Culture can't be regulated, but it still needs to be fixed, and the onus is on top bankers to do it themselves.
That's the conclusion of a yearlong study released this week by the Group of Thirty, an advisory group whose membership list reads like a who's who of the world's most influential bankers some of the very people, in other words, whose leadership the report finds fault with.
The prescription they offer is to lay responsibility for failures and misconduct on banks' leaders, while doing away with the willful blindness that they say afflicts some management teams. They advocate pay cuts or firings for scofflaws and their bosses, cycling key employees between compliance and business functions to emphasize the importance of risk management and using scorecards to reward or punish employees' conduct.
The heavily detailed, 84-page report pulled few punches in discussing banks' cultural shortcomings and argued that these failures are sinking the industry's reputation and financial performance.
"Banks and banking today stand in disrepute," the report said. The industry is "at a low point in terms of customer trust, reputation, and economic returns, and steps must be taken to reverse this."
The report is as significant for what it says as for who says it. The Group of Thirty is currently led by former Federal Reserve chairman Paul Volcker, JPMorgan Chase International chairman Jacob Frenkel and Jean-Claude Trichet, the former president of the European Central Bank.
The report on bank culture, based on from more than 70 interviews with the leaders of the world's biggest banks, was guided by bankers and regulators with resumes that are no less impressive: Roger Ferguson, TIAA-CREF CEO and onetime candidate to lead the Federal Reserve; William Rhodes, former vice chairman and current advisor to Citigroup; and ex-Comptroller or the Currency John Heimann. A former director of the International Monetary Fund, Gerd Häusler, and a former chairman of Barclays, David Walker were vice chairs of the conduct study.
Without naming names, the report they've produced sends a clear message to their fellow captains of finance that if they're wondering what's wrong with their industry's reputation, they need to look in the mirror.
"It's essential that banks turn their attention to restoring the public's trust, because trust is a bedrock of a safe and effective financial system," Ferguson said at a news conference Thursday.
"Strong leadership is an essential part of the equation, because the tone is set at the top," yet "many of the bold reform statements made by banking leaders have failed to secure the necessary changes," he said.
The Group of Thirty report suggests that banker misbehavior is becoming a systemic threat to the industry. Conduct fines and penalties for the largest global banks have totaled $300 billion since the financial crisis, or 30% of the cost for credit-loss provisions.
The report effectively tells top bankers that fixing the problem requires top management to take responsibility for failures, and to get everybody in their organizations involved, rather than just in the legal or compliance departments.
Banks need to have three lines of defense against misconduct, the report said: first, the board and top executives; then the departments specifically responsible for risk and legal liability; then the auditors.
The report also suggests using a "scorecard" system to grade employees on how closely they're following conduct rules, with clearly defined punishments for those who fall short, as well as rewards for employees with strong records. The largest banks should annually review the performance of the top 200 to 400 senior executives, rather than just a handful, it said.
These changes would effectively shift responsibility for weeding out and punishing misbehavior from outside the bank that is, from fines and penalties imposed from above by regulators back inside. While bank supervisors have a role in shaping bank culture, regulators can do very little, the authors of the report argue.
"[I]t should not be the regulator's objective to judge an institution's culture per se," and regulators need to recognize "the limited effectiveness of promulgating rules related to values and conduct," the report said.
The report's focus on the responsibilities of bank management rather than regulators underscores the message that the industry's leaders most own its dysfunctional culture, said Mark Olson, a former member of the Federal Reserve Board of Governors.
The report represents prestigious industry heads saying, in effect, a "this is our problem," said Olson, who is now chairman of the consultancy Treliant.
"It isn't an external group saying it's somebody else's responsibility. This is people saying that all of us need to be doing better," he said. "I like the fact that people who are active in the industry would be willing to take a critical, in the greater sense of the word, look at themselves."
The report's recommendations are likely to get the attention of the global systemically important institutions, Olson said. The Group of Thirty keeps a low public profile, but its heavyweight leadership makes it influential among the managers of the largest banks, he said.