Our study shows the way bank bosses talk about risk can negatively affect financial stability.
Metro Bank positioned itself as “a fresh start to banking” when it launched in the wake of the 2008 global financial crisis. It was set up in 2010 as a challenger to the “big five” banks dominating the UK market post-crisis: HSBC, NatWest, Lloyds, Barclays and Santander.
Metro Bank is currently operating normally and there is no reason to think its customer deposits are in danger. It has secured new financing, and plans to open 11 more branches. But ongoing struggles with regulatory capital levels means its business model is still being questioned by analysts. Why the regulator won’t relax requirements Regulators must maintain a stable financial system that can provide essential services to households and businesses in both good and bad times. Banks are at the heart of this financial system. In the 1980s and 1990s, deregulation destabilised the industry and led to the 2008 global financial crisis. Many people lost their jobs and homes as a result, while US$15 trillion of taxpayers’ money was spent globally to prop up the banking sector.
UK financial authorities have even recently called out UK government plans to ease financial regulations under the Edinburgh Reforms and to remove the bankers’ bonus cap, in case it encourages more risk-taking by banks. Recent bank failures: a stark reminder Regulators, as well as financial market participants, also remain vigilant after the unexpected failure of a number of banks earlier this year.
Most banks’ business models rely on balancing risk management with profit maximisation in this way. But it needs to be done responsibly: signs of poor risk culture, such as excessive risk taking or misconduct, are red flags to regulators and investors. Our analysis showed that words and phrases associated with the “regulatory requirements” risk culture dimension, for example, were mentioned the least by CEOs prior to and during the global financial crisis. Unsurprisingly, use of the term picked up in its aftermath, as CEOs had to explain how tightening banking regulations were affecting their businesses.
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