Jean-Claude Trichet WASHINGTON, DC – Banks and banking rely on trust. But while trust takes years to establish, it can be squandered abruptly if a particular bank’s ethics are weak, its values poor, and its behavior simply wrong. The events that triggered the 2008 global financial crisis, together with the subsequent scandals that have emerged – from the rigging of the London Interbank Offered Rate (Libor) to sanctions-busting and money-laundering – amount to a catalog of cultural failures within our financial institutions. Yes, extensive measures have been taken since the crisis to strengthen the financial system. But a profound weakness remains: To be blunt, it concerns the risk-taking culture that still prevails within some departments of global banks and in the financial system itself. Too often, bank bosses’ promises to change the “corporate culture” and ensure their employees’ good conduct have not been matched by fully effective implementation. In too many cases, banks are still failing to fulfill their obligations in serving their communities and the public at large. It is true that the banking sector is paying a high price for its misdeeds: fines, litigation, and regulatory tightening have cost approximately $300 billion so far. But the tax-paying public – innocent of any wrongdoing – has also had to bear costs, both direct and indirect. And, while a handful of “rogue traders” (and, most recently, one Libor manipulator) have ended up in prison, it would be overly optimistic to conclude that the punishment has been sufficient to transform bank culture. If banks and other financial institutions are to perform their crucial role in providing support for growth and employment, it is imperative that they take steps to regain the public’s trust. But how? More regulation is not necessarily the best path forward: The rules and norms that define a “right” and “wrong” culture are beyond the wit of regulators and supervisory bodies. But the pressure to devise such rules is bound to mount if banks do not demonstrate that they are grappling effectively with the challenge of cultural change. Sadly, until now, many banks have adopted an unconvincing piecemeal approach. It is not enough to strengthen legal compliance. A new report published by the Group of Thirty argues that banks must do far more. Real change must go to the core of an institution’s day-to-day operations. Banks must change compensation practices that reward excessive risk; protect whistleblowers; recruit and train staff to reflect proper ethics; and ensure that their boards of directors play a more active oversight role. (I believe that if boards had been aware of the egregious behavior being perpetrated within some institutions, from product mis-selling to price-fixing, they would have acted to stop it.) Let me be clear: Setting values and shaping an organizational culture take a long time and a great deal of work. Successful reform requires changing people’s mindset and habituating them to self-regulation. A written code – emphasizing the commercial benefits of ethical business conduct, and the negative consequences of falling short – is part of that effort and may help preserve and strengthen a culture; but a code alone is not enough. Constant reminders and repetition are essential. Employees must understand instinctively what may be done and what should never be done. They must internalize a culture that values strict adherence to high ethical standards of conduct. To that end, banks should make their values and culture integral to their hiring, firing, and promotion decisions. Indeed, the values and conduct of a bank’s risk-takers should account for 50% of their annual performance review. Failing to live up to a bank’s desired cultural norms should have an impact on an employee’s career – and, when necessary, end it. Banking regulators and supervisors also have a decisive role to play. They need to work with boards and senior management to ensure that major reforms are implemented and then consistently applied. Regular exchanges of views between oversight officials and the banks should be regarded as a crucial component of this process. Central bankers have been dismayed by many banks’ failure to move forward decisively to address the difficult internal issues of conduct and culture. And now the concerns have grown to the point that delay is no longer an option. Either the banks reform themselves, or public authorities will intervene still further. Jean-Claude Trichet, Chairman and CEO of the Group of Thirty, is a former president of the European Central Bank and a former governor of the Banque de France. Copyright: Project Syndicate.
