In modern global society, discussions on the responsibility of companies and their decision-makers is becoming increasingly prevalent as an everyday topic. Since the financial crisis, the financial services industry especially suffered from a loss in trust and reputation. Although banks reacted, they mainly made more progress with respect to financial than non-financial risks (Song and Thakor 2018; Mathérat 2014). For financial risks, banks can use stress test losses to quantify and cascade risk appetite from group level to individual business units. This makes it accessible to measure risks. However, for non-financial risks like excessive risk-taking, misconduct, and fraud, quantification is more challenging – if possible at all (Sheedy and Griffin 2018). The banking culture is often blamed in this regard, following the assumption that cor-porate culture has to essentially reform itself to restore this loss of trust (Young 2014).
Kreps (1990) contended that good reputation supports good behaviour and higher cooperation rents as well as that corporate culture could substitute the impossible task of specifying all possible contingencies in advance. He asserted that corporate culture could be more systematically and deliberately understood by using Schelling's (1980) notion of focal points. A focal point refers to a rule or principle individuals use naturally to select a mode of behaviour in situations with many possible equilibrium behaviours. Suchanek and Entschew (2018) apply this concept normatively by defin-ing ethical focal points as those values, principles, or norms underlying expectations on how an individual should behave. Deliberate work on focal points can aid in form-ing corporate culture, which could then address non-financial risks.
In the banking industry, instead of corporate culture the term risk culture is often used by regulators and practitioners, since risk is at the very heart of banking activities (Banks 2012; Carretta et al. 2017; Bott and Milkau 2018). Accordingly, (Jackson 2014a) defines risk culture as how individuals behave and the decisions they make within the context of the risk environment which is influenced by values and incentive structures.
This work sets out to apply the concept of ethical focal points on risk culture in an intra-organisational banking context; specifically, the ethical focal point of moral symmetry. Taleb and Sandis (2014) refer to morally symmetrical behaviour as one that is neither egoistic nor altruistic. According to the study of bounded rationality, moral behaviour comes from the interplay between mind and environment and is based on pragmatic social heuristics rather than moral rules or maximization principles which are not good or bad per se, but also in relation to the environments in which they are used (Gigerenzer 2010). By using the ethical focal point of morally symmetrical behaviour, the aim is to identify and analyse conceptually its function in mitigating conduct risk in the banking sector – specifically, problems of excessive risk-taking and (ethical) misconduct. The focus of this conceptual work is (i) on values and desired behaviour in dealing with risk, and (ii) on risk structures like remuneration systems that frame such behaviour. Crucially, this work questions whether risk culture can be made more tangible via a shared understanding and common heuristics in banking.
In times of frequent change, complexity, uncertainty and disruption in the financial services sector, this research aims to enhance scholarly and evaluative work by introducing the (ethical) focal point of (moral) symmetry in order to develop an approach of a sound risk culture framework for the banking industry based on moral principles, norms, and values.
Keywords: Risk culture, conduct risk, risk-taking, business ethics in banking, heuristics, ethical focal points
