A Framework and Measure for Examining Risk Climate in Financial Institutions

Purpose

The risk environment within organizations and business groups has been identified as a key factor in preventing scandal, unexpected losses, and even insolvency in financial institutions. The objective of this paper is to propose a multilevel framework for investigating risk climate (the shared perceptions among employees of the relative priority given to risk management, including perceptions of the risk-related practices and behaviors that are expected, valued and supported), together with its outcomes and antecedents, and validate a new measure.

Design/Methodology/Approach

A bottom-up phenomenon-driven process was used in scale development. We drew on published case studies, the industry literature, and interviews with subject matter experts. We performed three studies across a total of 10,544 employees in three different banks based in different countries. An online survey methodology was used to first explore and then confirm the factor structure, fit and invariance of our risk climate measure at the individual level of analysis, before progressing to examine fit and invariance across both the individual and business unit level simultaneously.

Findings

We found evidence for four unique factors of risk climate that were invariant across three organizations, two countries, and two levels of analysis (individual and business unit).

Implications

The risk climate scale presented in this paper provides a means by which senior leaders of financial institutions may better understand risk climate and how it varies at the business unit level. This information is relevant both to meet regulatory requirements and as a guide for potential intervention to strengthen or change risk climate.

Originality/Value

This paper provides the first academic study of a new strategic-focused climate construct based on the relative priority given to risk management.