Capital Markets Advisors

Turning Change Into Opportunity


By Gina Chon in Washington
Financial Times


The Federal Reserve Bank of New York is stepping up pressure on the biggest banks to improve their ethics and culture, after investigations into the alleged rigging of benchmark rates led officials to conclude bankers had not learnt lessons from the financial crisis. The investigations into the alleged manipulation of Libor and foreign exchange rates produced emails and other evidence that NY Fed officials believe reflected risky and lawless behaviour, people familiar with the situation said.

Fed officials were surprised that some of that reported behaviour occurred after the 2008 crisis, leading them to believe bankers had not curbed their poor conduct. To make sure the biggest banks are paying enough attention to ethics and culture, NY Fed bank evaluations have begun incorporating new questions emphasising such issues. Topics include whether the right performance structure is in place to punish bad behaviour, especially when it comes to compensation.

The NY Fed does not have the authority to write regulations, but it plays a crucial role in the regulatory landscape, overseeing banks in its jurisdiction that include Goldman Sachs, JPMorgan, Citigroup, Barclays and Deutsche Bank. It assesses banks through evaluations, which often do not contain specific criteria but which provide guidance for standards.

NY Fed general counsel Thomas Baxter has also been meeting bank executives to emphasise that when it comes to ethics and culture the tone needs to be set at the top, people familiar with the efforts said. The agency will also hold a workshop on bank ethics and culture in the autumn.

Banks have already been working to overhaul their risk management and have hired thousands of additional compliance staff. But they are worried about how regulators will measure how well they are doing in terms of ethics and culture. Regulators across the globe probe alleged manipulation by US and European banks of the London interbank offered rate and other key benchmark lending rates. “Banks are taking the Fed’s message very seriously,” a banking industry source said. “We just want to make sure we know what the rules are.”

The steps taken by the NY Fed come after its president, William Dudley, gave a surprisingly scathing speech in November saying tougher capital requirements may not solve the problem of banks’ “apparent lack of respect for law and regulation”. “There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” Mr Dudley said. “Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”

Another key NY Fed official, Sarah Dahlgren, who is head of the Financial Institution Supervision Group, said in October: “We may be at a low point of confidence and trust between the public and the financial sector.”

Fed officials have also asked banks to look at other sectors that have gone through crises or reputational issues, such as the oil industry, to see what they can learn. Fed officials have also been meeting with academics and thought leaders to get ideas about banking ethics and culture.

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