Banks need new culture
Remuneration structures linked to short-term performance have createdincentives for dishonesty and must be changed
There has been a lot of focus recently on a long and growing list of scandalsinvolving some of the biggest global banks. Barclays has been in the spotlightfor manipulating the London inter-bank offered rate and has been fined $460million by regulators in the United States and United Kingdom.
But Barclays is not alone, the list of other banks involved includes some ofthe best-known global banks, from Citigroup, JPMorgan Chase, and Deutsche Bankto HSBC, RBS and UBS.
In addition, JPMorgan Chase announced a fresh assessment of losses in thetrading positions of its London-based unit, which have now been revised upwardto $5.8 billion. Meanwhile, HSBC faces the threat of being fined up to $1billion by the US authorities for allegations of laundering money and financingterrorists, and Standard Chartered has been accused by the US financial watchdogof violating anti-money laundering rules.
It is not surprising that the banking sector, already under attack in themidst of the global financial crisis, has been hit by a new wave of criticism.But most worryingly, trust and confidence in the financial system have reached arecord low.
Although there are many reasons why the banking sector collectively hasperpetrated so many misdeeds and broken ethical norms, greed is one of the rootcauses. Therefore, to fix the banking sector requires reshaping its corporateculture.
The values of an organization are shaped by its corporate culture. Of course,any business aimed at maximizing shareholders' values must strive to make aprofit, but the profit-making activities must be legal and morally acceptable.Experience shows that misbehavior in the banking sector often stems from thebelief that only bonuses can reward people. Remuneration structures, oftenlinked to short-term performance, have created incentives for dishonesty.
But as Greg Smith, who resigned as a Goldman Sachs executive director andhead of the company's US equity derivatives business, wrote in an article, "WhyI am leaving Goldman Sachs": "people who care only about making money will notsustain this firm – or the trust of its clients – for very much longer".
但是高盛投资公司的前执行董事和该公司美国股票衍生品业务的前掌门人 Greg Smith在题为《我为什么离开高盛集团》的文章中写道：“只关心赚钱的人是不会长时间维持这家公司或是客户的信任的。”
Leadership plays an important role in shaping the culture of a bank. Clearly,the "tone at the top" is a key factor influencing how a bank operates. Moreover,qualified leaders motivate subordinates to work for the good of a bank, not justfor themselves. In particular, executives of a bank should have a specialresponsibility to create an environment where people cannot do bad things. AsBob Diamond, Barclays' former chief executive, once declared, "the evidence ofculture is how people behave when no one is watching".
Financial regulatory reforms will help banks change their culture. Imposinghigher standards of capital adequacy and liquidity management can lower leverageratios and increase loss-absorbing capabilities, thus reducing the appetite fortaking risks and limiting profits in the banking system.
The scandals of the past months may have been a watershed in policymakers'attitudes toward regulating banking services in many countries. From the VolckerRule in the US, which prohibits proprietary trading business in banks, to theVickers Recommendations in the UK, which separate banks' retail business fromtheir investment business, restrictive measures could force banks to be moretransparent and change the incentives driving their behavior. It is importantthat banks stick to their core mission of supporting the real economy.
Regulators in Western countries should learn from their mistakes. TheFinancial Service Authority in the United Kingdom has reportedly tracked theprice-rigging back to 2005. In April 2008, a Barclay's employee told an analystat the Federal Reserve Bank of New York that the UK bank was deliberatelymanipulating LIBOR, which was then briefed to the Bank of England and theBritish Bankers' Association. But the regulators did not respond quickly andthus missed the opportunity to reform the system.
The effects of these scandals will stretch far beyond developed countries.Chinese banks and regulators must seriously consider how to further promote ahealthy corporate culture and enhance the sector's internal controlmechanisms.
Usually, financial crises occur when what was thought to be low risk turnsout to be very high risk. For this reason, the banking sector requires specialregulation, because its failures have very big economic, political and socialfallouts. In this respect, the nation's top bankers must be accountable and ofhigh integrity, no matter how intensified the competition becomes.
It is understandable that the recent scandals have enraged the public.Nevertheless, it is useless to direct perpetual "blame and shame" at the banks.Instead, the focus should be on how to inspire and encourage banks to fulfilltheir responsibilities and redefine their culture.
The banking business involves risks and its corporate culture cannot bemanaged by outside regulation alone. It must be cultivated internally step bystep.
The author is chairman of the Board of Directors of Bank ofChina.