Fixing A Bankrupt Banking Culture By Hiring More Bankers?


The Group of 30 published a report titled BANKING CONDUCT and CULTURE: A Call for Sustained and Comprehensive Reform last month (July 2015). This report, co-written by both academics and senior financial industry regulators and banking executives, pulls no punches in its critique of the morally bankrupt global banking industry and the pressing need for across-the-board reforms in the sector in order to restore public trust.

The foreword of the report notes: “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.”

Figure 3 below highlights the scale of the immoral conduct/criminal behavior problem in the banking industry with a graphic illustration of how conduct fines and redress costs in the banking industry have grown to represent one-third of an average bank’s total loss provisions over the last few years.

Jim O’Shaughnessy: Fear Signals Created By The Reptilian Brain

ValueWalk's Raul Panganiban interviews Jim O’Shaughnessy, Chairman, Co-chief Investment Officer, and Portfolio Manager at O’Shaughnessy Asset Management. In this part, Jim discusses the fear and emotional signals created by the reptilian brain. Q1 2020 hedge fund letters, conferences and more That's very cool. For the factor to try to seek the reason why it works, Read More

Steps to repairing public trust in the morally bankrupt banking industry

The Group of 30 report emphasizes that there must be a sustained focus on conduct and culture by the banking industry. This means that boards of directors and management need to make major improvements in the culture within the banking industry and at each individual bank. The report does note that some banks have taken initial steps to set up governance systems that will inculcate cultural change, but the process is just beginning and many banks have only made token efforts at reform to date.

According to the report, developing a solid, honest but competitive banking culture is a three step process: defining the desired culture, challenging the what and how of their cultural foundations and implementing the new culture.

Defining the culture starts at the top, but is an all-encompassing process. Input should be solicited from all employees as part of the process of defining the desired culture, and especial care should be taken to develop compensation and incentive packages that encourage compliance with, not violation of, the cultural standards.

Banking Culture

Creating a positive banking culture

Banks should weave the essence of the culture into all aspects of their operations, including a system for ongoing monitoring, senior management accountability and governance, and thoughtful structuring of performance incentives and staff development and promotion.

It is very important that boards make sure that the CEO and senior management are highly visible in the process of defining the desired values and conduct, and that they face material consequences if there are multiple and/or high-profile violations of the standards of conduct.

Banking Culture

The report also suggests that banks “formulate and implement a system-wide values and conduct evaluation process for internal promotions and external hires. These send strong messages about what the bank values in practice.”

In concluding, it is noted that financial institutions that emphasize diversity of all sorts (cognitive, gender, racial, background) find it much easier to develop  improved values and conduct, and more importantly, are able to sustain this positive behavioral change.

Banking Culture

See full PDF below.