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    Practice Question Banking Conduct and Culture

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    101 views6 pages
    or decades, Sheldon Natenberg’s Option Volatility & Pricing has been helping investors better understand the complexities of the option market with his clear and comprehensive explanation of trading strategies and risk management. Now, you can raise your performance to a higher level by practicing Natenberg’s methods before you enter the market.

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    or decades, Sheldon Natenberg’s Option Volatility & Pricing has been helping investors better understand the complexities of the option market with his clear and comprehensive explanation of trading strategies and risk management. Now, you can raise your performance to a higher level by practicing Natenberg’s methods before you enter the market.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    101 views6 pages

    Practice Question Banking Conduct and Culture

    Uploaded by

    Black Mamba
    or decades, Sheldon Natenberg’s Option Volatility & Pricing has been helping investors better understand the complexities of the option market with his clear and comprehensive explanation of trading strategies and risk management. Now, you can raise your performance to a higher level by practicing Natenberg’s methods before you enter the market.

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    of 6

    P2.T7.

    Operational & Integrated Risk Management

    Bionic Turtle FRM Practice Questions

    “Banking Conduct and Culture: A Permanent Mindset


    Change,” G30 Working Group, 2018.

    By David Harper, CFA FRM CIPM


    www.bionicturtle.com
    “Banking Conduct and Culture: A Permanent Mindset Change”
    P2.T7.20.1. BANKING CONDUCT AND CULTURE (G30) ................................................................ 3

    2
    “Banking Conduct and Culture: A Permanent Mindset
    Change”
    P2.T7.20.1. Banking conduct and culture (G30)
    Learning objectives: Describe challenges faced by banks with respect to conduct and
    culture and explain motivations for banks to improve their conduct and culture. Explain
    methods by which a bank can improve its corporate culture and assess progress made
    by banks in this area. Explain how a bank can structure performance incentives and
    make staff development decisions to encourage a strong corporate culture. Summarize
    expectations by different national regulators for banks’ conduct and culture. Describe
    best practices and lessons learned in managing a bank’s corporate culture

    20.1.1. Culture is famously difficult to define. The Financial Risk Manager (FRM) says that risk
    culture “can be thought of as the set of goals, values, beliefs, procedures, customs, and
    conventions that influence how staff create, identify, manage, and think about risk within an
    enterprise, including implicit and explicit beliefs." By comparison, the G30's simplified framework
    (see image below) asserts that bank culture is one of the key inputs that determines the bank's
    outcomes.

    Specifically, the G30 defines culture as "the mechanism that delivers the values and behaviors
    that shape conduct and contributes to creating trust in banks and a positive reputation for banks
    among key stakeholders, both internal and external1." Which of the following statements about
    culture is TRUE?

    a) Cultural norms and beliefs can be easily measured


    b) Conduct can be measured and should be measured
    c) Cultural outcomes by definition are not objective
    d) In general, cultures are empirically either right (aka, good) or wrong (aka, bad)

    1
    “Banking Conduct and Culture: A Permanent Mindset Change,” G30 Working Group, 2018.

    3
    20.1.2. After years of progress on improving banking culture and conduct, industry leaders have
    reported eight important lessons they learned during the process. Among these lessons
    learned, which of the following is TRUE?

    a) Diversity is orthogonal to (independent of) cultural outcomes


    b) Regulation has a key and important role to play in cultural outcomes
    c) The ideal mechanism for managing culture is an annual off-site event
    d) Conduct includes unintended consequences of decisions and/or lack of knowledge

    20.1.3. The G30 examined other industries (that is, aside from the banking industry) in order to
    identify the common characteristics that tend to lead to cultural breakdowns. With respect to the
    cross-industry lessons learned, each of the following is true as an industry characteristic that
    can lead to greater culture risk EXCEPT which does NOT lead to greater culture risk?

    a) Misaligned incentives
    b) Presence of dominant companies
    c) High utilization of technology
    d) High dependence on specialized skills

    4
    Answers:

    20.1.1. B. TRUE: Conduct can be measured and should be measured.

    In regard to (A), (C) and (D), each is FALSE or inaccurate. Explains the G30 (emphasis ours):

    "Culture comprises not only conduct and behaviors, but also the bank’s values and ethics.
    While cultural norms and beliefs cannot easily be measured, the conduct and behaviors
    that the cultural norms encourage or discourage can be. In fact, conduct can and should
    be observed, monitored, managed, and incentivized. It is important to remember that while
    conduct and behaviors—that is, what people actually say and do—are the only visible elements
    of culture, they are directly influenced by the less tangible elements, such as the bank’s
    unspoken rules, ideas, norms, and subconscious beliefs that lie beneath the surface. Managing
    culture thus requires understanding visible conduct and behaviors as well as the complex web
    of influences that lie beneath them. While conduct can be evaluated as good or bad, culture
    itself cannot be. The culture of each firm is unique to that organization and it is not empirically
    right or wrong; rather, it has to be right for that organization ...2"

    In regard to FALSE (D), the G302 asserts that one cross-industry lesson is that "lack of diversity"
    leads to greater culture risk.

    20.1.2. D. TRUE: Conduct includes unintended consequences of decisions and/or lack of


    knowledge

    In regard to (A), (B) and (C) each is FALSE or inaccurate. From the Study Note:

    "Summary of the lessons learned:


    1. Managing culture is not a one-time event, but a continuous process under progress that
    must be reinforced in the daily business operations and embedded permanently into the
    way of doing business.
    2. Leadership plays a significant role in integrating conduct and culture from the top down
    to throughout the entire firm (commencing with the board and senior management, more
    importantly including middle management and down to the ordinary staff). To emphasize
    the point that the advice from above is as significant as the advice from the top,
    managers at all levels of the organization need to be trained, promoted, and supported.
    3. Conduct management is not only about misconduct but also more broadly about conduct
    risk management. That is, not just misbehavior on purpose, but unintentional
    wrongdoings arising from decisions and/or lack of skills and knowledge need attention.
    4. Culture management needs a multifaceted approach and alignment of multiple cultural
    levers at the same time which includes structural elements like processes and policies,
    and also human elements like beliefs and attitudes.
    5. Diverse opinions on culture will lead to better and more sustainable outcomes for all
    stakeholders. Diversity in thoughts, problem-solving abilities, and leadership styles helps
    attain better results in an organization.

    2
    “Banking Conduct and Culture: A Permanent Mindset Change,” G30 Working Group, 2018, Page 2.

    5
    6. Cultural norms and beliefs cannot be measured clearly but the behaviors and outcomes
    that culture promotes can and should be measured properly.
    7. Regulation plays a limited role in culture management as culture cannot be defined by
    rules. However, regulation is effective in providing guidance related to basic principles of
    good conduct, diverting banks’ attention to areas of constant misconduct, and in helping
    to understand the lessons learned from across the industry. Supervision can effectively
    monitor and give feedback that assists management in improving culture and conduct.
    8. Communication and sharing of industry-wide best practices will help in building up trust,
    leading way to a better and stronger banking sector."

    20.1.3. C. False. High utilization of technology is NOT cited as a cultural risk factor. In
    regard to (A), (B) and (D) each is TRUE. According to the G30,
    1. "Cross-industry lessons: Upon examination of other industries that have suffered
    significant and systemic cultural breakdowns similar to those observed in banking, we
    identify five characteristics that these industries have in common and that might provide
    insights into characteristics that lead to greater culture risk.
    2. Lack of diversity: Industry homogeneity in backgrounds, education, gender, and
    racial/ethnic composition remains prevalent and can foster groupthink cultures. Such
    environments limit the number of challenges or alternative opinions required to
    effectively mitigate poor business decisions.
    3. Presence of dominant companies: A few large, successful players dominate these
    industries and may lead to deprioritizing culture, given that these companies have been
    able to attract customers and talent due to their dominant brands.
    4. High dependence on specialized skills: High-quality, well-educated candidates with
    specialized knowledge are critical in these industries. As a result, such individuals can
    often take on an outsized organizational role in their influence and decision making and
    make it more challenging to fire such highly valued individuals even in the face of
    egregious behaviors or inappropriate decisions. Distorted views of individual’s
    contributions can also lead to the cult of personality in many of these firms.
    5. Misaligned incentives: Performance and remuneration schemes are often aligned with
    quantitative or financial targets, which can inadvertently prioritize decisions that lead to
    misconduct. In addition, average annual wages for positions in these industries tend to
    be significantly higher than mean annual national wages; for example, in the United
    States, the mean annual wage for financial analysts and advisors is 107 percent higher
    than the U.S. mean annual wage across all industries, and the mean annual wage for
    computer- and tech-related jobs is 77 percent higher than the U.S. mean.
    6. Ineffective leadership and management skills: Board members, senior leaders, and
    middle management of fast-growing and highly successful firms may overestimate their
    own and their company’s capabilities and be ill-equipped and too inexperienced to
    recognize potential risks and complexities of their operating and revenue models. Hubris
    caused by a high degree of success can also cause individual leaders to believe their
    capabilities and decisions are unassailable and they start to believe their own rhetoric.3"
    Discuss in forum here: https://www.bionicturtle.com/forum/threads/p2-t7-20-1-banking-
    conduct-and-culture-g30.23205/

    3
    “Banking Conduct and Culture: A Permanent Mindset Change,” G30 Working Group, 2018, Page 11.

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