The head of the New York Federal Reserve has called for bank boards to ensure their companies’ behavior and values are in good stead, regardless of successful financial performance, to help avoid a repeat of troubles that have plagued the industry and economy in recent years.
John Williams, who became president and CEO of the New York Fed earlier this month, spoke on his first day in office about the ‘urgent need to focus our attention on banking culture in supervision.’ He said changes made since the financial crisis mean there is ‘a more robust regulatory regime in place, and banks are well positioned to survive future storms’ while the economy continues to grow.
But he added: ‘Paradoxically, it’s precisely this sense that things have gotten so much better that worries me most. Although we have seen marked improvements in the critical areas of capital, liquidity and resolution, we have not yet fully addressed the root causes of many of the problems that have plagued the financial sector.’
Williams pointed to not just ‘the excessive risk-taking and leverage in the run-up to the crisis’ but also a series of scandals affecting the financial services industry. ‘Underlying these scandals is often an inadequate corporate culture, where accountability and ethical conduct have fallen by the wayside,’ he argued.
Issues to be aware of during ‘good times’, he explained, include potential complacency, missing problems that may be obscured by generally positive data and the need for long-term investment in culture that takes many years to develop and requires constant reinforcement. ‘If you let it erode, you can’t go to the market and obtain a new culture overnight,’ he added.
‘As supervisors, we need to ensure that bank management and boards are exerting strong and effective leadership with robust governance. That means holding management and boards of directors to high standards in terms of culture and conduct, even when the numbers look rosy. It means ensuring corporate values are clearly articulated and incentives are squarely aligned with a bank’s strategic goals.
‘It means identifying, communicating and mitigating risks in a timely and effective manner. It means employees feel empowered to raise their hands if they see wrongdoing, and that comprehensive fixes are implemented when something goes wrong.
‘We must stay vigilant around the softer side of supervision. Strong culture and robust corporate governance are our first lines of defense. They’re a critical part of the tool kit when it comes to protecting people, banks and the economy from risk, scandal and harm.’