Banking Conduct And Culture: A Call For Sustained And Comprehensive Reform

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Banking Conduct And Culture: A Call For Sustained And Comprehensive Reform by Group of 30

Executive Summary

“Pursue a straightforward, upright, legitimate banking business. Never be tempted by the prospect of large returns to do anything but what may be properly done under the National Currency Act. ‘Splendid financiering’ is not legitimate banking, and ‘splendid financiers’ in banking are generally rascals or humbugs.” – Letter of guidance to bankers from the U.S. Comptroller of the Currency, December 1863

This report addresses the governance challenges facing the world’s largest banks, their boards, their management, and the supervisors who oversee the health of the financial system as a whole, and the economic sustainability and strength of the individual firms.

Banks and banking today stand in disrepute. Poor cultural foundations and significant cultural failures were major drivers of the recent financial crisis, and continue to be factors in the scandals since then, exacerbated by staff with questionable conduct and values who move from bank to bank with impunity. Unhealthy cultural norms, or subcultures within large banks, including in some cases criminal behavior, have hurt the public, caused reputational damage and loss of public trust, and have been financially costly in terms of fines, litigation, and regulatory action; economically costly to society at large; and have been a major distraction for both senior management and boards. Banking is, in 2015, at a low point in terms of customer trust, reputation, and economic returns, and steps must be taken to reverse this.

Banking Conduct

A Sustained Focus On Banking Conduct And Culture Is Needed

There must be a sustained focus on banking conduct and culture by banks and the banking industry, boards, and management. Firms and their leaderships need to make major improvements in the culture within the banking industry and within individual firms.

Restoring trust in banking is a public trust and economic imperative, and is the bedrock of a safe and effective financial system. Banks need to restore the primacy of serving customers to help them achieve their financial goals, and of serving the communities and economies in which they operate. Many leaders and banks are already engaged in this important endeavor. They need to continue this focus because addressing culture and repairing trust go hand in hand and are a prerequisite for sustainable economic returns and—in the medium term—a source of competitive advantage.

Answers to the cultural challenges facing banks and banking do exist. Indeed, workable solutions are being implemented by banks across the world. This report identifies shortcomings but also good practice, and makes a series of recommendations for boards, management, and supervisors, which can be applied and drawn upon by leaders as they seek to address culture in their firms.

Banking Conduct

Define The Desired Culture

A major sustained improvement in culture can be achieved and secured by focusing on values and conduct that are the building blocks of culture.

Focusing on values and conduct is a more practical approach, since these are observable and measurable, can be specified as principles embodied in bank standards and linked to incentive structures, and can be explicitly linked to broader stakeholder objectives. Desired values and conduct should be evident in the tone from the top, and the voices of the middle manager should be heard in an echo from the bottom and should, in short, infuse the entire organization and its businesses. Desired values and conduct should be reflected in the daily habits and practices of employees-how they work; how they are evaluated; who is hired, promoted, and rewarded; and how employees act when managers are not present and when matters of personal judgment arise.

Banking Conduct

Achieving and sustaining a vibrant culture that is understood, internalized, and celebrated by everyone in the firm is difficult. Forming and sustaining a culture is a constant process requiring commitment, perseverance, and continuous focus and monitoring by the board and management.

Broadly speaking, the “what to aspire to” is in place. Most banks have made bold assertions on cultural aspiration in terms of expected values and refreshed or strengthened codes of conduct.

But banks are still failing in implementation. A comprehensive framework is needed to deliver a more effective set of actions and powerful monitoring.

There appear to be systemic weaknesses in embedding these values and codes of conduct in employees’ lives and the ways of doing business within firms. Banks that recognize that embedding a desired culture is core to their business model and its economic sustainability appear to achieve greater success in internalizing the desired culture. Those firms that are reactive and defensive find embedding culture a more difficult task. The latter tend to view values and conduct changes as a means to minimize future redress, fines, and additional enforcement actions, rather than as structurally  important to the firm’s long-term success and viability. This view is misguided.

Banking Conduct

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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