BANKTHINK

Want to Keep Your Bank Out of Trouble? Easy, Don't Lie

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Many outside our industry wonder whether banks want to meet their legal obligations. They know banks have committed many crimes as well as civil injuries and that when occasionally caught, their punishment is usually a slap on the wrist—small compared to harm done or to what the bank gained by its offense. If so, then why would banks want to become or stay legal?

Unlike others, I don't believe that the prevalent negative view of bankers is actually doing us much harm. Like airlines, we are indispensable to customers. Believing bankers are crooks won't drive many consumers or corporations to PayPal or CIT. (People don't respect Congress, but they reelect them. A necessary evil.)

Nevertheless, nearly all bank directors and CEOs want to avoid legal culpability. They just don't know how to achieve this.

An anecdote: Long ago, the personal banking officer responsible for my account seemed assiduous and competent, as well as pleasant. One day she was gone. No one would say why. I eventually learned she had been peremptorily fired: "She intentionally entered wrong information on a transfer of funds."

At the time, this seemed to me a disproportionate punishment for a single, isolated offense. Maybe she had a good rather than a self-serving reason for what she did. Maybe it was harmless.

But I was wrong. Any and all falsification of bank records is intolerable.

Bankers doctored data on international transfers, facilitating billions of dollars of money laundering. Bankers falsified Libor rate inputs. Bankers solicited, approved and transmitted mortgage applications containing evidently untrue statements. Bankers sold mortgages based on false representations about their underwriting. Bankers mismarked or hid securities transactions. Banks or their agents lied to customers about the benefits available from protection products. Banks assessed overdraft fees as if debit card transactions been authorized much later than they actually were.

When banks fail or equity value falls precipitously, losses are almost always preceded and expanded by lying.

The common element is exactly that for which my personal banking officer was fired: lying. It's fatal. It destroys trust, safety and soundness.  Investors will not provide needed capital, and bank equity is greatly devalued because we lie.

The golden rule of banking isn't to treat everyone as we'd want to be treated—telling them what they want to hear, cutting them lots of slack. It's the opposite. It's purely and simply not to lie.

That includes not obfuscating and not misleading anyone—colleague, customer, counterparty, regulator. It includes punishing negligent failure to verify.

As an industry, we've lost sight of that. Irrelevant complaints about complexity of rules obscure the obvious failure to follow the most fundamental rule: We can't afford to tolerate lying in, or on behalf of, banks – no matter the potential gain, the unfairness of the regulations, or the beneficence of the purpose, and no matter what the customer wants. Neither should we do business with anyone who has tried to deceive us.

Embracing this principle fully and conspicuously, driving it into action through training and management controls, enables us to make our banks legal not just from the top down but, much more important, from the bottom up.

There is no position in a bank so humble or peripheral that it can be exempted from the full rigor of this rule. There's no lawyer, compliance officer or risk manager who's worth a damn if he doesn't trumpet, test against and enforce it daily.

For every banking offense, there's the excuse "I didn't know there was a rule against that." We debate just what bosses and enforcers should have known or done. But you shouldn't even need a lawyer to tell you not to lie.

If we simply kept all our banking information and communications explicit, honest and accurate, without regard to any other requirements or prohibitions, then 90% of the billions of dollars of civil and criminal liabilities piled up over the last five years could not have happened, or would have been nipped in the bud.

In antique times, bankers were expected to belong to the local Rotary Club, where the first rule was to tell the truth. Now they go to business school instead.

If the words and numbers are truthful, then risk officers, examiners and regulators can do their jobs reliably and banks as well as the financial system will be free of internal rot and much more resilient against external shocks.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was for six years the founding CEO of First Deposit, later known as Providian.

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Comments (5)
I often have a hard time agreeing with anything Mr. Kahr writes. This time he is right on! Integrity is the cornerstone of Banking. Banking is all about trust. How can I trust someone who lies - even about the little stuff?
Posted by CommunityBanker | Monday, February 11 2013 at 10:55AM ET
The implication is that all bankers lie....a blanket indictment of the industry. While I'm sure some have its crazy to preach to all 7000 banks as if they are sinners seeking to cover up their wrongful actions. Bankers continue to be indicted by the press and now some blogging wags who want to generalize the actions of a few.
Posted by Rhsmith999 | Monday, February 11 2013 at 11:02AM ET
While we're at it, can we add a few more groups to the list? I'm thinking if we could have rating agencies, Wall St., oh and maybe government also tell the truth, the world would be a better place. But I don't see that happening anytime soon either, do you? Thought not.
Posted by BankerBud | Monday, February 11 2013 at 12:09PM ET
It is human nature to lie whether it is not telling the truth to someone to avoid hurting them or misrepresenting the components of a mortgage,CDO or a CDS. Until share and bond holders really bare losses fully and until financial regulators really clamp down on how operational risks are ignored at banks, 'lying' and fraud will continue. This Psychology Today article is interesting on lying. http://bit.ly/XxwmNZ
Posted by Mayra Rodriguez Valladares, MRV Associates | Monday, February 11 2013 at 1:26PM ET
Who would have thought that such simple advice would have to be directed at banks? But as we know, the banks that went from Too Big To Fail, to Too Big To Behave and now Too Big To Prosecute, are clearly "truth-challenged." Sadly, because smaller banks (which are still overwhelmingly honest) have failed to distinguish themselves from the mega-banks and to condemn their dishonesty, they wind up being tarred with the same brush. As a result, the banking industry (along with its federal regulators) is almost as distrusted as Congress.
Posted by jim_wells | Monday, February 11 2013 at 4:42PM ET
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