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P2.T7.20.2. Risk culture (Carretta)

Nicole Seaman

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Learning objectives: Compare risk culture and corporate culture and explain how they interact. Explain factors that influence a firm’s corporate culture and its risk culture. Describe methods by which corporate culture and risk culture can be measured. Describe characteristics of a strong risk culture and challenges to the implementation of an effective risk culture. Assess the relationship between risk culture and business performance.

(reference is Alessandro Carretta and Paola Schwizer, Risk Culture in Banking (Palgrave Macmillan, 2017))

20.2.1. Betty and Peter are discussing the proper definition of "risk culture." In particular, they are interested in the relationship between corporate culture and risk culture. Betty and Peter each have a different perspective, as summarized this way:

I. Betty argues that risk culture (RC) refers to the firm's basic assumptions: RC is the set of values and beliefs about risk shared by the firm's employees
II. Peter argues that risk culture (RC) refers to norms and behavior: RC is how individuals discuss, behave, decide, and act with respect to the firm's risks

According to Carretta and Schwizer, who has the better definition of risk culture?

a. Neither has a good definition
b. Betty has the superior definition because RC is about beliefs; aka, basic assumptions
c. Peter has the superior definition because RC is ultimately about behaviors, decisions, and actions; aka, conduct
d. Both Betty and Peter have valid definitions of RC

20.2.2. Risk culture is not a static status, but a set of things that evolves over time. In particular, many firms (including banks) at some point attempt to improve, or renew, their risk culture for the better. But changing culture can be daunting. According to Carretta and Schwizer, if an organization wants to achieve a culture transformation, each of the following is true EXCEPT which is false?

a. Cultural change requires a systematic approach to all involved subjects and stakeholders
b. Cultural change requires that the new culture be profitable and that it creates real value for all stakeholders
c. Changing the culture of a complex organization is possible but requires motivation, resources, and much time
d. Change requires replacing economic and competitive advantage priorities with intangible and non-firm (e.g., ESG) priorities

20.2.3. Which of the following statements is TRUE about risk culture?

a. The chief advantage of ethnographic analysis is comparability
b. A firm's risk culture cannot be optimized solely by tighter supervision in part because the firm has several subcultures
c. Academic literature has not yet developed established approaches to the measurement of culture in general because there is nothing like a uniform definition of risk culture
d. Risk culture is a defensive variable because a bad culture engenders costs while a good culture only avoids unexpected costs but neither creates new value nor directly impacts the financial statements

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