The problem became rather apparent thanks to the GFC, which witnessed cases in which bank managers took excessive risks or otherwise breached the trust of their customers in the pursuit of profit and bonuses. In some infamous cases, such as AIGFP and Merrill Lynch, sizable bonuses, funded by taxpayers’ money, were still paid to managers even though their actions had arguably contributed to the failure of the firms. This “heads I win, tails you lose” regime in modern banking is clearly a recipe for disaster and can do very little to help enhance the trust and reputation of bankers. 8. Another material change in banking from the “good old days” is the problem of what I call “short-termism” amongst some bank shareholders (“impatient capital” focused only on bolstering their own short-term returns). It has also become increasingly common for senior bank managers, especially at the top levels, to be hired on contract basis. While this might be justifiable from the point of view of hiring the best talent available in the market, it could have the unfortunate side effect of cultivating short-termism amongst senior bankers if they only work for a contract or two and therefore must deliver tangible and quantifiable financial results within a short period of time, such as a target RoE. In essence, like football managers, they survive on their reputation for delivering fast results during the current league season. The problem has been exacerbated by two more factors.
At the HKMA, we have just introduced an initiative called “Balanced and Responsive Supervision”. It involves a mechanism to regularly review with banks possible execution issues arising from the supervisory processes, as well as to collect ideas for streamlining supervisory practices and requirements. Through better and ongoing communication with the industry, we should be able to achieve a more optimal and sustainable supervisory outcome in the longer run. 14. I would also argue that banking supervision is not the only, and should not become the most important, means in protecting the interests of bank customers. It is my strong belief that regulation and supervision are most effective in prescribing what constitutes unacceptable behaviours or outcomes, e.g. minimum standards for capital and liquidity ratios, prohibition of unacceptable market behaviours such as insider dealing and rigging of interest rate or FX benchmarks, no mis-selling of financial products, etc. However, supervision is much less effective or appropriate in setting good corporate culture, values and ethical standards of a financial firm. No amount of external supervision or policing can instill and sustain the right culture and ethics of a bank. Culture and ethical standards must be from top-down, owned by the Board and filter down to the senior management and then to all levels of the firm. A bank and its staff must internalise good culture and values in such a way that they behave properly not because they are afraid of being caught and punished by the supervisors but because they think it is unethical to do otherwise. 15.