William C Dudley: Reforming culture and behavior in the financial services industry - expanding the dialogue Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the conference "Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue", Federal Reserve Bank of New York, New York City, 20 October 2016. * * * Welcome to the Federal Reserve Bank of New York, and to our third conference focused on culture within the financial services industry. It is encouraging to see all of you in attendance today—in particular, the many non-executive directors, representatives from the investor community, and foreign supervisors who have joined us to help broaden and deepen the dialogue. Thank you for your participation. As always, what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.1 The evidence is pervasive that deep-seated cultural and ethical problems have plagued the financial services industry in recent years. Bad conduct has occurred in both investment banking and securities market activities as well as in retail banking.2 This has eroded the industry’s trustworthiness. This erosion impedes the ability of the financial services industry to do its job. That job is financial intermediation—to facilitate the efficient transfer of resources from savers to borrowers, and to help customers manage the financial risks they face. Verification—whether through regulation or internal controls—is an expensive substitute for trustworthiness.
To put it very simply, incentives drive behavior, and behavior establishes the social norms that drive culture. If the incentives are wrong and accountability is weak, we will get bad behavior and cultures. This implies a role for both firms and supervisors. Firms need to continually assess their incentive regimes so that they are consistent with good conduct and culture. When they are not consistent, the incentives need to be changed. Supervisors should also play a role in assessing firms’ incentive structures. For example, they should evaluate: 1/3  BIS central bankers' speeches  How is compensation determined? In particular, is questionable conduct―such as compliance violations―consistently reflected in decisions about compensation and promotion? Do risk managers have the appropriate authority to challenge frontline revenue producers and prevent activity that is questionable? When that occurs, are there appropriate negative consequences for the frontline revenue producers? When people speak up to point out potential conduct issues, how are they treated? Are they held up as examples to emulate, or are they discouraged or even penalized? The answers to these questions should indicate whether incentives must be changed in order to foster the appropriate behaviors and culture. The primary responsibility for reforming culture—and changing incentives—belongs to the industry. However, the industry does not act alone. The public sector can play an important role as well. I’ll discuss that issue this morning with my colleagues Norman Chan, chief executive of the Hong Kong Monetary Authority, and Minouche Shafik, deputy governor of the Bank of England.