Insufficient reputational capital.

Photographer: Josh Edelson/AFP/Getty Images

Tougher Rules Can't Repair Banking's Broken Culture

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.
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Successful economies need healthy banks. In 2008, the errors of the U.S. banking system crashed the global economy. Seven years later, the recovery in the U.S. and elsewhere is still tepid -- and the failure to get the financial system working as it should is one reason why.

Financial rule-makers haven't been idle, but that might be part of the problem. In the U.S., it's argued that the Dodd-Frank Act's financial reforms have increased the regulatory burden -- especially on smaller banks -- so much that lenders can't support new businesses the way they should. There's probably something in this.

Another criticism, also plausible, is that the post-crash financial reforms have failed to mend the banking industry's defective culture and hence repair its reputation. Banks can't do what they're supposed to unless they're trusted. Reputational capital matters, both for the banks' long-run success as businesses and for the wider economy.

A study just published by the Group of Thirty looks in some detail at this question. (The G30 is a club of financial luminaries including former Federal Reserve Chairman Paul Volcker; former European Central Bank President Jean-Claude Trichet; William Rhodes, for many years a top executive at Citigroup; and Roger Ferguson, President of TIAA-CREF and a former Fed Vice Chairman.) Discussions about banking culture are hard to push beyond platitudes about high standards and integrity, but the study is concrete about where banks are falling short and what managers and supervisors need to do.

The problem, according to the study, isn't so much in stating the goal. Most banks understand, or say they understand, the concept of reputational capital; most are trying, or say they are trying, to reverse the collapse in trust in their industry that followed the crash. Yet banks often treat these efforts as separate from their main job -- an add-on, rather than a critical task. The study contrasts two approaches to raising standards:

The first positions the challenge as core to the economic viability of the institution, rather than a regulatory issue. The second views the challenge as defensive, with the aim of minimizing future client redress, regulatory fines and costs of compliance. This study finds that no more than a third [of banks reviewed] are in the former category. 

Fostering trust demands a pervading culture of doing the right thing even if the rules don't require it. When serious money is at stake, that's a tall order. Leaders therefore have to live that principle, not just talk about it.

Exhortation won't suffice, least of all from mid-level managers marking time while the most talented bankers are assigned to more important work. CEOs need to set up systems to watch for behavior, especially by senior executives, that might harm the bank's reputation; when they see such behavior, they must punish it -- and visibly. The report draws on research and interviews and offers practical advice for setting up such systems.

What about outside oversight? The report stresses the distinction between supervision and regulation. You need both, but they can often be at odds. Relying too much on rules rather than principles can create a narrow compliance mindset: If something isn't explicitly forbidden, it's all right. The result is perverse. Finding ways to get around the rules becomes praiseworthy.

Culture, says the report, is crucial -- but it can't be regulated, rule by rule. However, it can be monitored and guided. The report itself is a worked example.

Asking how hard banks are trying to build trust and reputational capital, the report finds weak performance in many areas. Boards of directors aren't focusing on the task. Management deals too mildly with recurring cases of misconduct. Despite top-level lip-service about values, middle managers concentrate on revenues, profit, and other standard metrics. Most banks talk about values in their recruitment literature; few ask questions about them in their recruitment interviews.

Tom Hayes, the UBS trader just convicted in London of rigging benchmark interest rates, made a lot of money for the bank until he was found out. Other banks tried to recruit him. The trial heard that the conspiracy was wide-ranging. The culture, to put it mildly, was far too tolerant for far too long.

Supervisors often fail to notice these problems until after the damage is done. The focus, argues the report, is too much on punishment after the fact and not enough on prevention. Supervisors can help by monitoring, benchmarking and identifying best practices. The more watchful they are, the earlier they can intervene and the less they'll need to resort to enforcement actions.

All this makes sense: Mere proliferation of rules isn't the answer.

Culture is about behaviors. Behaviors in general are not amenable to legislation or regulation. Getting behaviors aligned with established values and codes of conduct is properly the preserve of firms. More rules could prove counterproductive. Instead, sustainable cultures need to arise from, and be embedded in, banks' DNA. 

My colleague Matt Levine recently wrote about the Consumer Financial Protection Bureau's $700 million action against Citibank for unfair and deceptive credit-card practices. "I defy you to read the CFPB's announcement," he said, "without pumping your fist." After reading the G30 report, I'm not sure whether to call this a justified enforcement action or a failure of supervision. Probably both. Whatever you call it, the culture of banking evidently has a long way to go.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Clive Crook at

To contact the editor on this story:
James Gibney at