St Paul's Institute

Mutual Dependence - Banking Culture and Individual Behaviour (Part I)

by Seth Thomas

Posted: 20 Jan 2015

December 2014


Not even the recent near-death experience of the global financial system seems to have changed the behaviour of some individuals working in the financial markets. How do we change banking culture and when are we going to truly put individual behaviour at the centre of restoring trust in the banking system?

The recent foreign exchange scandal takes its place in a long line of other market-based abuses including 2012 revelations about Libor rate fixing. However, what is particularly disturbing is these recent problems occurred in the years following the financial crisis and at firms which had received direct - or systemic - support from taxpayers. In other words, these traders repaid society for saving their institutions and jobs, by manipulating the public markets for personal gain. Their actions spoke of individuals who understood little about personal responsibility, trust and professional behaviour. But it also spoke of wider problems in financial institutions centred on poor cultural practices.

In November 2014, Mark Carney in a speech to the Monetary Authority of Singapore said:

"the succession of scandals mean it is simply untenable now to argue that the problem is one of a few bad apples. The issue is with the barrels in which they are stored. Leaders and senior managers must be personally responsible for setting the cultural norms of their institutions."

In parallel, earlier this year Richard Lambert's Banking Standards Review was released. It recommended that a Banking Standards Review Council ('BSRC') should:

"act as an independent champion of better banking standards in the UK, and be driven by the interests of customers and of the wider group of stakeholders with a concern for the well-being of the British banking system."

It decided to take the approach to raise standards through engagement with the collective leadership of financial institutions rather than the individuals who staff them, noting that it did not wish to duplicate the work of existing professional bodies. So given this renewed focus on institution-level culture, how important is the role of individual behaviour in banking culture?


I worked in institutional banking throughout the crisis, and had an insider's view of how individual institutions, the industry as a whole, and policymakers responded to financial crisis. Just over five years ago I distributed an internal paper on the need to change banking culture to a small group of colleagues and managers within my firm. The responses to this paper ranged from interest, to scepticism about the likelihood of change, to a reply along the lines that 'now was probably not quite the right time'. From the perspective of 2009, with banks scrabbling to restore capital, restructure operations, and respond to a transformation of legal and regulatory frameworks, that latter sentiment may well have been pragmatic. However, it is striking that over six years on from the Crisis, poor cultural practice and dire individual behaviour remains such a major problem.

Since the 2007 regulators and politicians have scrambled to put in a series of reforms and safeguards to address weaknesses in the system in order to minimise the risks of future bank failure, and if the worst happens, are better able to handle any problem. In the UK there have been government reports, Parliamentary enquiries, a regulatory restructuring, increased capital requirements and a focus on bank resolution so that failed banks do not impact the financial system. Even how banks structure themselves has been addressed.

However a continuing theme since 2007 has been the serious problems of control, management and judgement in the banking sector - problems which emerge on a regular basis to an incredulous and justifiably angry public.

Preventing such a destabilising situation happening again is crucial. In the UK, serious intellectual firepower has been trained on improving the balance of the economy, regulation and governance. Yet it is noticeable that until recently nearly all the responses aim to explicitly control the operations of financial institutions, rather than addressing how the managers of those institutions - from senior to junior levels - conduct their daily business.

While unsuitable regulatory regimes and asymmetric financial incentives within banks were certainly major problems; it was poor business decision-making, from subprime lending to CDOs to unsuitable mergers, which brought down the system. Flawed decisions were made by individuals, decisions which had appeared reasonable within the cultural and ethical norms of finance. That these norms had become disconnected from those of society has been one lesson of the crisis.

The media have focused on colourful narratives to illustrate larger failures. So we've consumed stories about the arrogant young financier who sells junk investments to pension funds, the senior banker who doesn't even understand his own business, and the hubristic chief executive in front of a Parliamentary committee who simply 'doesn't get it'. We are collectively indignant at such behaviour, demanding retribution and reform.

Yet, far from being masters of the universe, banks and bankers now work within a Hobbesian view of the world, where Leviathan in the form of super-regulators and detailed codification aims to restrict their business. But as history shows, even such stringent - as opposed to light-touch - regulation may be a necessary, but not sufficient, condition for stability in banking systems.

Furthermore for a country such as the UK, there is a significant economic stake in continuing to host an international finance centre which is not solely about banking, but also comprises a cluster of insurance, fund management, legal, accountancy, trade and other business services.

This systemic and sometimes detailed response is unsurprising but it has limitations. It is much like a country where the only response to rising crime is to impose stricter laws, rather than also address the fundamental causes of criminal activity. Surely the best option is to look at both?

Many bankers are appalled by the events of recent years, as they have not deliberately set out to cause problems and feel that they are being vilified for the incompetence and greed of others. Other bankers seem to refuse to accept that there is a problem at their firm, or that it has been fixed, or that the problem in banking is only an issue at the large firms. Others in industries related to banking, feel that it is not their reputation in question - despite for example, providing legal or accounting advice for trading and investment structures such as CDO-squared structures or tax-avoidance mechanisms.

This is a case of pious myopia, because in an economic cluster such as the City of London, where most individual business trade with and are reliant on banks, everyone is affected by problems at the banks, and the collective reputation of the City is tarnished.

The deficiencies in banking and markets culture is not only a cause of the crisis but a major reason why the industry's reputation continues to crumble; why the public don't trust finance; and why increasing taxes on or regulations relating to banks is a popular move.

Or to put it in language which all bankers will understand, the failure to address this cultural issue is bad for business. Over $100 billion in fines imposed upon US banks alone since 2007 (according to the Financial Times) suggests that there is some linkage between market abuses and declining shareholder returns.

Individuals may operate in a regulated world, but it is individuals who seek to legally mitigate those rules, and it is individuals who make bad decisions based upon narrow-view of business: my year-end bonus or promotion rather than my firm's reputation.

How those individuals conduct themselves and take responsibility for their actions is dependent upon prevalent culture. And we've all read enough about some of the practices in banks to know that the culture in which bankers and trades work is an issue.

If regulators and firms don't address this cultural issue in banking - and beyond - then they aren't seriously addressing one of the fundamental causes of failure, and neither are they rehabilitating the industry over the long-term. By downplaying or ignoring the problem, financial institutions run the risk of future earnings shocks.

There are a number of ways to address cultural issues in finance. However, one response - proven by the historic experience of other trades - is to transform banking into a formal profession complete with a code of ethics at its heart.

About this author

Seth Thomas worked at a global bank for nearly two decades. He recently completed mid-career studies in public policy as part of the first class to graduate from the Blavatnik School of Government, Oxford.

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The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.