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While lenders have taken actions to boost capital, reduce leverage and strengthen liquidity, many banks have not shown the same commitment to adjusting their core culture, including their risk culture, to address key weaknesses.
I have long argued that there needs to be a vigorous public discussion about cultural changes in financial institutions and now, finally, this is starting to happen. I expect that the Financial Stability Board, as well as national regulatory and supervisory authorities on both sides of the Atlantic, are likely to insist on reforms to instill better behavior at banks.
Today, however, too many people at the helm of many banks have still not adequately recognized that a deficiency or failure of culture, including reputational risks, can be as destabilizing – or more so – to an institution than problems of capital or liquidity.
Culture is about behavior. It is about how individuals and groups act even when they are not being observed. A good culture underpins and is reflected by the actions of a company’s employees. The cultural tone of a firm is set by the actions of the chief executive, his or her top management colleagues and the board of directors, while being reflected in the actions taken daily by middle management and right down to the teller level.
New values-driven cultural frameworks are required at many banks. These need to include, at a minimum, compensation incentives and disincentives that promote integrity-led employee behavior. There also need to be more explicit guidelines with regard to managing “know-your-customer” regulations and guarding against all forms of illicit financial flows.
The reforms should embrace ways to set the institution’s risk appetite so that it is clear to all employees that profit maximization needs to be consistently viewed within a context that places the interests of customers and the reputation of the firm in top positions.