G30 - Banking Conduct and Culture, A Permanent Mindset Change

So. Good afternoon welcome to this special Road Center for international economics, and Finance events. The. Name the benefactor, behind the road Center volume roads Brown class of 57, is also one of the founding members of the group of 30 now. For the students here you may have heard of the g20 you, may have heard of the g7, but, you might not have heard so much about the g30, well, they're just as important, but they're rather different, rather. Than the other G's being composed of countries, this, D is composed of individuals, it's. A group that's drawn from finance government, academia formed in 1978. To, deepen understanding of. Issues, relating, to global, finance and public policy, and the intersection, there of the. People who joined the g13, are people, such as Paul Volcker jean-claude. Trichet, current. Policy makers such as Mark Carney, our, Nestor's the deal on the, panel that is here today that I will shortly introduce. They. Don't get as much press as the g20, or the g7, but, they have been instrumental in pushing reforms, in banking currently. Pensions, with Adair Turner and in, general crisis, management, in financial. Affairs the. Report that we're going to talk about today, came out in November and it's, an incredibly, important, document, because it perhaps, tackles. One, of the most difficult, areas of banking, reform ten years after the crisis, the, area of culture, that is. Doing, the right thing and surviving. And in an area we're, doing the right thing as we see time and time again it's. Very difficult, to do governor where the incentives are structured, so the bottom line is how do you engineer, a better more responsible financial, culture, both within institutions. And across institutions. And not as the tasks that, the committee that wrote the report set in themselves to get, us started I'd, like to ask bill rose to give us 10 to 15 minutes on the report to say what he wants to say about and then, we will turn over to the gentleman on the end Brandon, greeley from the Financial, Times who will chair a panel, discussion, and then, we will bring everyone else into the conversation. Our, panelists, along with bill are the others authors of the report Stuart, McIntosh, who, is in the middle executive. Director of the g30 neckla. Pan is Canadian, banking banker, and banking regulator, as chair of the Canadian, public Accountability Board which regulates, public.

Companies And Elizabeth, sings on is the part a partner Oliver Wyman's Financial Services Group and she, leads their work on financial institutions. In North America, to understand, measure, evaluate. And refine their, culture, and conduct, which, seems to be the heart of the affair so without further ado welcome, back to Brownville please. Tell us what we need to know yeah thank. You very much mark, I must say that I am so. Happy that mark agreed to take this role on to run the, road center here, our Watson and. To. Me it that, has, made a big change in, what, this group is doing I also want to thank my distinguished. Panelists, here, all. Of whom you, know worked, with. Me on this report, on culture, and and, conduct, and. I'd, like to to. Start off with just saying that when, I left Brown, I, needed. A job and I, ended up with, Citibank, and. One. Of the things that, were beaten in to me and to all trainees. At that point in time is, something. That unfortunately I think has been forgotten by, most. Financial, institutions, banks included, is that. First of all the. Bank's reputation. And the financial. Institutions reputation. Was key, you. Always told that's what you had to protect and, it's. Always easy, to. To. Build up, one's. Reputation, in the best of times but. When. You do it you, have to be very careful you don't lose it and we've. Seen it which I'll get into very briefly a string of institutions. That have, have lost it and, so. Protecting. The bank's reputation, was key as I said second of all was. To. Deal with your your client, to your customers, in an honest straightforward, way, and the, third thing was that you have to be part of your community both. The institution, in which you're working for as well as you as an individual, have to be part of the community and I, think all three of those unfortunately. We're lost. Over, the last few decades in the financial, area and this came to. Four with, a great with. A Great Recession and. So. This, is what we're going to talk about here today the. Group. Of 30, has been focused, on this issue since. 2011. Coming. Out of the Great Recession. To. Figure out what went wrong and, we issued our first report in 2012. Which. Was a report, on on governance, structures, you know talking, about what the boards were doing or in this case not doing and then. In 2013.

We. Calls for a new paradigm. Between financial, institutions and, regulators. And supervisors. What, I mean by regulators, and supervisors, I'm talking about the Federal Reserve System and it's in, this country the FDIC, controller the currency in, the case of the UK would be the Bank of England I could just run through it but that's what we were talking about and, finally. We turn to the subject really, at hand here which is conduct. And culture making, a call for sustained, reform, and growth because we felt that at, the heart of all these problems was. A lack of culture, and a. Lack of conduct, by the financial, institutions. Which came, to force so strongly in the great recession. At. The time we did this report in 2015. We. Decided. That we would follow up to see if the recommendations. We made were being followed both. By the individual, financial. Institutions, as well frankly, as the regulator's and supervisors. And. That's, what I really want to address, today. And, this. Final report was published in. November 2018. The. People on this panel, were. All involved. In that very, deeply. And. I would say divided, into three parts first, a, comment on repairing trust where are we now because I think it's fair to say that, the. Public lost, trust in the, financial system and. In the banking system almost. Worldwide, but, particularly, I would say the case of the United States Europe but I would say really worldwide. Second. Evidence, of progress. There is some good news but. I don't think it's a time for complacency and, we, still have a lot of work ahead as I. Mentioned with and we'll give, specific, examples of the continuing, scandals, we see coming up third. Is the ongoing shift, in culture and conduct, in the sense it's, got to be part of the, bank's mindset, and the practice, of. Everyone, involved in the institution, so, first of all repairing, trust where the banks today. The. Industry standing, among voters and the, public remains in. Really low order I would say disrepair, in fact the, Edelman, 2018. Trust Barometer which is prepared annually, for the World, Economic Forum, shows, that only 54%. Of the general public. That had been talked. To and for this particular report had. Trust in financial, services form I mean that's a pretty sad. Statistic. Which, is this is who you're dealing with where you keep your money, I. Need. 10 years on from the global financial crisis. It remains clear that a great deal needs, to be done to repair confidence. In financial. Institutions, and regain trust and. We we. Talk about recent. Scandals, that we read about in the paper and have, for the last couple, years almost, every day. One. Is of course the. One probably read, most in the United States because it's an American bank as Wells Fargo, and I, think this is a perfect example and. Demonstration. Of what happens when you have in incorrect. Incentives. For. The. People, working in the institution. To. Achieve. What they need to do in their work also. It's an example of what happens when you have a board who, doesn't understand. What's going on in the, institution, or in some cases perhaps doesn't, care, and. The cost of these cultural, failures, today are. Substantial. To. The individual, institution, to the shareholders, and frankly.

To The customers, of that institution. This. Is not just an American phenomenon in, Australia, there. Was a Royal Commission looking. At all over the banks and the banking system and, to a great surprise. Of many Australians, the. Report was pretty negative on, some of the abuses taking. Place in Australia, with, the banking system and, one of the worst cases probably, the worst case of money laundering in the history of the world took. Place with the leading bank in. Denmark. It. The timeskip, bank where. So. Far they've. They've. Discovered. Money. Laundering, up. To the amount of two hundred and fifty billion dollars, mostly, money. Siphoned out, of Russia illegally. In. A money. Laundering scheme. And. I think what's. Happened there is the CEO was fired, the. Chief. Financial officer was fired the, chair of the board was fired and many of the directives, were fired and has now become a major political, issue in, an electoral, campaign, in Denmark I mean this is this is a fallout of something like this and. I'm sure you all have, read about Goldman, Sachs and the IMDB. Scandal, that, that's that took place in Malaysia. And. That. Involves. I don't know five six seven. Hundred billion dollars, of funds, that were that. Were lent under, very bad, circumstances. Illegal, circumstances. Most. Recently in the UK we've had the. Metro Bank and Lloyds. Bank, for. Various reasons of bad. Practices to, come to fore and you're. Probably all reading about the Deutsche Bank. Because. We've talked about most. Recently, their attempted. Merger with. The Commerce Bank but, there you have numerous scandals from money laundering of Russian. Cash to, the LIBOR interest rate scandal, and. Also in Europe as the. Last example I would, mention I and. G which, is one of the largest banks in Holland and. Had a record fine for, a Dutch institution. Of the, equivalent, of 900, million. U.s., dollars, for, money laundering, all. Of these things that I'm mentioning have happened in the last two. Years some of them in. The last few months this. Is just an indicative, list. There are many many others I could go - but, it's cases like this that damage, the. Trust of the, public in. Dealing, with banks and financial institutions. And. So this is again one of the reasons we've gone into this report we. Talk about evidence, of progress, here and I, think we see a number of areas of progress, from. The time we did our last. Report which was 2015. - the one we did in, 2018. And. But. We should, understand. That this is no time for complacency, these. Examples, tell us how much work still needs to be done so. What, is a group of 30 found. Boards. Have upped their game but. Need to continue, to focus on conduct, and culture and embed it into institutions. And. It, all starts, at the board through the CEO. Through. Middle management down to the teller level, and it's. Important, that it. Starts at the board where culture, and conduct, are key and that boards. Ought to be looking at that as. One. Of their prime duties. And. I. Think that one, of the things that makes us feel somewhat, better is that. Most. Boards are now using culture, and conduct, dashboards, to measure tactics. You. Know in place to, address the concerns I've mentioned, and we. Recommend, that all banks create a dedicated, board level committee to, monitor conduct, in culture and we, found about one third of the banks that we monitor. Have. In fact. Set. Aside a separate, committee to look at culture and conduct. And. Whether. A committee. Is is. Formed. Or they just discuss it at the board in general, I think, it's very very important, that they're in there and we're. Also recommending, that the board members kick the tires that they actually go out and see what's going on in the branches, they, know what.

Their Institution. Where they're on the board is doing and as, I mentioned all of this has to start at the top and. As. I said go right through the teller level and it, has to start at the beginning when it, an employee, starts. Working at an institution, but it's not good enough just have an indoctrination, program it must be ongoing and, that's, why we talk about these dashboards. And. The. Training has, to be, from. The beginning right through the time the, employee no matter what the level and we're, talking up to senior management and even boards need to have this training on a conic on a constant, and consistent basis. And. One. Of the areas is I think. It's very very important, is that, there are tools and metrics. That you can judge all of this to, be happening and what we have to do is to encourage and reward good. Actions. For. Instance and protect, whistleblowers. And. In other words make. It plain that if somebody in an institution, sees that their colleagues are doing something wrong they raise their hand and they're going to be rewarded for it and not, pushed out of the institution, which we see too, often. And. How. Do you how do you hand the loads that we call a bad apples first, of all, if. It's not a serious, offence you take it out in their compensation their, bonuses, if it's a serious offense you fire them and they, have to know that this is part of it you can't excuse, it and we've, had too many cases that came up particularly. Since the, at. The time of the Great Recession where, these were just overlooked, and employees. Thought, that they could get, away with it with almost anything right up to almost the top levels and so. We're talking about strengthening, three lines of defense the. First line is, a business units themselves they have to own the culture and conduct, the, second line of the risk managers, who, must ensure compliance, with rules norms, of behavior in conduct and the, third line of the auditors, who, must review the, process and its effectiveness. Supervisors. Are and regulators, are very important, but they can't make a culture, in an institution, the, institution itself, has to have a culture of its history and practices. But what they can do is monitor, it and I, think there was a failure along the line of the institution's, but also of the regulators and supervisors. In. Many in, many countries including here in the States and so. I think, that what. Might have been acceptable, yesterday, should not be acceptable, today and I, think permanent. Change is starting to resonate in this, area and we've. Been pressing this case globally. Stewart. McIntosh, and I took, a trip to China. At. The middle of December. Last year most. People don't realize but the largest banking, system and largest, financial system, in the world is no longer in the United States, or Europe it's in China and, most people don't understand, that and, the.

People's Bank of China which is a central bank of China and the present, head, of that he, Gong. Called. In the head of every major, Chinese. Bank and. The, heads of many of the foreign banks operating. In China to. Hear us talk about this report and it, was made very plain to them that they were going to be judged on this by. The regulator's in China principally, the People's Bank in China which is probably, those of you who follow China the, most efficient, institution, in. That country, and so. What. We're seeing is that the regulators, are, taking. This seriously and, the Basel. Committee which is, a group that meets monthly which the head of all of the major central, banks in the world has. Invited, us to come make a presentation, to them because. They feel that this report, is a, template. For, what financial institutions. Should be doing worldwide and also what regulators, should, be doing worldwide. One. Of my concerns and the concerns of, our group here is that now we've passed in to let's, face it's been over ten years since the Great Recession and, the tendency. Is to loosen some. Of the controls that were put on during. The Great Recession and, in doing so I. Think the. Authorities, have to be very careful, that we, don't get back into the same mindset, that, we had prior to the Great Recession and this, is why this report I think is is so, important. So I think there's a lot of work ahead for all of us in here but, what we need is permanent. Change, in the mindset not. Only to embed the. Culture and conduct, requirements. Here but to monitor, them and make sure people that don't adhere to them are in some ways. Castigated. Whether it be salary, bonuses, or in the case of. Things. That are very serious actually, fired, and released so. That. Is basically where. This report comes out progress. Yes but, we're a long ways from, regaining, the trust of the community and in, in many cases, the trust of our own employees in, doing this so, I said that now I will, turn this over to my colleagues, who work so hard on this report, I don't know who, we have next on the panel Brendan may I'm gonna make people answer questions, that's. My culture um so, I I, read, this report and I was thinking about cultures that I'm familiar with. Newsroom, culture is basically, comes down to you're not special and you don't know anything. And. That culture is incredibly, strong and it, has a purpose which is that it, prevents, us from getting, over levered on a single fact right. You probably don't know anything you got to go check it again we, value what we call shoe leather the uncomfortable. Work of going out in the world and talking to people we valued or stopping you, get applause in a newsroom if you do that. And. And those obviously, have very clear, consequences, on the quality of the news that we produce so their culture is tied to what it is the organization does the. Other culture that I thought about is the military which. Has a culture. Of safety, surprisingly. The military has a culture of making sure that people don't get killed and, I think of you know my own father who spent the first half of his life flying, jets at. The speed of sound and the, second, half of his life making sure that nobody in the family was allowed to drive a car faster than 55 miles an hour. So. Maybe. We'll start with with Elizabeth what are other. Cultures, that you have looked to as you, work with banking where you can say that, is a successful.

Culture. Here. Are things that you can adapt to yours. A. Couple. Of things to that. I. Think what. We don't want to do is talk about good or bad cultures, what is most important, is having the, right culture. For each organization, so. We work with all sorts of finance institutions and quite frankly they all have very different cultures, what's. Important, is to make sure that there's alignment with, your corporate, values, your, goals your strategy, and then the culture, within the organization, and where, a lot of organizations. Get into trouble, is where they have misalignments. And I'll give you some one. Very easy example but brings us into perspective, one. Institutions. That we've, been working with their, key, mandate. Their thing that they most hold, dear to them is customer. Service above. And beyond anything else we need customer. Service but. Their. Employees. Who work the client. Call line you know when you have a question you call in to the customer. Service line those, employees, are managed, by. Number. Of calls in a day so. If you're metric, that determines, your success is number of calls in a day what, do you want to do you, want to hang up as quickly as possible to, answer the next call now, perhaps. Those two things are not out of alignment perhaps, the client requests can be answered quickly and easily and they're, happy, you did it you hung up and the client is very happy but what happens, when the clients request is difficult, to complex. Now suddenly that employee, is is, in a conflict, between, the. The values, of firm holds dear which is customer, service you. Know no matter what and their, own performance, management, and what is expected of them so. What we talk with our clients, about is it's really about having alignment. And clarity, around these. Things and and, not put employees, in that conflict, where they're having to to, balance out various, expectations. So. That's the long, answer but in terms of industries, look we've. Seen you talked about military, I think military has done a great, job in particular around developing. Leaders, I think the reason, why the military is done so well is they, spend a lot of time around developing, leaders, the. Aviation. Industry is, another, one you know current, situation. Notwithstanding. Has. Generally, done very very good, Pharmaceuticals. Is another, industry, oil and gas these, are all industries. That have been very, clear about their priorities and, how they will go out it because it really is a matter of life and death in in most of those cases but. We've also seen other industries, that haven't, done a great job and I think of high tech for, instance right where, you hear all sorts of stories about abusive, behaviors, to their, own employees, to, customers, taking advantage, misusing. Data so. We certainly see both industries, that have done a great job but, also other industries, that that, have conflicts, between the various, things that they're trying to achieve and are not clear, on what is, most important, to them and I think the culture of move fast and break things is a culture, that has failed because what they broke was us so. I think that's we're really seeing a cultural moment where they are beginning to dimly recognize, in, the tech industry that, they can't they need to operate the, way they do in the military or the pharmaceutical, companies where you just can't get. It wrong or be, clear on the trade-offs right if your culture is innovation, move, fast you know break things or you have a culture of cost management or, you have a culture of customer service. Or you have a culture of profitability, and revenue you, have to recognize that. They'll be trade-offs that, are needed but, senior, leadership has to be very, clear, on what trade-offs. Are willing to make and which ones are not acceptable, makes, a business, just. A couple of other elements of this Brendan to them when, you think of the military or. Or. Some. Of these other things it's not just what their culture, is but it's how they go about reinforcing. The culture you, know so the banking. Traditionally. Doesn't. Like to look very much upside its own doors at what other people have done it sort of like best invented, here right well so, think about the military we can either, like or not like their culture but they actually spend a huge amount of time figuring out how and in the news room I think figuring out how to reinforce, that how, do how to get it communicated right up and down the line some, of the things that Bill's talking about that we found that weren't there in banking, so there's a whole bunch of the process, stuff and they spend a lot of time with leadership, tell.

With, Leadership understanding. How do we enforce that culture and, I remember having a different. Life having, a fascinating, interview with. A general. In the US, force in El Paso Texas. About. The cultural, challenges, the US military, faced when they moved from Wars to peacekeeping. Because. There's a huge about a difference, in culture if you're actually telling, a nineteen-year-old you're you're going in to fight somebody versus. You're going in to try to do. Some element of peacekeeping, so there's a huge lesson there from a bunch of other organizations, about when you're into a new business when, you're into a new area how, do you try to make sure that the culture that you actually want is actually working in your new kind of area so there's a bunch of process, that, kind, of kind, of lessons I think are hugely important from some of these other industries. Something. That that, Nick. Has picked up the first thing about Elizabeth. It's, definitely, the case that we recognize. That cultures, are different and, unique to the institutions, however when you when we looked in 2015. And in the process of the multiple, reports we've done the. Mission, statements, of the different banks they, were very similar, because. And because we expect, that bankers, are you, know honest, trustworthy. Accountable. And so on right so on the one hand they're unique but actually, we expect, our bankers. To act in a particular way that, cuts across institutions. So. That the norms, are, transferable. In many ways and and. When. When those norms get distorted and broken, then you have troubles and to, follow. Up on what Nick, was saying the Italy we, could really see the difference, when, we were talking to different bankers, leading bankers between those who those, leaders, who embodied. It believed. It breathed, it walked, it every day and. Those, who were sent down it's just a regulatory, burden, you, know stop bothering, me about culture, you know there's a complete, difference and you could just almost, instantly, tell whether that firm was, taking it seriously or not were, the people inside, the leadership, living. It and you can judge, that quite quickly actually, you know we're talking about banking but one of the things that makes me wonder whether what, we're really talking about is a problem, in the way that we train capitalists, I mean. It's it's it starts as you're getting your MBA, I mean does there need to be a stronger focus before they even enter a bank in the things that they are required to read and the ethics courses that they are required to take before they're allowed to touch somebody else's money that's a great point it was something that the Federal Reserve Board of New York was grappling with me they had a series of discussions with leading.

MBA Course. Leaders, you know in Princeton, elsewhere, and they talked to the parathas and they said why. Are you not teaching ethics. To. Your students early and many, of them said that's not our job right, but the response to that is new hold on a second, your students, are going to leave their school and run. The largest firms in the country why. Are you saying you have no responsibility. For telling, them what is ethically, acceptable or, not if they were in law school in the soup school they. Would be required to take a course in ethics and if they fail that course in ethics they wouldn't be allowed to graduate, so, there is that is a very important, point well, you don't. There's. This interplay that you've, all talked about between incentives. And culture you, can't have you. Need both in order to make, it work. There's. A lot of the report about. Incentives within a bank you know that you talked about about customer. Service representatives, who need to be scored on something different ultimately. The people who run the bank are scored, on. Return. On equity and, so. Do. We need to prepare shareholders. For. Their ethical. And cultural burden. As well because ultimately if, you are doing culture right within a bank you are making your shareholders less, money so. Do shareholders, need to be prepared to accept them lower return hmm, so there's a short term long term in. A nun's room around this one big time and. In fact one of the interesting things in report both in this one and the previous ones bill was the stuff above what what uh what's the role for institutional, investors you know if actually care about what the culture is in these organizations, and if you go to ESG, the, sustainability, part of ESG. Environmental, sustainable. Stuff the, sustainability, part is, about, an, organization. That actually it's going to survive and last and prosper, over a long kind of time period and if you think about well, what is one of the longer-term potential, advantages, of a bank visa. Via Google, or a Facebook, or an Allie pay or any other kind, of stuff it may well be, excellent. Execution, on a real customer, service, culture because. They're. Not if they can have. A proposition out there that they're not actually going to be subject. To the same kind of problems of some of these other organizations that's. A comparative, advantage that's, worth real money so. So. I think in the, there's, a there may be a short-term benefit, to sort of skirting the rules so to speak and having, a culture that suboptimal, but. I think leaders of these organizations are, needing you realizing, that there's a huge. Comparative, advantage to doing what this report talks about really really well and some, people in the investment community are actually now starting to include that in how they look, at where they put their money, but. Yeah maybe there's some folks a need for shareholders, to accept that there's some kind of short term yet, but, I'm not even so sure that there at that short term it has to be all that at that high you know that there are lots of examples of institutions.

That Actually benefit. Hugely by really, really seriously, day in day of doing a fantastic job with customers I think it's a with without a doubt that's very important, because then. When. You talk to people or leaders in the industry and some regulators they'll point out to you that institutions. That have a good culture and conduct in live at day by day, earn. The, trust of their customers, and clients so these customers, and clients prefer to deal with an institution, that does the right thing that as, a culture and conduct they don't really want to deal with some. Institution, who. They read about the newspaper every day that has a scandal, so there's a bottom-line effect. Here without. A doubt I think, for an institution, having the the. Proper culture and conduct and maintaining, it and. I think that more, and more what. We saw from when we started in 2011. Until. We did this report is that, the senior management, of financial, institutions, banks and the boards are starting, to see that and. This has been one of the problems I think as. An. Example here in the United States it Wells and it's obviously, affected, their, bottom line so, I think that, if you want to just take a look at the bottom line here having. Good culture and content living it day by day you, earn the trust of your of your customers, and. I, think that pays off in in. The long run one of the comments that you may bring, you brought up and then we had, we. Had several comments, here is I, think it's very important, that it mmm at this level here, when we're talking here at a university, that. When. You are studying. Economics. Or. What, your whatever you're studying but particularly we're talking about economics, here I think, it's very important, that there be core courses, and ethics because. So often, if. I look back over the years and, without. Mentioning particular business, schools you. Would look at their curriculum, and there was nothing on ethics at all that, was taught and I, think it should start right at this level so, when someone enters into an institution. They. Don't want to be part of an institution that doesn't have a good ethical. Background. Here. And one. Thing that none of us have mentioned but I would just put out as. Of during, the course of all, these reports, we're talking about we've interviewed, the head of every major bank. In the world as well. As the heads of all a major regulatory, agencies, in the world and so. I think, we've. Taken this message, and they. Say they believe in. What we're doing and. Now, we'll just have to see over time if, that is if that is a case and a, lot of times you only know when you're tested, but, certainly I, think we saw enough of the fallout in the Great Recession that. We know we have to make a change and I think this is important, in the, session we had in China because. There, there. Wasn't an infinite emphasis, before on culture, and conduct among the Chinese banking, system and financial, system and we've seen all the fallout of all the scandals, in China, but. I think the authorities. Over there now understand, that. They have to demonstrate to, the public then, they can be relied upon because. If not you're. Gonna have massive money amounts, of money moving out of China and that could have a big effect on the Chinese economy which, is already in trouble. Thing. Or it's much harder to track is employee. Motivation, right, there's a wear, and tear on people. Doesn't. Feel good and. As humans, the vast majority, of us walk to the monk organizations. That feel good to us right that we're proud of but aligned with our own ethics, and values and. And, there's a toxic. Environment, why is you. Lose productivity right, you're not as innovative, you're not as caring, you're not as motivated you, don't work as hard but. When you think of these very large institutions. With the tens of thousands, of employees that they have in, magic, each of those individuals, is even 10% less, productive, or 15%, less productive, there's, a massive, cost but, it's hard to quantify right, it's invisible, so we don't pay attention to, that but, I think that's where the industry will lose out is if, we don't attract, the best and brightest, and we don't keep them motivated and being, excited, to come in to work every day and do, their very best as a financial.

Services Industry, we will lose out right, because it's all about having the best brains and the most creative and innovative people, working. For these organizations this, is you're talking about the famous scene from Mad Men we're donning big you're having a fight Peggy. Says you never say thank you and Don says that's what the money is for. And. I think also it, affects mmm. The, whole point elizabeth is saying if. You don't have proper morale, in the institution. These, employees aren't, going to do the job that they need to do to make the to, make the financial institution, successful, so, I think it all gets down to culture, and conduct also gets, down to the whole question of morale among. Among the staff and employees. Ask about, whether. The actual financial. Structure, of a firm can, have an effect on morale meaning. Can, you be does. Leverage, have an effect on culture, can, you be a highly, levered organization, with great culture that's just completely on top of all those risks or as, you, begin to take bigger risks does. It destroy culture. So. So. So one of the things that's interesting and, one, of the things the UK has done that. People, in the US are not ready for yet. They. Created, the. Group. That surveys. Participating. Banks what's the name of that I understand is both the banking Standards Board which is a voluntary, group that major banks, in the in the UK participate. In they. Came out with their second report. Recently. They. Surveyed, 37,000. People who work in the financial services industry and then they did a number of focus interviews one. Of the fascinating, things Brennan is when you look at some of the results of areas. Where. Culture. And conduct, isn't, where it should be it. Actually doesn't vary. A lot between, certain. Types of businesses it's fascinating, so the, nature of the business so you can think of say a wholesale, investment, banking business as being the one that's the like a to be the morally bird and the one where you know it's all in the Cowboys and what it's likely, to be the bad culture you know that's the well, in fact the. The issues, are often. Very, similar, across. That type of business and a retail business and which is why we've seen a bunch, of the recent problems haven't, been in the whole set businesses they've been in the retail businesses all right and and, so maybe. Maybe, the bridge you, know maybe, leverage, can can lead to a higher risk taking, environment, but, there's organizations that, have been historically high. Risk taking, but, also have had a very cohesive, very. Much. Wanted to protect their reputation kind, of culture and they were there there's and who assisted, some staying their operations, through centuries so. You know I don't think it has to be that way that just because you've got me bridge. You know maybe. Not but I do think that some, some of the evidence we we, gathered when we were talking to the different bank leaders, was, that you, do get I got a sense of bird there might be such, a thing as a Goldilocks, Bank where. The scale is not, too big so. The CEO that, chairman, can, look down into the bank personify. The personify. The culture, about, the board all all understands, the culture all, two or three hundred MDS in the bank unknown, personally. By, the by. The CEO, there. In turn there is interaction, and. And signaling, is clear if something goes badly wrong that person is fired that person supervisor is also fired and and, so I do think there's something about scaled when, you when you're talking about quarter, of a million people it's very hard, to manage your culture, across, different. National, cultural boundaries across different, states, different, regulations. And. Regulatory structures, so III, that's. How I would die say I'd say yes some banks you can get your arms around but. If you're a mu if you're a massive, GC fee perhaps not. Question. About some of these retail, violations, and then I want to open it up to the audience as well which is that when. You look at some of the things that Wells Fargo did, for example or. Even the robo-signing, that have been many, banks were guilty. Of um, I wondered. Would. Somebody have. Instituted. That who'd ever been foreclosed, on themselves. Meaning. Do, banks need diversity. In terms of, backgrounds, in terms of incomes, in terms of people who have a real life experience with, the consequences. Of rotten, organizations. So. If everybody's nodding their head how does that happen do we need do we need it does this start at the NBA level like, how do you fix recruitment, so that you have people from those backgrounds who prevent those violations exactly. I would, just say that I think that. That is extremely important, and one, of the things we emphasize in our report is diversity, because. You're. Dealing with your client base which is a diverse, base and. If. You don't have people that come from that base it's very difficult.

To Maintain a culture in conduct so, I think these are all elements that I think are extremely important, and, I. Think it's fair to say that this, is being realized more and more today. And this is something that really has to come from. The institution, itself the. Regulators and supervisors. Can't tell you what culture and conduct you ought to have you, have to have your own all they can do is monitor it as I said before but, diversity, and that's something we, had not emphasized, in our, conversation. Mm-hmm before, I think is key, it really is key and it used to be thought that if you were a board. Member as a director, sitting on the company HR and Compensation, Committee the main job was to figure out the CEO salary, and that was about it well, that's not true anymore, the main job and probably the more important, job for what we're talking about is to worry about and to ask management, about what are the hiring practices what kind of diversity policies, are we have a house that really working, what's going on at the frontline what is the culture times all, that sort of kind of stuff so there's a huge role for boards for example, in this good I give, a shout out to Gail, Kelly who also was on our team and in the leadership for this report and she, was she stepped down a, little while ago from. Her position of CEO of Westpac, one of the largest banks in Australia, and actually came, out of the review. Quite well the, Australian, banking women but when, she she. Laughs led that organization, for more than 10 years when. She left it almost, 50 percent of managers will women I don't. Think that's the case of most other banks in the world it, has to be a constant. Focus vitaly's, your that day in day idea well, let me let me open it up we've. Got about 10, minutes who has a question. Great. Okay sure. Fascinating. Report and, I applaud, the working, group. Very, much for, putting it together. The. Emphasis, on culture. I particularly. Applaud, as a social scientist, who tries. Pretty. Much as a. Matter. Of my. Own research. Success, to convince, other social, scientists, that culture really matters I, was. Especially interested, in. Nicola. Penn's remark, that bankers, don't like to look outside very, much for their culture and I suppose that's part of what you, all are really trying to get them to do to pay, attention to some outside. Stimuli, I, know, what I end up arguing. Half. Of the time, with. My colleagues, in, advocating. For the. Role of culture, is how. To respond. To the, issue of incentives. And, my colleagues will say look forget about culture, nobody can measure it nobody can change it nobody knows what it is it differs across firms so, forget, about it and look, at incentives, cuz that's researchable, we can actually do, something about that so that's my question what. Are your recommendations is. Just, as an example that quantitative, sales targets, and compensation. For, sales staff should, be disconnected. But, put. Simply 10, a single institution do that the competitive, pressures are just too, great I look.

At Derivatives, markets, you, can tell. Citibank. To disconnect those. Two things to set up the incentives, differently, can, they do it they're always worried, the next quant from, the Sloan School of Management is, going to go to Morgan, Stanley, and start, boosting the, bottom line too, much and if those guys can hire three of those quads it actually begins to make a difference, so, city. Banks board then, has, to worry about the shareholders, I think in a way that's the crux so it, boils down to the. Purpose, of the firm and ten. Culture. Be changed, without, an, industry-wide. Shift in practices. Go. From. The. I want, to pick up something to answer, to your question that Nick said about the necessity. For industry, action. And. Why and why. There's. A difference between the UK and the US and there's an is a bit of a disc but, disappointing. The, industry, in the UK have recognized, that and there and therefore they created this institution, to pursue, analysis. Of how they were doing visa be one another and so it wasn't so it wouldn't, it. Wouldn't provide, you know, confidential. Information but it enables, senior. Bankers to look and see how they're doing these are B the other other competitors, are they adhering, to norms are they falling behind and so on and it's very helpful to them when they're making judges, and it creates this notion that there as you said that there are societal. Norms, in how you should perform because. You're operating with guarantees. From governments and so on and you have social and societal goals the problem in the US has been a resistance, to that and bankers are still saying no we. Don't want to have some, sense of common, standards of common ways of approaching these, issues that we all confront. And so it's it's atomized, in a way that is not as, helpful I think, but. I think if you want to take a look at an example of it I've, mentioned Wells Fargo, or a number of times is. Where you had the incentives, you. Know down into. The consumer, area all. Really. Up almost to the head of the consumer, bank tied, in to incentives, and you, see what the what, happened there and this is not a new issue I remember. Doing a report for the Institute of International Finance. After. The, Asian. Financial crisis. As to, what went wrong there and. It. Was interesting that, some of these same things were, prevalent then in other words these issues we're talking about are not new the. Problem, is as my, friend Paul Volcker and colleagues, says, bill. He, says you know every 10 years. You know the bankers learned and then they forget and I, said unfortunately the way society, is moving today it's not every 10 years it's every five years and so, what we, what we tried to do in this report, is to set something down that can really be embedded, and so, institutions. Understand, that, they, have to really change and I, can remember walking into banks like. 20, years ago and we had one of our many problems, with low-doc no dock on. The consumer side and I'd, walk into these institutions, and they have they'd have these big banners and plaques saying. These are our cultural. Norms, and. People used to be given cards to carry with them so that they could look at them but there was never any embedding, never any follow up and frankly. There was never any training on this and so. I think this. Report is intending, to try and establish. And. Embed, this and, your comments, are very correct and if we can't do it this time I have, to tell you the next time is even going to be worse because. When. We talk about the the new, you. Know the new automation, that was going in, and. The. AI and, everything else I think, it can be even worse than it was before and so, you really have to go back to basics oh we're gonna face a real catastrophe the, next time we have a financial crisis, and there's only a certain, amount that the rules can do to, have. Common. Behavior, across the whole industry you do have to have a basic structure of rules does. That sets up a redress systems and so on but, you're not going to be able to have a set of rules that has forces, everybody to do everything, up to the current kind of standard because the stuff moves too fast, yeah, is a great example right where, where so, the institutions, always, have to do a bunch of this themselves, I would. Argue the other news recorders at themselves but, if you don't have a basic structure of rules you know about requirements. For treating customers in certain kind of weights and all that so kind of stuff you know generic, kind, of principles, things you know Regis mechanism it's work but, but to think that you can force everybody, to do certain, beats a common standard and keep that up to date through a regulatory, system. Market. Conduct I think is a shimmer. And. You say that is the next regulator I do. Koats. But I guess I'd preface, it by just saying thank you for the support you go to the Road Center it's really been going gangbusters this, year, but.

The Question is if you start with your autobiography, and say you know when I was coming up in the training program and I've. Heard similar stories from, a lot of bankers enough so that I believed them but I think this opens the question of where this culture came from in the first place and presumably it didn't exist in the robber baron, era and then it's built in the mid 20th century and then something unravels, in the late 20th century and I guess I have two hypotheses, one is that this has something to do with globalization and. That in the early 20th century which was highly globalized to the late 20th century that was highly globalized was, harder to have a culture like this than in a relatively close national economy, and some, speculative, evidence for that would be that a lot of the scandals your reference come from emerging markets like Russia or China or Malaysia a second, hypothesis, would be that there's something about progressive, taxation in the mid 20th century that if all the profits, you're going to make in one of these short-term deals is going to be taxed away anyway you're not going to care about it as much once you get to the tax cut era of the late 20th century you start counting these chips in a way that you weren't in the mid 20th century I'm wondering how you'd react to those hypotheses, well. I would just say that I think that the the culture and conduct that I mentioned, when I entered in it was, drawn out of the, school of hard knocks coming. Out of the Great Depression where. The. Pecora. Commission, that. Was appointed, by Franklin, Delano Roosevelt, ended up putting the, heads of most of the major New. York banks in jail now. That didn't happen this time and so, it. Was really I think a, tough. Lesson learned. By. What happened in the Great Depression and. You. Never saw any of this in the. You, know put. In let's say the 1940s. 50s 60s it. Started, coming up with your point on globalization, you know the opening, of the. International, markets, LIBOR, as cetera cetera and so. The cultures, were basically, lost. Internationally. And. Stewart mentioned, how difficult, it is to go across border, lines, and. You. Know London was the example, you, know the world financial capital. You, know invented, LIBOR and, this. Is where you want it to be but. A lot of these ills on investment, banking and come, from there so I think your, point is exactly correct and, the. Question is can we go back and learn. From this and one, of the points that, has been made and I, don't want to meet to. Mention Elizabeth, Warren here too much but, she is she. Is a representative of this area, of New England and you. Know I read a lot of her stuff that she comes out with and you. Know what she's basically saying, is that like. Paul Volcker you have these things happen again and again and so what we're trying to do in this report, is, to take you, know take. Into. Account the.

Globalization. And. And, how that can be dealt with with, with with the morals. That we need to have and I. Had, the head of the Netherland, assha Bank which is a central bank of holland talked. About when he was a young man growing up in holland he. Said, there. Were three people that he was taught. To trust by, his family one. Was the local minister, or priest. The. Second, one was. The schoolteacher and the, third was his, banker, and he, said we've come a long way from that and, and. Unfortunately, that's the truth and that's, why I emphasizes, this, point about being, part of the community and so. You have to get back from all this globalization, in many ways and you, have to you have to be part of your community and you, have to know, your community and that's where diversity comes in and I, think we got away from that and I. Think, the blame lies. Basically. With a financial institution, coming. Out of the Great Recession people, you. Know blame the regulator's and there was plenty to blame when the regulator's they, didn't see it coming and didn't want to see it coming the rating agencies, were the same but. The end of the day I blame the banks most of all because they are the ones running the institution, so I agree, with all of your points and the question is can we come back to these basics, and we're, going to be tested with the next crisis. That comes out but, with all of these you know new this. New technology, out there it's going to be much more difficult and was in the past so this, is really the challenge and it's why all of us on this panel coming. From different backgrounds, feel. So intense, on trying, to get this you. Know, this. Particular report. Understood. In sold worldwide, and hopefully. We can only. Time will tell but thanks for the question I would, add to that, actually I think about this quote all the time I was talking to a, man who runs a bank in Lafayette, Louisiana. Who. Said you know one of the reasons that we didn't get into trouble during the mortgage mortgage crisis, is that my regulators, are the people I go to church with so. If I'd screwed up I mean all of that there's, a lot of social. Capital that I would have lost if I'd done something wrong and. The damage I would have done would have been local and it would've been the people I know and I think that's it's, very easy the second you move out outside of single parish or County you begin to lose that accountability. Thank. You all for coming I found this talk very compelling, thank you dr. Pillai for putting this together um the last I'm just, my question is really building on the last one which. I thought it was a very shrewd question. The. It's. About culture and, regulation. Do. You think that the. Reason that you. Know you talked about it 60s. 70s and 80s there. Was this culture, of not having risk of looking out for the cost for customers you. Know the last question question. I brought up progressive, taxation do you think that was connected to the regulatory environment of that, where you know you couldn't charge banks couldn't charge more than 6% interest it was really hard to export. Capital there. Was a you know very clear line between commercial. Investment banking do you think that part, of the moral, decline that you've been talking about in banking is connected, to the deregulation, that has happened over the past 34 years oh that's a very good question because you get back to people who say why did we rescind glass-steagall, which. Came out of the Great Depression. Where. You had the separation, of commercial. And. Corporate banking, from Investment Banking. And, you. Can make a case either way for that, I think. The, the. Basic, problem, here, though is, not. Just regulation. It's. Really, within the institution, itself because, they were pretty, plenty of laws on the books that. Were. There even. With the repeal of glass-steagall, that, we're not being adhere to, by. The institution. Itself by. The supervisors. And the regulator's so, just having regulation. Itself if, it's not implemented, properly, on an, ongoing basis. And understood, by the financial, institution isn't. Going to work and. I, think that. This. Is a point, that.

I've Learned over the, over the years and so. What, we're trying to say in this report, is that, culture. And conduct, needs. To be implemented by the individual, institution, no matter what the regulatory framework. Is. Because. The regulatory framework is going to change, and. Whereas. I believe you, need, regulatory. You. Know oversight, without a doubt that. Itself, isn't going to do it if the institution, doesn't. Want to comply with it and and. When it's found out that individuals, are not doing the proper thing then. They should be in some way. You, know. Taken. Legally, you. Know whether it be jail fine or whatever it is so, you you, have to implement that but it's a real question that we're facing now because, you, had to build up of regulation. Particularly. Do the Ambala administration. And. Now the present, administration wants. To, disband, a lot of that and there's, a happy medium somewhere along, the line but regulation. Itself won't do it if the institution itself, does. Not want, to implement the proper culture and conduct so it's a trade-off there's no doubt about it it's just like the question on globalization it, really gets back to the individual, institution, wanting to do the right thing and frankly, if I'm a customer of an institution, it doesn't want to do the right thing I wouldn't want to be with that institution. I really wouldn't and I. Think it really begins at the level where you are here and that's why the point earlier made about teaching ethics is really. So important, and I. Got to tell you when I came up. Business. Schools really. Kind of didn't exist, they. Came into for to be big-time in the set these and 80s and. If you take a look at the curriculum of, some. Of the top business schools it wasn't one course, that, was being taught in ethics not, a single, one and I. Think that's a reflection of how we we. Ended up and not, just in the United States also. In the UK or wherever so. It. All comes down to the, points we're trying to make here what, I think the question is very insightful and this is one of the points we're facing today and I'd, like my colleagues, to comment about, regulation. Visa. Vie. Implementation. Of culture and conduct so. Once a couple points, on the regulatory side one of the things that most. Of these g30, reports, have emphasizes. The difference between regulation, and supervision so, regulation, being the rule supervision, being the enforcement, and. And. It's really important, when you think of the role of regulation, just put those two. Because. You. Can. You. You can under, resource the supervision, part which, has happened in lots of places or you.

Can Change the regulations. And not, realize that then you need to do something else so to. Compensate so. For example when glass-steagall. Went. Away. In. And, it happened in number of jurisdictions some, jurisdictions, were better than others in thinking, through where the risks were going to migrate to and, then. Adapting. Their supervision, to. Try to see whether that was being handled properly or not the u.s. was not one of those jurisdictions that thought that through fully so. There were big huge gaps that were exposed, in the financial, crisis in the u.s. because you the u.s. did not have comprehensive, consolidated. Supervision of, the investment, banks which. Other countries that had lent plasty GLE equivalents. Of. Go. Away had. Put in place so. So, it's not as simple as well. There's, one kind, of regular deregulation. Kind of move and then and then, that, is the is the is this a driver. Of some of the kind of stuff we're talking about I wonder. You want to emphasize a couple of other things that the. Regulation. Can't regulate culture, you. Can't set up rules for culture now. Regulators. You know you can set up rules around market. Conduct and, that's. My plumber here to this gentleman about the frameworks those have to be reasonable. Supervision. Can help in certain, areas so, for example the u.s. is one of the outliers, compared. To other g20, countries, and not splitting, the chair and CEO. And. That. G30, reports, have. Consistently. Said that that's an important, area where, you. Can help them to, get the better incentives, would inside an institution for. The boards to actually treat this seriously and hold the CEO to account on behalf of the shareholders okay, well. Supervisors. In some other countries, have, actually played a major role in pushing banks, to split the chair and CEO role that's, not been an area that supervisors. And regulators in the u.s. are willing to touch politically.

It's. My sense so, there are certain, things that regulation. Supervision can, do supervision. Can because. The supervisors. Go through banks so you see a lot of stuff and they, can actually provide useful feedback to, boards you know we're seeing stuff down here do you realize that supervisors. Can also hold boards to account if they aren't actually treating this seriously at all you. Know you don't have a committee you don't have any metrics all that Casta so, there is a role for supervision, but, primarily it's, got to be the banks and I would caution against, simplistic, so the deregulation, regulation. You know 14,000. Pages or whatever it is of. Regular. Of legislation. After the financial crisis and however many hundreds and hundreds of times as a regulations, I don't they're still still, outstanding here in the US because of the because. Of the legislation post financial crisis I'm sorry, I you know how do you how do you resource that for supervision so you. Have to have smarter regulation in some cases but also you have to focus on the regulation, that Matt and not, pull it back on and that's what Bill's talking about that there's a lot of worry around there's gonna be pulled back on some of the stuff that really matters there's, a bunch of stuff that probably doesn't but there's a bunch of stuff that really really does I, would. Just add very, quickly I know we're running out of time but um, because. I spend a lot of time thinking about it in our work with financial institutions. Right and on the one hand we could say you, know there's been a moral, failure right whereas eclis people are not as. Ethical, as they used to be but I actually, think there's a few other things going on one is and Stewart mentioned, this earlier. Organizations. Today are far, more complex. To manage than ever before, so. Even if you mean really, well an individual, who is well-meaning, can still get into trouble, because, the world around us is more complex, and the organizations. That these leaders. Are leading are. Far more complex, so I would point more. To, a leader, failure. In leadership capabilities. Than, a failure and immorality because. I just think that the trade-offs, and the subtleties, of managing. Very complex, organizations. Today are on a scale never seen before the. Other element, that I think is happening is there's. Far more transparency. And far. Higher expectations. Right I mean you watch movies like the wolf of Wall Street could you imagine those. Things being acceptable, in today's world right so, I think as a society, our. Expectations. Increase, and there's far more transparency. Things. Don't stay hidden things, do come out and and. So we just live in a very different world so I, wouldn't necessarily say, well 50 years ago people, were far had far higher morality. Than they do today I just don't think you can compare, the. Two the environmental. Factors, and the complexity, of the organizations, today I just. Want to jump in real quick cuz it happens to be what we're talking about right now, the. Take. Your point that regulators can't fix culture can. The DEA fix culture. I, think, that one. Of the things these reports, this advertised, wrong agree with that is if you don't have a strong enforcement. Capability. In your country, that's, a big huge gap it can't be no. One element, of the but it could okay but, you need to everything working you need the right governments of leadership you need the right kind of incentives. Inside the organization, and you do as bill says you need the right external incentives, right so you have to be accountable on would criminal prosecutions go.

Some, Distance towards helping fix culture getting I I think, that's been a major, failure and of indolence. That. People. Involved, in in the regulatory response and supervise response, after the GFC have. Subsequently. Admitted that, in the American context, yeah nobody. Went to jail think, about the 2010. Crash several. People large very senior, people went to jail CEO, the Tyco, and so on for, really small issues. You know spending, money on their shower curtain, and stuff what. Happened in 2008. Was much larger than that but no one in the American context, at the top of the leadership went to prison and that is a problem because. It sent the wrong signal, and arguably, that's, one of the reasons why we have problems with populism. And anger. Against, the system right now because, people the average voter feels, like the. Bankers got let off and they, could ended up with the headache and the problems, and the negative equity and the, sagging, wages, and so on and so forth it was a big, mistake we need to learn, that mistake, going forward that it must be a proper enforcement and linking back to the question what regulation, one of the things that UK focused, on post a financial, crisis was, better clarifying. Statutorily. The, roles of senior managers, including, chairs of risk committees and all that to the kind of stuff precisely. So they could have a more, robust enforcement regime, after because. The next one because they figured that they actually hadn't, had clear enough requirements, in their legislation, and these, are not detailed kind of stuff these are generic. Kind of requirements, for governance and oversight so. They could actually do a better job enforcing, later, and. That, hasn't happened in a bunch of other jurisdictions that that's effective, regulation in my mind I would, just have two points, is. That mmm. I think culture. And conduct are all the more important, based. You, know on Elizabeth's. Comment because as an institution, becomes larger. And nor, more difficult, and more complex, to ma

2019-06-06 08:17

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