Trichet says banks must keep 'hammering' at their culture

Progress towards improving culture and behaviour at banks is uneven, and the G30 is calling on the laggards to catch up

trichet-european-central-bank
Jean-Claude Trichet

Many banks have failed to deliver on promises they would improve their behaviour, and need to embark more seriously on a process of cultural change, according to members of the influential Group of 30 (G30).

"Those banks that have developed a culture that is not appropriate have to do a lot of hard work ... in terms of changing behaviours inside the firm," says Jean-Claude Trichet, the former governor of the European Central Bank and current chairman of the G30, speaking to Central Banking, sister website of Risk.net.

"Culture might be very entrenched in some cases, and it might be much harder to change it than changing rules and regulations," he adds.

The G30 is an organisation made up of top current and former policy-makers, academics and financiers, which makes its mission to influence global financial policy. A key part of that work is efforts to improve governance at financial institutions.

Trichet says it is naïve to believe there was ever a "golden age" of well-behaved finance, but he thinks globalisation, technological changes and the sophistication of markets have combined to create "many more opportunities" for bad behaviour – culminating in the 2008 crisis and a string of scandals such as the Libor-rigging conspiracies.

"A number of employees in finance were living in a universe where a lot of deviant conduct was considered natural," he says. "But what was considered internally perfectly acceptable appears very clearly to be absolutely unacceptable to the external viewer."

A report by the G30, published in July, pushes banks to change their ways. "Banks are, to varying degrees, still failing to implement desired ethics, values and behaviours, and weaknesses in embedding values and codes of conduct for all staff are widespread," the report warns.

Establishing good culture

The need for reform may be obvious, but pinning down the definition of good culture is tricky. While some forms of bad or criminal behaviour are obvious enough, the report notes that at many firms staff are confused about the greyer areas of what is expected of them. Cases of "wilful blindness" are still prevalent, it says, and spreading cultural change throughout a large organisation is a daunting task.

Banks tend to mention factors such as trust and integrity, respect and teamwork, excellence, customer service, financial performance, accountability and leadership when asked about "good values". But how to deliver them in practice is less clear.

The so-called 'tone from the top' is clearly important. "Senior managers have to hammer and hammer tirelessly what is considered correct in terms of behaviour," says Trichet. "It is a question of hammering indefatigably, what is the correct behaviour, what is the culture of integrity of the firm, from top to bottom at all levels in the firm."

Nick Le Pan, Canada's former superintendent of financial institutions and a contributor to the G30 report, says many elements of cultural change are "not rocket science", but simply good management. "Board and CEO leadership is key, as is building culture and conduct considerations into enduring processes in banks, such as the processes for hiring, assessment and promotion."

The report sets out six main areas for change, starting with recognising the need for fundamental change, and ensuring this shapes all its actions. Senior accountability and governance comes next.

Third, staff should have their performance managed, and their rewards tied to behavioural outcomes, while – as highlighted by Le Pan – behaviour should be a factor in promotion decisions.

Next, three lines of defence should reinforce the standards being set from the top – from the first "business line" to the second monitoring and standard-setting line, and the third independent audit line.

Finally, regulators and supervisors should maintain close ties with the firm's board. The G30 was eager to stress more rules and regulations are not the answer, but close scrutiny is essential. "We stress particularly the importance of the independent directors, who must ensure the appropriate following up," Trichet says.

Scope for change

The process of cultural change is a long one, and it remains to be seen if banks will stay the course. Le Pan strikes a hopeful note. "Among many of the leadership we talked to there was a genuine commitment," he says. "It is a major area of focus in 2015. We hope it remains as such."

One way of turning culture into something more concrete and assailable is to measure it. Le Pan says there are good ways of doing so, and some banks use a "suite" including internal surveys, audit and compliance reviews, supervisory reviews, formal and informal customer feedback, and root cause analysis of specific events.

With a measure of progress, bonuses and promotion can be tied to the results. "Performance management systems have to take account of failure to oversee for conduct, wilful blindness and failure to escalate issues," LePan says.

Stuart Mackintosh, the G30's executive director, suggests pay should be determined on the basis of 50% behaviour and 50% more traditional performance, which some banks are now doing. The bank's top risk-takers should set an example to the others. "If they are not doing so, then that ought to be reflected in the way they are compensated," he says.

Although the report avoids questions of the level of pay, namely ultra-high pay for bank executives, Trichet sees a problem there too. "There is a tendency to deviate in terms of pay from what is generally considered correct and appropriate by the people in our modern democracies," he says.

As well as improving performance within the firm, the G30 believes improving culture is a way of gaining the upper hand over competitors. Le Pan describes the mechanism as a "virtuous competitive cycle" whereby those banks making the most progress on culture are rewarded by customers and investors, putting pressure on the others.

The report includes a number of case studies, highlighting effective or innovative approaches at banks – from simple improvements to training, to the use of big data to spot anomalies and the hiring of behavioural psychologists.

But no bank – good or bad – is named in the report. Rather than naming and shaming, Trichet says we should rely on supervisors to do their jobs. It is a question of "tireless vigilance", he says.

Le Pan says the G30 is planning a follow-up report in two to three years' time, which could be a good time to get tougher. "If we don't see material improvement – i.e. reflected in fewer new scandals and cultural failures arising, as opposed to legacy issues – then it will be time to talk about naming and shaming," he says.

The G30 has already presented its findings to the Financial Stability Board, which is pursuing its own line of enquiry on culture, and will also be presenting to supervisors and central banks. "We like to modestly feel like we are succeeding in our goal," Mackintosh says.

This article first appeared in sister title Central Banking.

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