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CBA and the Prudential Approach to Culture

Friday 4 May 2018

Risk Culture

Findings from the Prudential Inquiry into the Commonwealth Bank of Australia (CBA) show systemic challenges may have arisen from a system too dulled by success and an overly-collegiate atmosphere that made it unable to see red flags.

While this Report is about CBA, this prudential inquiry has implications for other financial institutions.

APRA believes culture can be quantified to a degree, and pilot reviews to this effect are expected to be finished in the second half of this year.
Last year, the Australian prudential regulator said it was enlisting the help of organisational psychologists and other experts to conduct ‘risk culture’ reviews within a selected group of organisations.
The then-head of governance, culture and remuneration, Fahmi Hosain, said they would be able to look beyond the policies and procedures and uncover the ‘informal drivers’ and ‘behaviour norms’.
These pilot reviews into risk culture, announced last year, will be finished in the second half of 2018; this approach to risk culture will then become business-as-usual for the regulator.

CBA Findings
While industry awaits the pilot reviews, in the meantime, APRA’s review into CBA has come out. The Report highlighted ‘widespread complacency’, a ‘reactive stance when dealing with risks’, ‘being insular and not learning from mistakes’, ‘an overly collegial and collaborative working environment, which lessened the opportunity for constructive criticism’, and ‘timely decision-making and focus on outcomes’.

According to APRA:

The Report raises a number of matters of prudential concern. In response, CBA has acknowledged APRA’s concerns and has offered an Enforceable Undertaking (EU) under which CBA’s remedial action in response to the report will be monitored. APRA has also applied a $1 billion add-on to CBA’s minimum capital requirement.

APRA also noted the bank’s continued financial success dulled its senses to what APRA termed its ‘deteriorating risk profile’.

The Report suggests this was particularly apparent in what was defined as CBA’s non-financial risks, including operational, compliance and conduct risks.

Figure 1
"As the Panel notes, CBA has itself identified and begun taking steps to address many of these issues, but there is much to do and a risk that the same issues that have led to the need for the Inquiry undermine the bank’s efforts to comprehensively and effectively respond to the recommendations of the Panel,” APRA Chairman, Wayne Byres, said in response to the final report.

It is because of the efforts to tackle some of their internal challenges that the regulator has accepted the Enforceable Undertaking from the member of the big four, as well as adding to the risk capital requirement.
Recommendations in the report:

 On the final Report, Byres said:

The findings of the Report provide important insight for all financial institutions, particularly about the need to maintain a broad focus on all aspects of risk and stakeholder interest, and not allow financial success to mask or detract from other important measures of an institution’s performance and risk profile.