12 Jun 2015

Cultural Change in Banking

Many large banks have announced programs to change their corporate culture in recent months. This was largely in response to regulations which address corporate governance and culture in banks based on the consideration that misbehavior of bankers was one reason for the outbreak of the financial crisis.

On 10 June, the SAFE Policy Center organized a panel discussion with the anthropologist and Guardian journalist Joris Luyendijk to discuss problems in bank culture and possibilities to change it. Luyendijk spent two years in London, investigating the social mechanisms in the financial sector and interviewing more than 200 bankers. He shared his insights and discoveries on The Guardian’s banking blog and recently published a book on bank culture (“This can’t be true”). He was joined on the panel by Daniel Mikkelsen, Director at McKinsey & Company, representing the industry perspective and Thomas Mosk, Assistant Professor at the Research Center SAFE, bringing in an academic view on the topic. The discussion was moderated by Hans-Helmut Kotz, Program Director of the SAFE Policy Center.

In his talk, Luyendijk stressed that the issue at the heart of problematic bank culture is not that bankers are amoral. It is rather that institutional structures in banks lead to perverse incentives from the point of view of society. Not all bankers break the law or behave like the “Wolf of Wall Street”, he said. Rather, institutional structures, as for instance the fact that bankers have almost no job security lead to behavior which is focused too much on short-term profits. Individual employees have no reason to place much importance on the long-term effects of their actions or to identify with the future reputation of their bank when they can expect to be let go from one day to the next.

Furthermore, Luyendijk criticized that bankers are not made liable for the risks they take on. Losses are borne by clients, shareholders or – in case of severe unbalances – taxpayers. He therefore demanded a new banking structure where bankers are responsible for the risks they take as well as for the long-term outcomes of their investments. This would incentivize them to avoid too high risks and keep them from investing in products they do not fully understand.

In the ensuing discussion, the panelists first debated the question raised by Thomas Mosk, whether it is really only bank structure which leads to problematic behavior or whether it is also the fact that certain people self-select into a career in banking and that banks also change the character of their employees. For the aspects which have to do with institutional structures, Mikkelsen argued that improvements have already been achieved in the last years. For example, banks have worked on their incentive structures by changing remuneration schemes and in the UK, from next year, senior managers of banks and insurers should be directly held accountable for failures in their areas of responsibility through the Senior Manager Regime. Also, the UK has introduced criminal penalties against bankers who behave irresponsibly under a new criminal offence for reckless misconduct in the management of banks, Mikkelsen outlined.

At the end, all panelists raised the concern that there are also costs to society from making banks too cautious, which might not be well understood but need to be taken into consideration when policy measures are decided.