The ECB is planning a new aspect of supervision, focused on organisational behaviour. This is expected to build on DNB’s approach, which emphasises the importance of an ethical, effective culture. Supervisors and banks alike face a steep learning curve. Banks may find the new approach unsettling, but those that embrace the process have nothing to fear - and could reap significant value.
Since 2011, De Nederlandsche Bank (DNB) extended its supervision to the culture and behaviour of financial institutions in the Netherlands. This reflects a view that behaviour and culture are central to effective management, and that organisational culture can help to reduce risks. DNB believes this approach can complement traditional methods of supervision, and help to mitigate or prevent potential risks arising from unsuitable behaviour.
This approach is now expanding beyond the Netherlands. Having established a DNB-chaired task force in 2015, the ECB is in a pilot phase to decide whether to incorporate assessments of behaviour and culture into its own supervisory activities.
So, what can banks across the Eurozone expect from this new initiative? Recent statements from Danièle Nouy suggest the ECB will draw heavily on DNB’s approach. It contains assessings even elements that DNB sees as vital to an effective and ethical culture. They are:
In practical terms, the most important aspects of the DNB’s approach to behavioural supervision are:
For now the ECB’s precise methodology remains unclear, but this will change as the new approach is trialled and developed coming year. We expect the ECB to learn from DNB’s experience, the pilot exercises and incorporate variations to allow for differences in business models, locations, leadership styles and cultures.
It is clear that behavioural supervision represents a complete departure from traditional supervision. Instead of being technical or prescriptive, it is dialogue based, subjective and forward looking. As such, it presents a challenge to all parties. On one hand, the ECB will need to adapt its own skills and culture. In the case of DNB, this has included recruiting professional psychologists. On the other hand, banks and senior bankers may feel uncomfortable or even threatened by the personal nature of the process.
Banks should be reassured that DNB has never mixed fit and proper testing with research in the context of supervision on culture and behaviour. We do not expect ECB to start with a close study of individual personalities of board members. Instead, like DNB, ECB is expected to focus on collective behaviour in areas such as boardroom dynamics, decision making and organisational culture. And while assessments may identify areas for improvement, they are not expected to have any quantitative impact on supervision. There are also concrete steps that banks can take to start preparing for the new approach. These include making a self-critical assessment of how the organisation lives up to the seven key elements of effective culture, and how boards manage their own decision-making processes.
In fact, banks that engage positively with behavioural supervision are likely to find it a valuable source of objective feedback. In contrast, banks that are dismissive of behavioural supervision will not derive value from the process – and are unlikely to make a positive impression on supervisors.
In short, the introduction of behavioural supervision is a game-changer for supervisors and banks alike. A degree of scepticism is natural. But banks that embrace the new approach could enjoy significant benefits.