Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor Philip Molyneux Bangor University, Bangor, UK The Palgrave Macmillan Studies in Banking and Financial Institutions series is international in orientation and includes studies of banking systems in particular countries or regions as well as contemporary themes such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk Management, and IT in Banking The books focus on research and practice and include up to date and innovative studies that cover issues which impact banking systems globally More information about this series at http://www.springer.com/series/14678 Alessandro Carretta, Franco Fiordelisi and Paola Schwizer Risk Culture in Banking Alessandro Carretta University of Rome Tor Vergata, Rome, Italy Franco Fiordelisi University of Rome III, Rome, Italy Middlesex Business School, London, UK Paola Schwizer University of Parma, Parma, Italy Palgrave Macmillan Studies in Banking and Financial Institutions ISBN 978-3-319-57591-9 e-ISBN 978-3-319-57592-6 https://doi.org/10.1007/978-3-319-57592-6 Library of Congress Control Number: 2017940616 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Cover illustration: RooM the Agency/Alamy Stock Photo Cover design: Samantha Johnson Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Contents Introduction Alessandro Carretta, Franco Fiordelisi and Paola Schwizer Part I General View: Theory & Tools Risk Culture Alessandro Carretta and Paola Schwizer Risk Culture in Different Bank Businesses Marco Di Antonio Risk Culture in the Regulation and Supervision Framework Alessandro Carretta and Paola Schwizer Internal Controls and Risk Culture in Banks Doriana Cucinelli People First: Risk Culture Swings into Action Daniele A Previati Measuring and Assessing Risk Culture Nicola Bianchi and Franco Fiordelisi The Impact of Risk Culture on Bank Reputation Giampaolo Gabbi, Mattia Pianorsi and Maria Gaia Soana Watchdog or Pet Dog: What Is the Role of Media in Shaping Banks’ Risk Culture? Vincenzo Farina, Lucrezia Fattobene and Elvira Anna Graziano Part II Good practices, Experiences, Field & Empirical Studies 10 Influence of National Culture on Bank Risk-taking in the European System Candida Bussoli 11 Risk-Taking of the European Banks in CEECs: The Role of National Culture and Stake Vs Shareholder View Federica Sist and Panu Kalmi 12 Banks’ Risk Culture in Residential Mortgage and Cross-Selling Policies: Evidence from the Euro Area Umberto Filotto, Claudio Giannotti, Gianluca Mattarocci and Xenia Scimone 13 Supporting an Effective Risk Culture in Private Banking/Wealth Management Paola Musile Tanzi 14 Attitude Toward Risk and Financial Literacy in Investment Planning Gianni Nicolini, Tommy Gärling, Anders Carlander and Jeanette Carlsson Hauff 15 Bank Credit Risk Management and Risk Culture Doriana Cucinelli and Arturo Patarnello 16 Credit Rating Culture Giacomo De Laurentis 17 Accounting Conservatism and Risk Culture Alessandro Mechelli and Riccardo Cimini 18 Role of Internal Audit on Risk Culture Fabio Arnaboldi and Caterina Vasciaveo Index List of Figures Fig 3.1 A conceptual framework for studying business culture Fig 5.1 Internal control system vs Enterprise risk management Fig 6.1 A contingency framework for analysing people’s behaviour and risk culture Fig 7.1 Mean tw and SRCI ’ growth rate per year Fig 9.1 Plots of the BRC index and some of the main financial episodes for different countries over the time span 1998–2015 The BRC index is plotted for the countries which show a positive and statistically significant correlation with the financial indicator Nonperforming loans The time interval is 1998–2015 except for Ireland (2000–2015) Ireland and The Netherlands present one missing value in the years 2004 and 2007, respectively Fig 12.1 Correlation analysis: real estate mortgages vs cross selling Chart 15.1 Sample composition by bank specialization Chart 15.2 Participants on the survey Chart 15.3 The increase in the number of CRM staff Chart 15.4 Number of credit committees in the credit risk management system Chart 15.5 Number of meetings of risk committees external to the BoD Chart 15.6 Presence of risk committee separate from the control committee inside the BoD Chart 15.7 The credit risk models Chart 15.8 When the CRO attends the board meetings Chart 15.9 When the CRO attends the executive committee Chart 15.10 When the CRO attends the risk committee of the BoD Chart 15.11 The CRO responsibilities in the risk committee Chart 15.12 The reporting line of the CRO Chart 15.13 The reporting line of the credit risk manager Chart 15.14 Credit risk management activity: information to the BoD Chart 15.15 Credit risk management activity: information to the risk committee within the BoD Chart 15.16 Credit risk management activity: information to the CRO Fig 16.1 May ratings be used for predicting defaults of single borrowers? Fig 16.2 Are ratings issued by rating agencies useful to classify corporate customers’ default risk? Fig 16.3 Are predictive performances of implied ratings (from credit spreads, CDS spreads, equity prices) higher than those of agencies’ ratings? Fig 16.4 Are the predictive performances of internal ratings assigned by banks higher than those of agencies’ ratings? Fig 16.5 Is recognition of an ECAI (External Credit Assessment Institution) by the national supervisor based on the analysis of the rating assignment methodology used by the rating agency? Fig 16.6 Binary predictions versus binary future events Fig 16.7 Global corporate average cumulative default rates by rating (1981–2015) Fig 16.8 Through-the-cycle ratings versus point-in-time ratings Fig 16.9 Average 1-year transition rates for global corporates by rating modifier (1981–2015) (%) Fig 16.10 CDS-implied default probabilities of Italy Fig 16.11 Years from rating category Fig 16.12 Global 1-year corporate ratings performance: Lorenz curve Fig 16.13 Cumulative accuracy profile Fig 16.14 Gini coefficients for global corporates by broad sector (1981–2015) Fig 16.15 Gini coefficients by region (1981–2015) Fig 16.16 Gini ratio for different segments of structured finance, during the crisis Fig 16.17 Gini ratio over years Fig 18.1 Role of internal audit Fig 18.2 RCF implementation assessment Bibliography Effective internal audit in the financial services sector, Chartered Institute of Internal Auditors, July 2013 Guidance on Supervisory Interaction with Financial Institutions on Risk Culture—A Framework for Assessing Risk Culture, Financial Stability Board, April 2014 Guidelines on common procedures and methodologies for SREP, European Banking Authority, December 2014 Report on Misconduct Risk in the Banking Sector, European Systemic Risk Board, June 2015 Risk Culture, Italian Association of Internal Auditors (AIIA), December 2015 Index A Accountability Accounting conservatism Advisory Asset management Asset quality Audit approach Audit charter Audit plan Audit technique Audit universe Authority B Balanced scorecard Bank holding company (BHC) Banking crisis Banking sector Bank stability Behavioral analysis Benchmarking Board of directors Bonus Branches Building society Business area Business culture Business model C Capital market Capital requirement Central bank Commercial banking Communication flow Communication system Company identity Competence Competitive advantage Compliance Conduct risk Contingent factors Control environment Control function Cooperation Corporate behavior Corporate culture Corporate finance Corporate governance Correlation Cost-income ratio Counterculture Counterparty risk Credit rating Credit risk Credit risk management Credit risk officer (CRO) Crisis Cross selling Cultural conflict Cultural wealth Culture D Dashboard Decision-making Default Deregulation Disclosure Diversification Diversity E Efficiency Engagement Enterprise risk management Entrepreneurial spirit Ethical banking Ethical fund Ethnographic analysis Executive compensation F Financial conglomerate Financial institution Financial instrument Financial literacy Financial stability G Globalisation H Hedge fund Hierarchy Honesty HR management I Individualism Initial public offering (IPO) Instability Institutional investor Integrity Internal audit Internal control Internal governance Internal rating based (IRB) Investment banking Investment planning IT risk J Job rotation Joint stocks company K Knowledge L Leadership Lending industry Loan M M Management style Mandate Market risk Mass media Material risk taker Mergers and acquisitions Misbehaviour Misconduct Mortgage-backed asset Mutual banking Mutual commitment N Non-executive director (NED) Non-performing loan (NPL) O Operational loss Operational risk Organizational culture Organizational design Organizational learning Ownership effect Ownership model P Paradigm Payment Performance Power distance dimension Price-to-book ratio Private banking Private equity Professionalism Proportionality Public company R Rating Rating assignment Rating quantification Rating validation Real estate Reform Regulation Regulatory requirement Remuneration Reputation Reputational risk Retail banking Return Risk appetite Risk assessment Risk awareness Risk control Risk management Risk policy Risk-taking Risk tolerance S Sanction Scenario Securitization Self-regulation Senior management Shareholder Socio-demographic categories Sound and prudent management Staff Stakeholder Strategic choices Strategic decision Strategic orientation Subculture Sub-prime loan Subsidiaries Supervised entity Supervision Sustainability Systemic risk T Tangible common equity Teamwork Text-analysis Tone-from-The-Top Total assets U Underwriting V Value driver W Watchdog Wealth management ... main theoretical and empirical findings of different streams of knowledge that are directly or indirectly linked to the role of people in establishing and changing risk culture in financial institutions... implies being able to invest in terms of risk culture, risk management , and risk control , while maintaining an appropriate cost-income ratio In her view, the choice of the proper business model... Italy She is also SDA Fellow in Banking and Insurance at SDA Bocconi School of Management Her main research interests are risk management in banking, financial education, financial behavior and corporate