NEW YORK — Federal Reserve Bank of New York general counsel Thomas C. Baxter Jr. criticized the financial services industry's ethics and culture on Friday, faulting bankers for valuing profits over relationships.

A "root part of the cultural problem," Baxter said, is "the movement of the banking industry away from providing a service to customers or clients to interacting with a counterparty who is to be explored for their profit opportunity."

In the past, he said, bankers "were in it to develop those [client] relationships over the longer term and those clients would keep coming back for more services." Today it's "a very different relationship, and that is a counterparty to be explored for profit."

Baxter, speaking at The Clearing House Assocation's annual meeting, was echoing his boss, NY Fed president Bill Dudley who questioned the industry's culture in a speech Nov. 7 at NYU.

Baxter quoted Dudley as saying the post-crisis regulatory improvements "may not solve another important problem evident within some large financial institutions: the apparent lack of respect for law, regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issue is difficult to judge, but it is another critical problem that needs to be addressed."

Baxter advised boards of directors at these institutions to structure compensation policies to ensure the right behaviors are rewarded. For example, he suggested the executive who made a profit of $500,000 on a secured loan ought to be promoted or given a bonus over an executive who made $1 million on a repo.

Baxter also endorsed making an example of executives who don't live up to the institution's cultural standards.

"Nothing focuses the attention like a hanging," Baxter said. "So you need to focus attention on your senior people when they misbehave."

Finally, Baxter told directors they need to constantly track their institution's culture. "Measuring it and monitoring it and talking about it, make it important," he said. "There is a need, starting at the top of the organization, to change the culture."

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