Errors and Failures in European Banking: A Cultural Perspective

Misconduct is still widespread in banking. It often leads to economic and reputational losses and negatively affects trust in the economic and financial systems. Misconduct is mainly a result of errors in policies and procedures, of mistakes or malpractices in individual behaviours and of failure in management and control systems. Elaborating on the new theory of risk culture in banking, we develop a general framework of errors and failures in banking, on the basis of existing literature and taking into account the empirical evidence that is currently available. Particularly, we focus our attention on the influence of national cultures, the role of the organizational environment, errors and management practices and the impact on reputational risk role of banking regulators and supervisors in the handling of errors and mistakes. Our work helps demonstrate that culture is the main driver of organizational and individual behaviours and consequently of errors, mistakes and failures in bank management. Moreover, in a “sound” risk culture environment, the ability to manage errors must be in the toolkit of bankers and banking supervisors, enhancing cultural capital while preserving stability and efficiency of the whole financial system.