How do banks earn back trust?
“Today, the focus has to be on culture and conduct in banking”. That was the message from G30 Executive Director Dr Stuart Mackintosh, who was speaking at a recent ICAS event on ethics in the banking sector.
Stuart spoke of the financial disaster of 2008/2009, and how the landscape of banking regulation has changed since then.
He compared Nicholas Copernicus' discovery that the Earth orbits the sun and the following scientific revolution, to the chaos of the financial crisis of 2008 and the resulting regulatory changes.
It was Copernicus who defied the backwards and nonsensical way of thinking which had been the norm for so long, causing a massive step forward in the way we understand the solar system and our place in it. Similarly, it was the financial turmoil seven years ago that caused a radical shift against the practices and norms within banking which led the world to that point.
He said: "In 2009 and 2010 the regulators made a big leap in narrative. They rejected the previous worldview and adopted a macro-credential narrative in which the stability of the system as a whole, was as important as the stability of those individual firms."
It's one thing to change regulations, but it's another thing to change the way in which banks do business.
Speaking of how self-regulation and the obscuring and morphing of risks were common practice pre 2008, and how too many connections existed between the world's largest banks, Stuart described how the crisis shook people awake and put regulation back into the hands of central banks.
One step on a larger journey
Since then there has been positive reform of banking regulations, but this is only one step on a much larger journey for the banks.
"It's one thing to change regulations, but it's another thing to change the way in which banks do business,” said Stuart.
"Today the focus has to be on culture and conduct in banking. Before the crisis, boards were more focused on performance than culture. It was dismissed as being too soft, not worth getting your hands around."
This, he says, was an issue of much debate within the Group of 30 (G30), an international body of leading financiers and academics. In the end it was decided that in order to restore trust in banking there must be visible and continuing cultural reforms within the sector.
He said: "Banks are viewed extremely poorly at the moment. If you take one measure, for instance the Harris reputational survey in the United States, it ranks the top 100 companies in the US in descending order of trustworthiness. Last year's ranking put Goldman Sachs at 99. and most major American banks came very low as well.”
Boards must 'own the culture'
In Stuart’s view it is up to the board to take charge of culture, change it, implement and survey it. "Every board meeting should be discussing aspects of culture,”
“Senior management has to own it because on a daily basis they are the expression of the firm. They need to walk the walk and talk the talk. They need to express the culture in everything they do. Not episodically, every day. Better leaders do that already.”
When it comes to appraisal he said there has to be a balanced score card approach. A 50/50 split between strict performance management of normal goals and assessment of the cultural fit of that individual.
“That means if you have a star trader who delivers very big profits but has done so by exceeding his risk limits and other actions, which are unacceptable on a cultural conduct basis, perhaps the person should be penalised, if it's very serious the person should be fired. This needs to reinforce the cultural norm.”
“These cultural changes may not be visible for some time, as he stressed that this kind of reform is “a journey, not a destination”
He went on to praise the ICAS Power of One ethics initiative saying “[The power of one] is very important and is something we do talk about in our work, which is the ability of individuals to raise the issue to say wait a minute, this is not acceptable.”