Addressing conduct and culture issues in banking

April 2015

“In this environment of eroded trust, widespread disbelief in the adequacy of bank culture and the substantial further intrusion of regulation and enforcement into the conduct of banking business, there is, I believe, urgent need for proactive initiative by the banking industry to turn the tide.” 

—Sir David Walker 

Mark Carney, chairman of the Financial Stability Board (FSB) and governor of the Bank of England, expressed optimism regarding the progress in reform of international banking, saying at a November 2014 meeting of G20 leaders that a “watershed moment” had been reached. But a mere month earlier, Andrew Bailey, CEO of the United Kingdom’s Prudential Regulation Authority, took a dimmer view: “We are in many ways in the second phase of the financial crisis. The first phase was a prudential one, while the second phase has revealed past misconduct … Standards of governance, conduct and the right incentives structures are all extremely important [to fix the financial system].”  

Banks and regulators are therefore asking what more they could have done in the wake of past issues, and what more they can or should be doing now to avoid recurrence in other places. Bank boards are wondering how they can be sure that executives are truly addressing any persistent underlying issues as they face increasing financial, reputational, and even personal risk. Regulators and policymakers, meanwhile, are considering whether further fundamental changes are needed across the industry.

Recent BGLN discussions have focused on these issues, including two meetings on March 3, 2015 in New York and March 17, 2015 in London in which participants discussed supervisors’ expectations and practical approaches to addressing conduct and culture within and across banks.  

This ViewPoints synthesizes key themes emerging from those discussions in the following sections:   

  • Renewing the focus on issues of culture in banks and banking (pages 2-3). Persistent misconduct and the accompanying fines have attracted greater attention not only from conduct, but also prudential regulators concerned about governance, risk management, and the ultimate safety and soundness of banks. Supervisors and bank leaders are increasingly concerned that the root cause of conduct and other risk issues is a more fundamental problem requiring long-term culture change. 

  • Developing holistic approaches to culture reform (pages 4-13). Addressing culture requires a structured way to target a broad range of issues across organizations. Depending on their experiences with conduct or related cultural issues, banks are at markedly different stages of developing comprehensive initiatives to address culture. A holistic approach begins with clearly defining objectives and desired outcomes (e.g. Is culture change a way to mitigate conduct risk or create value?). Then, leaders can provide examples of associated behaviors that will help achieve those outcomes, and integrate new thinking into hiring, training, incentives, and accountability. Banks are also developing new approaches to measuring and monitoring culture and informing and engaging the board. Ultimately, the board should be asking: Is the firm communicating the right message and setting behavior standards? Has the firm established an environment that supports the desired culture, including clear accountability and governance? Is transparency and escalation encouraged? Does the firm provide the right motivation and incentives? 

  • Integrating culture into supervisory frameworks (pages 14-16). Because culture is relevant to risk appetite and the potential consequences of poor culture or related misconduct so significant, many supervisors globally are experimenting with ways to assess culture, though they are at different stages in this experimentation. Some are developing new, explicit efforts to assess culture, while others are integrating observations about culture into their regular supervisory work. While there is a focus on holding banks and their leaders accountable, most supervisors understand the need for caution. They are focused on using these assessments in engaging bank leaders in discussion of possible issues rather than on enforcement.   

  • Instituting industry-wide initiatives (pages 16-17). Some cultural problems have been described as endemic to the industry, not just individual institutions.  As a result, broader industry responses are also being considered. Participants suggested any such efforts, including those of the Banking Standards Review Council in the UK, should focus on issues than cannot be addressed by individual institutions, while avoiding overlap with regulation.  

  • Defining success (pages 17-18). Culture change takes time. Outcomes of cultural transformation efforts may be difficult to measure in the short-term. Participants say it is important to define success, since mistakes and misconduct will continue even as broader culture change initiatives may be effective.