In a stimulating op-ed in the Financial Times (free registration required) Simon Samuels, a member of the Financial Stability Board enhanced disclosure task force, argues that the driver of bank failure is not insufficient capital but rather a bad “risk culture”.

He cites the anecdote of Tim Geithner who said he realised Merrill Lynch’s risk culture was not in great shape when John Thain, then chief executive, did not know the name of his chief risk officer – who at the time was sitting next to him.

He then says :”Think of three pairs of superficially similar banks pre-crisis: Citigroup and JPMorgan Chase; Royal Bank of Scotland and Barclays; Belgian-Dutch lender Fortis and BNP Paribas. In each case, when crisis struck, the first needed a taxpayer rescue; the second did not. Yet here is the odd thing. Entering the crisis the capital strength of each pair was near identical. The overall risk culture, and not capital levels, explained their divergent fortunes.”

But how do you measure risk culture?

He offers 3 possible methods: firstly, an assessment by the bank’s regulator, secondly vary the way they pay executives to reflect their different relationships with risk and thirdly, banks should reveal their own record at measuring risk by disclosing how their losses each year compared to the level they expected, and providing an explanation for any difference.

He concludes: Just because culture is harder to measure than capital does not mean it is less important.

David Murray’s Financial System Inquiry Report is due in the next month. It will be interesting to see his recommendations.