NY Fed VP Calls on Banking Industry to Restore Trust

Federal Reserve Bank of New York (“NY Fed”) Executive Vice President Alberto G. Musalem outlined the NY Fed’s initiatives to promote a positive banking culture. In his speech before the Goethe University in Frankfurt, Mr. Musalem explained that the initiatives are a response to recent incidents of misconduct, including the manipulation of LIBOR. He also stressed that the “responsibility to address these flaws” in the “culture of banking . . . rests with the banks themselves.”

Mr. Musalem described the NY Fed’s message to the banking industry as follows: (i)¬†cultural problems are the banking industry’s responsibility to solve, (ii) a bank’s implicit norms – especially those reinforced through incentives – must align with the public purpose of banking and (iii) the aim of reforming bank culture should be to restore trust.

Mr. Musalem also referenced the following “insights” from a previous NY Fed workshop:

  • culture is a soft concept that is hard to measure, and perhaps even harder to manage and sustain, but it is as important to teh industry as capital and liquidity;
  • a bank’s culture must reflect public expectations and promote considered behavior toward the firm’s many stakeholders, including those who are part of the public;
  • managers at all levels must take action to promote a greater sense of personal responsibility and stewardship among employees;
  • sharing best practices across the industry could help firms to identify the common warning signs of problems within sub-cultures, as well as behavior that is incompatible with the firm’s values;
  • diversity of thought and background are valuable cultural assets because they generate better questions and decisions to contribute to effective challenge; and
  • certain basic principles – such as the fair treatment of customers and employees – cannot be open to debate.

Mr. Musalem delivered his remarks at an event titled “Towards a New Age of Responsibility in Banking and Finance: Getting the Culture and the Ethics Right.” The event was hosted by the Goethe University of Frankfurt’s Institute for Law and Finance.

Lofchie Comment: From time to time, banks and their employees violate the law and are punished for it appropriately. In that respect, banks are no different from companies in other industries or the government itself. The government’s job is to (i) go after those who break the law and (ii) make good laws. The notion that the government is able or should attempt to be an arbiter of “culture” seems dubious. Despite that vagary, the New York Fed seems sure enough about its own culture to devote significant resources to portraying itself as a model to others, since it has established a Web site devoted to raising cultural awareness. Illustrating the eccentricity of such an exercise, the pieces on the NY Fed’s Web site include a speech by the Archbishop of Canterbury on income inequality. Whatever one’s feelings about the Archbishop of Canterbury might be, or one’s views on the causes of income inequality, the New York Fed has a lot on its plate, and either promoting the Archbishiop’s views or championing income inequality ought not to be among them. If any representatives of the New York Fed feel strongly about this issue, then their support for it would be more appropriately displayed in their private capacity and not on the Web site of a governmental agency that mandates bank regulation and control of the money supply.