Macroscope | Cleaning up the stockyards of banking
Regulators and shareholders must become more powerful for the culture in banking to change
Appeals to reform the “culture” of banking, most recently by New York Federal Reserve president William Dudley, amount to an abrogation of responsibility and a counsel of despair.
Kicking off a closed-door, yes closed-door, meeting of regulators and bankers on cleaning up finance in New York last week, Dudley argued that “context largely drives conduct” while at the same time reiterating calls for a cultural change led from within the industry.
This is partly true but fundamentally backward.
Culture doesn’t simply grow out of the good wishes and intentions of people at banks, much less what they say in public. It is shaped by the system of rewards and punishments awarded and meted out, a responsibility which falls squarely, if not entirely, on regulators.
People at banks make calculations, they are good at it.
Therefore if we have a system, which it seems we do, the sum result of which is episodes like that of the London Whale or money-laundering scandals, then the thing to do is not to blame math. Culture won’t change those calculations, regulation and enforcement will.