On October 20, at a conference focused on financial services industry culture, William C. Dudley, the president and chief executive officer of the Federal Reserve Bank of New York, pressed the idea that financial institutions should monitor the way employees are incentivized.
These comments come in at a time when a major financial institution, Wells Fargo & Co (NYSE:WFC), has run into trouble involving its ethics, and the CEO of the bank has resigned.
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In addition to this, California Attorney General Kamala Harris has launched a criminal investigation into the bank, to determine whether the employees at the bank were involved in falsely identifying themselves and stealing identities in order to meet sales goals. (Source: “California launches criminal probe into Wells Fargo bank account scandal,” CBC News, October 19, 2016.)
Dudley said, “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. This has eroded the industry’s trustworthiness.” (Source: “Opening Remarks at Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue,” Federal Reserve Bank of New York, October 20, 2016.)
He also explained what a trustworthy financial services sector can achieve.
“In contrast, a trustworthy financial services sector will be more productive and better able to support the economy. Reliable financial intermediaries can help increase the flow of credit, promote economic growth and make the financial system more stable. This is why restoring trustworthiness must be the ultimate goal of reforming culture.”
How do we get to a financial services sector that’s trustworthy and one where employee incentives are in line with good behavior?
Dudley said, “Two years ago I proposed solutions to two such obstacles to reforming culture. First, there should be a database of banker misconduct to combat the problem of ‘rolling bad apples.’ Second, a baseline assessment of culture is needed in order to measure progress.”
“I suspect that while seemingly simple, the discipline of asking ourselves these questions on a regular basis and answering them thoughtfully and honestly may be more challenging, thought provoking and effective than one might initially think,” Dudley concluded.
