10 With this range of motivating factors and the impact they have on the culture in mind, a number of firms have integrated “how” factors into an employee’s performance evaluations by assessing the methods used to achieve a performance goal alongside the “what” components such as contributing to their group’s financial performance. Industry Benchmarking Another perspective is from the industry as a whole. I think we can gain important insights by looking across the financial industry, identifying best practices, and understanding what approaches are most effective in positively influencing conduct and culture. Conferences and workshops like those hosted regularly by the New York Fed and others can help. In addition, standardized metrics and indicators can provide insights when assessing changes over time and across firms. The BSB, for example, provides one lens on assessing culture change for a broad cross-section of financial services firms operating in the U.K.11 Each firm participating in the survey has the ability to see its outcomes relative to others and the industry average. This type of industry-wide assessment gives firms insight into areas they can individually focus on, as well as areas they may want to address as an industry. The U.K. is not alone in this approach.
Bank analysis suggests that such reductions in the spread over the risk-free rate played an important role in raising credit growth relative to GDP during both of the surges in the credit to GDP ratio since 1980.8 The spread over the risk free rate appears to have fallen due to three main factors – improvements in “intermediation technology”, greater risk appetite by banks, and greater access by banks to wholesale funding.9 How long should we expect these factors to exert downward pressure on the spread over the risk-free rate? Reductions in the business cost of intermediation pushed down on rates and up on credit growth relative to GDP during the financial liberalisation of the 1980s. They continued to have an effect, though to a lesser extent, during the 2000s. Such reductions will almost certainly be long lasting. The underlying drivers such as technological innovation in information gathering and rising competition are unlikely to go into reverse. Indeed, we might expect technology and competition to drive intermediation costs down further. The other factors that pushed down the spread over the risk-free rate in the upswing have proved to be much less sustainable. The increase in banks’ willingness to take risks and in investors’ willingness to provide wholesale funding both unwound sharply in the crisis. This is likely to have been one factor behind the fall in credit to GDP. Following the post-crisis repair phase, banks’ risk taking and lending spreads now appear to be at a more standard level.