Ensuring that desired culture is fully embedded throughout a financial institution provides a necessary bulwark to ensure resilience as stress and risk rise, says former New York Federal Reserve president William Dudley.
What financial institutions choose to do during this time of crisis will define them well beyond it. In the midst of the Covid-19 pandemic, with bank staffs working from home and outside the typical risk control environment that prevails within the office setting, regulatory and reputational risks could result in significant impact long after this crisis ends.
To address this, financial institutions need to re-engage effectively with their employees, partners, customers and regulators on several levels. If some on-site monitoring processes are temporarily suspended, off-site risk mitigation options must replace them. Firms must seek to shutter windows of opportunity for those who might look violate standard policies and procedures in an effort to take compliance shortcuts while no one’s watching.
The First Line of Defense for risk management is meant to be embedded in the customer-facing business units where risks are taken. Ownership of that risk management responsibility cannot be outsourced to internal risk and compliance teams on the Second Line. First Line risk owners must identify and rectify weaknesses at an early stage and then seek to leverage the support of Second Line risk and compliance professionals, who are meant to set risk management frameworks, rather than to execute the risk management function. Setting the right cultural norms along the First Line is critical — especially now.
Companies need to prevent their own crises. Firms must think about what could go wrong under current circumstances and adjust processes and procedures proactively, before problems arise. The benefits of investing in culture may not always be visible when times are good. But when the waters turn turbulent, the returns on a good culture are likely to be especially high. An ounce of prevention is worth a pound of cure.