Reform bankers culture and not banks…

After so much talk about all kinds of proposals to resurrect financial world, scholars are realising we have to focus on bankers’ culture. There is something really weird about the financial world which gives you perks and salaries which cannot be provided by any other sector. Despite the crisis, bankers continue to make monies like never before.

NY Fed has been talking a lot about culture. Interestingly, Hong Kong Mon Auth also released a document about reforming bank culture.

Further, Prof Charles Goodhart in this post says:

The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken.   Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king.   I offer some thoughts here from that perspective.  I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions.   Banks cannot take decisions, exhibit behaviour, or have feelings – but individuals can.  The solution lies in reforming  the governance set-up  and realigning incentives faced by banks’ management.

Recent regulatory problems have been greatly reinforced by a widespread tendency to apply human characteristics, i.e. to anthropomorphise, to an inanimate institute, in this case a bank.  We tend to talk about Bank X having assumed too much leverage, or having behaved in an improper fashion—rather than management of Bank X did such and such; We say that Bank X got bailed out rather than the creditors and clients of Bank X got bailed out.

The outcome has been a regulatory system primarily based on imposing a structure of regulations on banks, with insufficient concern about the incentives on bankers to adjust to, and to ‘game’, that system.  By the same token there has been insufficient concern for reform of the incentive and control system facing bank managers.  Some reforms of the governance structure for bankers have been introduced in the UK, for example in the guise of claw-back rules and the senior managers’ regime.  But even while the Bank of England has been in the vanguard on this, I believe that much more could, and should, be done in this respect.

….

The root of the problem is the bad behaviour of bankers, not of banks, who are incapable of behaviour, for good or ill.   The regulatory framework should be refocused towards the latter, with a focus on reforming incentives.

You wonder what has taken it so long to understand these basic issues?

 

Advertisements

One Response to “Reform bankers culture and not banks…”

  1. Sriram Iyer Says:

    Couldn’t agree more with this. Though, we have witnessed stray cases of bank bosses being hauled up. Sadly, short term-ism is still the accepted norm in the consumer banking space. The entire variable comp mechanism is geared to promote her-and-now revenues with not a hint of concern for the client. No lessons learnt.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: