Pub. 5 2015 Issue 4

I T BEGAN SEVEN YEARS AGO WITH THE FINANCIAL CRISIS, WHICH WAS CHIEFLY BLAMED ON LARGE GLOBAL BANKS. NEXT, A GROUP OF GLOBAL banks were accused of rigging the London Interbank Offered Rate (LIBOR)—a crucial interest rate that impacts trillions of dollars in financial transactions—followed by the revela- tion that other banks had fixed foreign exchange markets. Not only are big banks getting a nonstop black eye in the press, but regu- lators are questioning the onslaught of bad actors in the industry, and coming to grips with the fact that regulations alone do not make a safer, sounder banking system. Now, the question coming from regulators is increasingly this: Is there something wrong with the culture of banks? This is mostly a question for the big- gest global banks, which sell complex financial products and have to manage hundreds of thousands of employees in multiple countries, but it’s also a ques- tion that is coming up for smaller and regional banks as well, particularly if they have been the subject of enforce- ment actions. While regulators give speeches about the role of corporate culture in the safety and soundness of the banking industry, the biggest banks, including JPMorgan Chase & Co., Barclays and Goldman Sachs, have published lengthy reports telling the world how they are working to instill their principles and values across their organizations. It’s one thing to tout your values, and another all together for your employees to actually practice them. So how do you know what your culture is, particu- larly as an independent member of a bank’s board? Banks are hiring consultants to do culture studies of their institutions, and sending the results to the board. They are incorporating concerns about risk management into hiring decisions and performance reviews and offer- ing case studies to guide employees through ethical decision-making. Board members increasingly are expected to oversee their bank’s risk management, and often that comes with questions about the institution’s overall corporate culture and values. Your employees’ at- titudes toward risk and compliance with regulations are just one aspect of the company’s overall corporate culture. But what is culture? Most descrip- tions sound similar: It’s the sum of the behaviors of people in your organiza- tion over time. If your organization promotes ethical decision-making but the employees are all robbing the bank, then clearly there is something wrong with your culture. Most of the time, culture in a midsized or large institution can be hard to see even for members of senior management, let alone the independent members of the board. The “tone at the top” may be important for senior management to set, but if middle managers aren’t buying it and are pursuing their own varied agendas, then employees down the line will be impacted by that. Every employee is battling competing demands to meet deadlines, reach internal goals and please their managers. The corporate policy statement is sometimes the last thing on anyone’s mind. There is little argument that regu- lators are increasingly focused on questions of bank culture. William Dudley, president of the Federal Reserve Bank of New York, used the word more than 40 times in a speech in October 2014. Thomas Curry, the Comptroller of the Currency, stressed in a speech last November that “laws and regula- tions only take us so far,” and that supervision and the “health of an orga- nization’s culture” play a critical role in the safety and soundness of an institu- tion. “We are asking [banks] to be a lot more specific in articulating their values,’’ says Molly Scherf, an OCC deputy comptroller for large banks, in an interview. The LIBOR manipulations and other revelations are leading the OCC and other regulators to ask these questions. “I would not say we’re auto- matically jumping to the conclusion that these banks have a bad culture as much as it is a point we want to clarify.” The focus on corporate culture, which follows the enactment of a host of new regulations and laws following the financial crisis, is global in scale. In an early sign of international think- ing that may eventually translate into U.S. policy, the Basel Committee on The financial crisis combined with embarrassing LIBOR and foreign exchange scandals have led to intense scrutiny of the banking industry’s culture, and smaller institutions haven’t escaped attention. BY NAOMI SNYDER DO BANKS HAVEA CULTURE PROBLEM? n Culture — continued on page 14 13 FALL 2015