We cannot rely too much on regulation alone to make finance safer. As Jacques de Larosiere reminds us: “Strong, intrusive supervision as well as careful risk assessment and management by bankers are of the essence. They will never be replaced by rules.” Put differently, a culture of prudence and risk governance is a better guarantee of safety and soundness than all the rules on capital and liquidity that we can draw up. Finally, we want finance that is not only safe but also purposeful. Regulation must not seek to eliminate all risk and must be impact-sensitive. Let us not lose sight of the bigger picture: a sound financial system that is able to play its vital role of intermediation, to support sustained economic growth and help create opportunities for individuals and enterprises. Thank you. BIS central bankers’ speeches  7
This is worrying, because misconduct erodes trust in the system. If investors, depositors and policy holders stop believing that their interests are being safeguarded, the entire system quickly comes unraveled at significant costs to society. These costs can arise from failures of financial institutions, a misallocation of economic resources, or simply steep fines that destroy shareholder value and employment prospects for affected workers. Since the global financial crisis, banks have paid more than USD320 billion in fines and legal costs and have been the subject of numerous Government financial inquiries due to misconduct. In Malaysia, in the last 5 years, Bank Negara Malaysia has imposed fines on financial services providers to the tune of RM116 million. A survey conducted by the Bank revealed that almost twothirds of reported losses by banks in 2016 were associated with internal fraud, regulatory noncompliance and operational lapses. We have examined these incidents in some depth. Our observations lead us to conclude that behaviour is very much influenced bycontextual factors such as organisational values, incentives and management responses to misconduct or non-compliance. The rightcontextual setting can exert a powerful influence on individual behaviour. We believe this begins with setting and clearly communicating expectations of desired behaviour. Without clarity on what is acceptable in the first place, it would not be possible to encourage, much less enforce, these expectations. The FSPB serves an important role in this regard through its work in defining and developing codes of behaviour for financial institutions.