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Early warning system on banks’ risky behaviour

by Lewis Panther SA FIN | 15 Nov 2018
A leading authority on prudential supervision has developed an early warning system to prevent behaviour similar to the risk-taking and sales behaviour revealed at the Royal Commission. 500 Early warning system on banks risky behaviour

Wijnand Nuijts, of De Nederlansche Bank (DNB) in Holland, and his team have spent the past eight years supervising and educating boards of directors in the financial services industry in the subtle science of culture and behaviour.

The majority of the 100 organisational assessments performed by his team of 13 experts have revealed a wide array of behavioural patterns that may create risks for their business. 

Other supervisors around the globe have taken keen interest in DNB’s methodology and many have built elements of it into their own approaches. 

But the regulator who is on his first visit to Australia admits it is not a panacea - and is a part of a series of supervisory measures that will ensure banks avoid regulation-breaking behaviour in future.

He said: “One of the biggest challenges for banking and finance is to become credible again in the eyes of the consumer.

“We have to see what drives misconduct. There were a multitude of factors that led to the global financial crisis. It wasn’t just the mortgage brokers and Lehman Brothers that led to the crash. It was a succession of mistakes that built up over time.”

But the deep recession that followed and the desire to avoid a repeat has led to a focus on culture as the driver behind the risky behaviour.

“The whole aim of our method is to tackle the root causes of risky behaviour,” he said. 

“It’s like an early warning system.”

But how does it work in reality?

When Nuijts and his team are called in - upon receipt of certain signals - they concentrate on the decisions made at the C-suite and board level of the organisation they are examining, carrying out desk research, surveys and interviews of board members with questionnaires, which process takes around two months

The next step is to sit on a board meeting to observe the dynamics between executives and members. A case study highlighted how a dominant CEO pushed through decisions that had a negative impact on the performance of his company. Although he initially denied the findings of Nuijts’ team, he eventually acknowledged their observations.

In general, their findings are presented as a “challenging dialogue” that gives the board a chance to justify the approach that had been a cause for concern - or to recognise a change has to happen.

“Our approach has proven to be an effective extra tool in the supervisory tool box,” he said.

“We have experienced that we were not only able to identify risky behaviour and group dynamics, but that we also managed to influence the institution to change it.

“The whole aim is to get initiate institutional change before having to revert enforcement. Our experience is that most of our findings are followed up adequately.”

In the cases where the behavior actually led to non-compliance enforcement action followed. 

As DNB focuses on the top echelons of a business and not all the pockets of an organisation, he accepts that “his is an indirect way to influence the whole organisation.”

Bearing in mind many of the instances of sales behaviour revealed at the Royal Commission were down to those many floors below the C-suite, it could perhaps be seen as a fundamental flaw in his approach.

But Nuijts’ perspective is much more positive.

“We are in the process of learning how to become more effective in encouraging organization wide change. People say cultural change is so difficult,” he explains.

“But it needs perseverance. The key is to learn from mistakes made in the past.

“The airline industry has demonstrated that it can be done. Casualties have fallen.”

Kylie Blundell SA FIN, Head of Standards and Education said: “Like Wijnand and his team, we see this as part of the way of restoring trust in the banking and finance.

“Professionalism is one of the pieces of the puzzle.”


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