Bank Culture

Global experience is that the culture within banks can have a major bearing on how a wide range of risks are identified and managed.

There have been a number of examples where the absence of strong positive culture has given rise to a deterioration in asset performance, misconduct and loss of public trust. In Australia, there have also been examples of weak internal controls causing difficulties for some banks.

These include in the areas of life insurance, wealth management and, more recently, retail banking. In August, Australian Transaction Reports and Analysis Centre (AUSTRAC) initiated civil proceedings against the Commonwealth Bank of Australia for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. In the current environment where investors still expect high rates of return, despite regulatory and other changes that have reduced bank ROE, banks need to be careful of taking on more risk to boost returns.

A central element to address this issue is to ensure that banks build strong risk cultures and governance frameworks. Regulators have therefore heightened their focus on culture and the industry is taking steps to improve in this area. APRA’s powers will be strengthened once the Banking Executive Accountability Regime (BEAR) announced in this year’s Federal Budget is legislated. The BEAR strengthens APRA’s abilities to impose civil penalties and dismiss bank executives for poor conduct, and requires a significant share of executives’ incentive remuneration to not vest for at least four years (although banks already largely adhere to this).

APRA has also established an independent inquiry to identify whether there are deficiencies in governance, culture and accountability frameworks and practices at the Commonwealth Bank of Australia and, if so, how these can be addressed. The banking industry’s own initiatives to improve culture include background checks aimed at preventing individuals with a history of misconduct moving within the industry, and rewriting the Code of Banking Practice to strengthen its commitment to customers.