Review is
Essential.
• What do we need in place to grow & sustain a new risk culture?

Poor
Unclear
Lack of Insight
Over Confidence
No Challenge
Fear of Bad News
Indifference
Slow
Gaming
Beat the System
Good
Clear
Good Insight
Confident But Careful
Constructive Challenge
Reward Honesty
Diligence
Fast
Coordinating
Play By The Rules
Communication
Tolerance
Level Of Insight
Level Of Insight
Communication
Tolerance
Level of Care
Speed of Response
Cooperation
Adherence to Rules
Transparency of
Risk
Acknowledgement
of Risk
Responsiveness
To Risk
Respect For Risk
High Risk Low Risk
Risk Culture Framework
Beware of the Weak End of the
Continuum!

Regulating Complexity
In The Universe Of Finance

Basel III
2009 proposed
2011 effective
Capital
Capital Buffers
Conservation 2.5% & Countercyclical 2.5%
Risk Management
Liquidity
(LCR ≥ 100%) (NSFR > 100%)
Leverage ≥ 3%
Reporting
Less Reliance on External
Rating Agencies
• Increase in common equity requirements from 2% to 4.5%
• In crease in Tier 1 Capital (Going Concern) from 4% to 6%
• Tier 1 Capital can no longer include Hybrid Capital
instruments with an incentive to redeem through features
such as step‐up clauses. These will be phased out
• Tier 3 Capital will be eliminated (Previously used for
Market Risk)
• Credit Valuation Adjustment (CVA) Capital Charge must be
calculated to cover Mark‐to‐Market losses on counterparty
risk to Over‐The‐Counter (OTC) Derivatives.
• Stressed Parameters must be used to calculate counterparty
Credit Risk
• Effective Expected Positive Exposure (EPE) with stressed
parameters to be used to address general wrong‐way risk
(WWR) and counterparty credit risk
• Banks must ensure complete trade capture and exposure
aggregation across all forms of counterparty credit risk (not
just OTC derivatives) at the counterparty‐specific level in a
sufficient time frame to conduct regular stress testing.
• A multiplier of 1.25 is applied to the correlation parameter
of all exposures to financial institutions (meeting certain
criteria) (Asset Value Correlation – AVC)
• Additional Margining required for illiquid derivatives
exposures.
• 100% risk weight for Trade Finance.
• Contractual maturity mismatch
• Concentration of funding
• Available unencumbered assets
• Market‐related monitoring tools; asset prices and liquidity,
Credit Default Swap (CDS) spreads and equity prices.
• LCR by currency
• Results of stress tests should be integrated into regular
reporting to senior management
Basel II
2007 effective
+= +
++

Basel III
Tried But …
Sub‐Prime
Lending
Excessive Risk Taking
Housing Prices decline
resulting in sub‐prime
defaults
Sub‐Prime Defaults,
Securitized Assets &
Derivatives Trading
resulted in huge losses
Excessive Leverage &
Poor capital could not
absorb losses fully,
demanding fresh
equity infusion
Huge losses resulted in
a crisis of confidence
causing liquidity to
evaporate
Short‐term borrowing
demanded fresh
borrowing which failed
in liquidity crisis
Firms on the verge of
insolvency; threatening
system failure
Governments step in to
inject capital to
prevent systemic
failure
Capital Conservation &
Counter‐Cyclical
Buffers
Capital Conservation &
Counter‐Cyclical
Buffers
a) Less reliance on external ratings
agencies; b) Credit Valuation Adjustment
capital charge; c) Stress Testing
a) Higher quality & quantity of capital; b)
Leverage Ratio Introduced; c) 100%
weight for Trade Finance
Enhanced Supervisory
Review and Disclosure Two new Liquidity
Ratios
Correlation to financial
institutions will carry more
risk weights to prevent
systemic risk and an overall
collapse
In stressed market situations,
credit rating downgrades of
financial institutions and
securitized products further
lowered valuations and
increased losses.
Securitization
BUT
not Enough!

Lenders
Surplus Spending
Units ‐SSUs
• Individuals (Current
Income is GREATER than
Current Expenditures)
• Firms (Earnings in excess of
what the firm needs currently)
• Government (Current
Revenues are in excess of
planned Expenditures)
• Financial
Intermediaries (Funding
is currently GREATER than
investment)
Borrowers
Deficit Spending
Units ‐DSUs
• Individuals (Current
Income is LESS than Current
Expenditures)
• Firms (Earnings falls short of
what the firm needs currently)
• Government (Current
Revenues fall short of planned
Expenditures)
• Financial
Intermediaries (Funding
is currently LESS than
investment)
Regulated
but not like
Banks
Heavily
RegulatedNot Regulated
With Financial intermediation in
Both BUT Complexity of an
Unprecedented Nature and
Magnitude in Shadow Banking
With No
Intermediation
BCBS has been paying attention to Financial Transactions (Not
Intermediation) and Associated Risks But Little To Economic Engines
$
$
$
$
This Loop is what matters to Economics
Where to warehouse
the Surplus?
Where to go to
finance the Deficit?

Risk Management of Today has been Contaminated by the
Complexity of Regulations. … Where in Many Jurisdictions Risk
Management should be as Simplistic as the Environment it
Operates in.

A Strong Culture Demonstrates Several Critical
and Mutually Reinforcing Elements:
• A clear and well communicated Risk Strategy.
• High standards of analytical rigor and information‐sharing across the
organization.
• Rapid escalation of threats or concerns.
• Visible and consistent role‐modeling of desired behaviors and
standards by senior managers.
• Incentives which encourage people to “do the right thing” and think
about the overall health of the whole organization.
• Continuous and constructive challenging of actions and
preconceptions at all levels of the organization.

Sources of Risk Culture Failures: Whatever their degree of severity, such
failures have important common causes & Implications.
• Whether triggered by an internal or external agent, risk culture failures often
expose a long‐standing cultural weakness or a linked series of weaknesses
that have been incubating over time and that can be clearly recognized after
the event.
• Failures and near failures often offer managers and key stakeholders a
window of opportunity to demand changes that strengthen an
organization’s risk culture and make it more robust. Unfortunately, some of
he most powerful stimuli to change come when bad things happen, or are
only narrowly averted.

A Successful Risk Culture would Include:
• A Distinct and Consistent tone from the top from the Board of Directors and
Senior Management in respect of Risk Taking and Avoidance.
• A Commitment to Ethical Principles, reflected in a concern with the ethical
profile of individuals and the application of ethics and the consideration of
wider stakeholder positions in decision making.
• A common acceptance through the organization of the importance continuous
management of risk, including clear accountability for and ownership of specific
risks and risk areas.
• Transparent and timely risk information flowing up and down the organization
with bad news rapidly communicated without fear of blame.
• Encouragement of risk event reporting and whistle blowing, actively seeking to
learn from mistakes and near misses.
• No Process or activity too large or too complex or too obscure for the risks to be
readily understood.

A Successful Risk Culture Would Include:
• Appropriate Risk taking behaviors rewarded and encouraged and in appropriate
behaviors challenged and sanctioned.
• Risk Management Skills and Knowledge valued, encouraged and developed,
with a properly resourced risk management function and widespread
membership of and support for professional bodies. Professional qualifications
supported as well as technical training.
• Sufficient diversity of perspectives, values and benefits to ensure that the
status quo is consistently and rigorously challenged.
• Alignment of culture management with employee engagement and people
strategy to ensure that people are supportive socially but also strongly focused
on the task in hand.

What Do We Mean By Risk Culture?
• Risk Attitudes is the chosen position adopted by an individual or group
towards risk, influenced by risk perception and pre‐disposition.
• Risk Behavior comprises external observable risk‐related actions,
including risk‐based decision‐making, risk processes, risk
communications etc.
• Risk Culture is the values, beliefs, knowledge and understanding about
risk, shared by a group of people with a common intended purpose, in
particular the leadership and employees of an organization.
One of the many challenges in addressing culture is that people naturally
gravitate to others like themselves so the culture of an organization can
self‐propagate if recruitment processes and environment remain
unchallenged.

Discover Risk Culture with Mohammad Fheili

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