Book contents
- Beyond Bad Apples
- Beyond Bad Apples
- Copyright page
- Contents
- Figures
- Contributors
- Acknowledgements
- Introduction
- Part I Risk Culture Conceptual Underpinnings
- Part II A View of Risk Culture Concepts in Firms and Society
- 5 The Changing Risk Culture of UK Banks
- 6 Regulating Agency Relationships and Risk Culture in Financial Institutions
- 7 What Does Risk Culture Mean to a Corporation?
- 8 Values at Risk
- Conclusion
- Index
- References
6 - Regulating Agency Relationships and Risk Culture in Financial Institutions
from Part II - A View of Risk Culture Concepts in Firms and Society
Published online by Cambridge University Press: 22 May 2020
Book contents
- Beyond Bad Apples
- Beyond Bad Apples
- Copyright page
- Contents
- Figures
- Contributors
- Acknowledgements
- Introduction
- Part I Risk Culture Conceptual Underpinnings
- Part II A View of Risk Culture Concepts in Firms and Society
- 5 The Changing Risk Culture of UK Banks
- 6 Regulating Agency Relationships and Risk Culture in Financial Institutions
- 7 What Does Risk Culture Mean to a Corporation?
- 8 Values at Risk
- Conclusion
- Index
- References
Summary
The chapter analyses the role of financial regulation in facilitating the development of organizational norms to enhance risk culture in financial institutions. The paper suggests that shortcomings in risk culture – particularly as understood through the lens of human agency theory – in large financial institutions are the result of collective agency problems. The paper argues that regulation has a role to play in addressing collective agency problems but that regulators should be selective in what tools they use to enhance risk culture in institutions with consideration given to the regulation of remuneration and trusted financial products. It further suggests that to address collective agency problems in large financial institutions policymakers should consider the utility of a senior managers’ liability regime to incentivize senior officers and board directors to be more proactive and aware of misconduct and other behavior that results in agency costs for the firm and society. The paper concludes that a effective regulation involves a balance between official sector regulation and self-regulation that can channel the collective actions of individuals to improve governance and operations in a way that benefits overall firm performance and which mitigates socially costly behavior.
- Type
- Chapter
- Information
- Beyond Bad ApplesRisk Culture in Business, pp. 165 - 189Publisher: Cambridge University PressPrint publication year: 2020
References
Ashby, S., Palermo, T. and Power, M., (2014). Risk culture: definitions, change practices and challenge for chief risk officers. In Patricia, J., ed., Risk Culture and Effective Risk Governance. London: Riskbooks.Google Scholar
Bailey, A. (2016). Culture in financial services – a regulator’s perspective. Speech at the City Week 2016 Conference, 9 May 2016. https://bit.ly/2rb72sZGoogle Scholar
Bandura, A. (1986). Social Foundations of Thought and Action. Englewood Cliffs, NJ: Prentice–Hall.Google Scholar
Bandura, A. (1999). Social cognitive theory of personality. In Pervin, L. A. and John, O. P., eds., Handbook of Personality. New York: The Guildford Press.Google Scholar
Bandura, A. (2000). Exercise of human agency through collective efficacy. Current Directions in Psychological Science, 9(3), 75–8.Google Scholar
Bandura, A. (2006). Toward a psychology of human agency. Perspectives on Psychological Science, 1(2), 164–80.CrossRefGoogle Scholar
Bandura, A. (2009). Agency. In Carr, D. S., ed., Encyclopedia of the Life Course and Human Development. Detroit: Macmillan Reference USA.Google Scholar
Bank of England and Financial Services Authority (2011). The Bank of England, Prudential Regulation Authority – Our Approach to Banking Supervision.Google Scholar
Banks, E. (2012). Risk Culture: A Practical Guide to Building and Strengthening the Fabric of Risk Management. Basingstoke: Palgrave MacMillan.Google Scholar
Baxter, J. and Megone, C. (2016). Exploring the Role of Professional Bodies and Professional Qualifications in the UK Banking Sector. London: Banking Standards Board. https://bit.ly/2puA46BGoogle Scholar
BCBS (Basel Committee on Banking Supervision) (2009). Enhancements to the Basel II Framework. www.bis.org/publ/bcbs157.pdfGoogle Scholar
BCBS (Basel Committee on Banking Supervision) (2014). Consultative Document: Corporate Governance Principles for Banks. www.bis.org/publ/bcbs294.pdfGoogle Scholar
CB:PBS (Chartered Banker Professional Standards Board) (2016a). CB:PSB Progress Report. https://bit.ly/32c6sIdGoogle Scholar
CB:PBS (Chartered Banker Professional Standards Board) (2016b). Foundation Standard Requirements for Professional Bankers. https://bit.ly/2qjp9fYGoogle Scholar
CB:PBS (Chartered Banker Professional Standards Board) (2018). The Chartered Banker Code of Professional Conduct. https://bit.ly/2Ndp4mWGoogle Scholar
Dow, J. (2000). What is systemic risk? Moral hazard, initial shocks, and propagation. Monetary and Economic Studies, 18(2), 1–24.Google Scholar
Dunkley, E. (2015). UK draws line under ‘banker bashing’ after scrapping assessment. Financial Times, 2015 December 30. https://on.ft.com/2NGehALGoogle Scholar
Emirbayer, M. and Mische, A. (1998). What is agency? The American Journal of Sociology, 103(4), 962–1023.Google Scholar
Ernst & Young (2014). Shifting Focus: Risk Culture at the Forefront of Banking. https://go.ey.com/32gtQofGoogle Scholar
ESRB (European Systemic Risk Board) (2015). Report on Misconduct Risk in the Banking Sector. https://bit.ly/2NIXFsfGoogle Scholar
FCA (Financial Conduct Authority) (2015). CP15/22 Strengthening Accountability in Banking: Final Rules (including Feedback on CP14/31 and CP15/5) and Consultation on Extending the Certification Regime to Wholesale Market Activities. www.fca.org.uk/publication/consultation/cp15-22.pdfGoogle Scholar
FMSB (FICC Markets Standards Board) (2016a). FICC Markets Standards Board proposes greater transparency in new issue process for debt. FMSB, 2016 November 18. https://bit.ly/2NhBN8nGoogle Scholar
FMSB (FICC Markets Standards Board) (2016b). Statement of Good Practice for FICC Market Participants: Conduct Training. www.femr-mpp.co.uk/wp-content/uploads/2016/12/16-12-08-SoGP-Conduct-Training_FINAL.pdfGoogle Scholar
FMSB (FICC Markets Standards Board) (2016c). Surveillance Core Principles for FICC Market Participants: Statement of Good Practice for Surveillance in Foreign Exchange Markets. www.femr-mpp.co.uk/wp-content/uploads/2016/12/16-12-08-SoGP_Surveillance-in-FX-Markets_FINAL.pdfGoogle Scholar
FMSB (FICC Markets Standards Board) (2017). New Issue Process Standard for the Fixed Income Markets. https://fmsb.com/wp-content/uploads/2017/04/FMSB_NewIssuesProcess_FIMarkets_2-May-FINAL.pdfGoogle Scholar
Foreign Exchange Professionals Association (2015). Focus On: Foreign Exchange Benchmarks. https://fxpa.org/wp-content/uploads/2015/06/fxpa-benchmarks-5-22final.pdfGoogle Scholar
FSB (Financial Stability Board) (2014). Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture. www.fsb.org/wp-content/uploads/140407.pdfGoogle Scholar
G30 (Group of Thirty) (2013). A New Paradigm: Financial Institution Boards and Supervisors. https://bit.ly/2JOXw5mGoogle Scholar
G30 (Group of Thirty) (2015). Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform. https://bit.ly/2qpKBQhGoogle Scholar
Hart, O. (1995). Firms, Contracts, and Financial Structure. Oxford: Oxford University Press.Google Scholar
House of Commons (2011). Uncorrected transcript of oral evidence, to be published as HC 1447-xii. Oral evidence taken before the Joint Committee on the Draft Financial Services Bill, 8 November 2011. https://bit.ly/2CbrQmnGoogle Scholar
HM Treasury (2012). The Wheatley Review of LIBOR: Final Report. https://bit.ly/2r8S3QdGoogle Scholar
HM Treasury (2015). Senior Managers and Certification Regime: Extension to All FSMA Authorised Persons. https://bit.ly/2C9kgZwGoogle Scholar
HM Treasury, Bank of England and FCA (Financial Conduct Authority) (2015). Fair and Effective Markets Review: Final Report. https://bit.ly/36yYg8tGoogle Scholar
Hölmstrom, B. (1979). Moral hazard and observability. The Bell Journal of Economics, 10(1), 74–91.CrossRefGoogle Scholar
IIF (Institute of International Finance) (2009). Reform in the Financial Services Industry: Strengthening Practices for a More Stable System. Washington, DC: IIF.Google Scholar
Jensen, M. C. (1998). Foundations of Organizational Strategy. Cambridge, MA: Harvard University Press.Google Scholar
Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305–60.Google Scholar
Jensen, M. C. and Meckling, W. H. (1994). The nature of man. Journal of Applied Corporate Finance, 7(2), 4–19.Google Scholar
Khurana, R. (2002). The curse of the superstar CEO. Harvard Business Review, 80(9), 60–6.Google Scholar
Malmendier, U. and Geoffrey, T. (2009). Superstar CEOs. Quarterly Journal of Economics, 124(4), 1593–638.Google Scholar
McDermott, T. (2015). Culture in banking. Speech to the British Bankers Association. https://bit.ly/36Af3YEGoogle Scholar
Nouy, D. (2015). Towards a new age of responsibility in banking and finance: getting the culture and the ethics right. Speech at Goethe Universität, Frankfurt, 23 November 2015. https://bit.ly/2PIcP3AGoogle Scholar
Ostrom, E. (2008). Tragedy of the commons. In The New Palgrave Dictionary of Economics. Basingstoke: Palgrave Macmillan.Google Scholar
PCBS (Parliamentary Commission on Banking Standards) (2013a). Changing Banking for Good, vol. 1. https://bit.ly/33hDwjyGoogle Scholar
PCBS (Parliamentary Commission on Banking Standards) (2013b). Changing Banking for Good, vol. 2. https://bit.ly/36xKjaTGoogle Scholar
Peltzman, S. (1975). The effects of automobile safety regulation. Journal of Political Economy, 83(4), 677–726.Google Scholar
PRA (Prudential Regulation Authority) (2014). The Use of PRA Powers to Address Serious Failings in the Culture of Firms. https://bit.ly/36xjEefGoogle Scholar
Ralph, D. and Tuveson, M. (2015). Is regulation of risk culture the missing piece? Civil actions reconsidered. Banking and Financial Services Policy Report, 25(1), 12–18.Google Scholar
Ross, S. A. (1974). On the economic theory of agency: the principle of similarity. In Balch, M., McFadden, D. and Wu, S., eds., Essays on Economic Behavior under Uncertainty. Amsterdam: North-Holland.Google Scholar
Sants, W. H. (2010). Do regulators have a role to play in judging culture and ethics? Speech at the Chartered Institute of Securities and Investments Conference, 17 June 2010. www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/0617_hs.shtmlGoogle Scholar
Shleifer, A. and Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–83.Google Scholar
Tversky, A. and Daniel, K. (1974). Judgment under uncertainty: heuristics and biases. Science, New Series, 185(4157), 1124–31.Google Scholar
Walker, P. (2016). FCA drops banking culture review. FTAdviser, 2016 January 4. https://bit.ly/2JOMFZeGoogle Scholar
- 1
- Cited by