NY Fed chief urges progress on banking culture

William Dudley

Federal Reserve Bank of New York president and CEO William Dudley has again called for firms to address their culture, and has urged them to clarify their purpose, measure how they are doing and consider incentives.

Corporate culture, specifically with regard to compliance, has become a focus for regulators in recent years following the financial crisis and a range of high-profile scandals and enforcements involving major financial institutions.

In a speech at a Banking Standards Board (BSB) event in London on Tuesday, Dudley said culture is important to both the private and public sectors and will need continued work. ‘The public sector must continue to shine a spotlight on the issue, and the industry must continue to demonstrate that it is taking responsibility for its culture,’ he said. ‘And culture cannot be a subject that receives attention only because bad conduct has occurred in the recent past.’

Having a good culture can have a range of benefits, including fewer incidents of misconduct ‒ leading to lower internal monitoring costs ‒ employees speaking up so problems get early attention and firms having greater credibility with prosecutors and regulators, he told attendees.


LONG-TERM VIEW
A key to improving culture within the financial services industry is defining and clarifying purpose, ‘because clear goals are necessary if one is to assess performance,’ Dudley said. ‘I believe the question, What are you for? can be a litmus test for a firm confronted with challenges. If you cannot answer the question, What are you for?, or if your answers do not make sense in light of your business, then it is time to re-examine your purpose.’

The statement of purpose for any bank should emphasize sustainable success, not short-term profit, because of the many roles banks play in the economy that require long-term commitment, he said. These include acting as intermediaries between savers and borrowers, providing infrastructure, supporting financial markets and acting as wealth custodians.

Having established their purpose, firms need to address measurements of how they are performing, although calculating particular metrics with regard to culture is less important than the goals of such measurement, Dudley stated. The first goal is to assess how a firm is doing compared with what it has set out to do ‒ in other words, is it fulfilling its purpose? ‒ the second is to assess how the firm compares with its peers, he said. ‘In both ways, measurement provides critical benchmarking, without which firms and the industry cannot assess whether they are making progress,’ he added.

He also pointed to the recently published findings of a BSB industry survey on culture. Of particular note, he said, is that almost 30 percent of respondents report that they would be worried about negative consequences if they raised concerns at work: ‘That shows, perhaps more than any other finding, that there is still a long way to go in creating a culture for long-term success in banking.’

In addition, he noted that roughly one quarter of employees do not affirmatively agree that their organization puts customers at the center of business decisions. ‘That is also of concern if we want an industry that is sustainable over the long term,’ he added.

Dudley argued that firms will need to focus on incentives – specifically, compensation and promotion – to improve such results. ‘As I have argued before, incentives shape behavior and behavior drives culture,’ he said. ‘If you want a culture that will support your long-term business strategy, you need to align incentives with the behavior that will sustain your business over the long haul.’

Bad incentives were a key contributing factor in the financial crisis, he said, quoting the Financial Crisis Inquiry Commission as concluding: ‘Compensation systems ‒ designed in an environment of cheap money, intense competition and light regulation ‒ too often rewarded the quick deal, the short-term gain, without proper consideration of long-term consequences.’