Risk Transparency and Risk Culture for Financial Institutions

Sylvie Mathérat

Risk is at the very heart of banking activities; therefore, a key success factor for any financial institution is its ability to effectively pool, manage and diversify its risk in order to achieve an optimal balance between risks and returns. This risk management requires institutions to have clear knowledge of their individual risk exposures so that they can provide meaningful information to both internal and external stakeholders. Risk transparency therefore has two aspects: transparency with regard to the risks within a financial institution, and transparency with regard to its external stakeholders.

Internal risk transparency is a prerequisite for creating a more robust risk culture within financial institutions. It allows boards and senior management to hold the front-office business units accountable if the risks taken exceed the institution’s risk appetite. This is an essential factor in changing the existing risk culture and leaning against risk creep in good times.

External transparency is also vital in order to increase the market discipline of financial institutions whose risk culture leads to high risk-taking. The lack of visibility surrounding risks in financial