Ten-years on from the UK Parliamentary Commission on Banking Standards Changing banking for good report, we can step back to ask how far we’ve come.
In an In Focus article here, Chartered Banker Institute Simon Thompson offers his thoughts. “In this digital age, confidence and trust can evaporate more quickly than ever before,” he notes. [See the In Focus Article Has Banking Been Changed for Good?] “It is fair to say we haven’t seen anything in the collapses Silicon Valley Bank and Credit Suisse that we haven’t seen before. A lack of professional banking expertise on the board and management of the former. A poor culture — and the inability or unwillingness of senior management to tackle this and embed strong professional norms — in parts of the latter,” Thomson argues. “If we really want to make banks and banking stronger, safer, and more resilient than the prescription offered by Changing banking for good and similar initiatives, we must go further,” he adds. “All have failed to adequately address the key issue of culture.”
“Despite higher capital and liquidity buffers, accountability regimes, resolution planning and much stricter supervisory regimes,” Thompson continues, “it is clear that some parts of the global banking system, at least, remain highly vulnerable with the potential to threaten financial stability overall.” He ties this directly to a lack of individual professionalism in the industry. “The answer lies not in policy prescriptions or regulation, but in the re-professionalisation of banking,” he suggests. “If we genuinely want to have confidence and trust in banks and banking, then we need to have confidence and trust in bankers.” This would be advanced by the promotion of clear professional standards for the industry. “We still have much to do if we are to continue changing banking for good,” Thompson concludes.
“In this digital age, confidence and trust can evaporate more quickly than ever before,” - Simon Thompson
“Structure and design are not the only elements that determine how robust a bank’s governance framework is,” argued Frank Elderson, Vice-Chair of the Supervisory Board of the ECB, in a June 2022 speech. “A bank can have all the risk controls in place, avail itself of the most advanced tools to manage risks, and rely on data of the highest quality, but still become mired in a scandal it has brought upon itself, which badly affects its reputation owing to weaknesses in its internal culture,” he adds. “The behavioural patterns exhibited by management and staff, as well as the drivers that underpin that behaviour, are no less important,” Elderson observes, urging that “Banks’ management bodies should be attentive to these intangible but real underlying drivers of behaviour.”1
Regulators are turning to sharper use of individual accountability regimes to prompt management to attend to intangible drivers of behavior, and to assure adequate professionalism and proper ethics among personnel. A February 2023 policy paper from the Financial Stability Institute details this trend.2 Here, the report’s authors, Raihan Zamil and Ruth Walters, share key learnings in another In Focus interview. [See the In Focus Article Holding Bank Executives Accountable for Misconduct] “It goes without saying, but it is individuals and not abstract corporations that commit corporate wrongdoing,” they begin. “So, the question becomes, who is to blame?”
“While individuals who commit the alleged infraction should obviously be held to account,” they argue, it is increasingly believed that bank executives should also be held to personal account “if they contributed to the broader context that enabled such breaches to occur or if they failed to properly oversee individuals in their areas of responsibility.” This echoes a long-standing emphasis among prudential authorities on bank boards and senior management owning responsibility for the firm’s strategy, risk appetite, and ethical behavior.
So, what’s changed? “Traditionally,” Walters and Zamil offer, “supervisory authorities viewed bank boards and senior management as collective bodies and individuals could evade responsibility by hiding behind the cloak of collective decision-making.” The move towards individual accountability regimes aims to get past this.
“Specific regimes targeting individual accountability have been introduced in recent years in the UK, Australia and Singapore,” Walters and Zamil note. In the UK and Australia, this followed industry-wide conduct scandals that had seized public and political attention. That was not so in Singapore, but recent experience with misconduct concerns aside, regulators in all jurisdictions remain sensitive to the lessons of the financial crisis. “The current spike of interest in strengthening accountability is clearly a response to recent bank failures and related allegations of mismanagement, but we would see that as a continuation of the post-GFC work rather than a change of direction or a radical rethinking of mechanisms to promote accountability.” In short, we’re still trying to change banking for good.
There is also a more recent recognition that “The threat of sanctions alone may not deter individual misconduct if the potential rewards from that behaviour are high and the perceived risk of being caught is low.” The new accountability regimes hope to encourage culture change through preventative mechanisms rather than further retributive action. “Indeed, the authorities tend to downplay accountability as a tool for enforcement or a hook for exemplary justice,” they explain. “The general philosophy is that enhanced accountability at senior executive levels will improve the ‘tone from the top’ and that this will drive improvements in culture throughout the organisation.”
In that direction, the regimes introduced in the UK, Australia and Singapore all emphasize (1) a focus on senior executives, (2) responsibility mapping to make clear who is to be held to account for what, and (3) a requirement that responsible executives demonstrate that they have taken “reasonable steps” to prevent or rectify risk management failures. It is the latter requirement that provides the “glue” that links senior executive responsibility to the actions of subordinates. “The concept of ‘reasonable steps’ can function as a valuable ‘hook’ for accountability,” Walters and Zamil argue, “although assessing an individual’s conduct requires supervisory judgment that may not be straightforward,” they caution. “Above all, the effectiveness of any accountability regime is premised on effective supervision and enforcement.”
“Our research suggests that many authorities have issued ad-hoc regulations, policy statements, guidelines or supervisory expectations over a number of years that address aspects of senior level accountability in banks,” Walters and Zamil note. “We think there is merit in looking at accountability with a broader, more holistic lens: that is, what are the collective set of regulatory instruments, supervisory tools and enforcement powers needed to foster executive-level accountability?”
But this leaves unanswered how we are to test for the “professionalism” Simon Thompson urges, or the “reasonableness” of steps taken by responsible executives in guiding the behavior of their juniors. If efforts to promote accountability hinge on effective supervision, then how are supervisors to render judgement about “professionalism” and “reasonableness” without devolving into “vague, subjective, personal preferences — which are as likely to be wrong as right,” as former Fed Vice Chair for Supervision Quarles cautions in his interview here?
“When presenting your company risk to your insurer,” Marsh emphasized in a February 2023 paper on Directors & Officers (D&O) insurance, compiled in partnership with the New Zealand Institute of Directors, “you need to find opportunities to differentiate your company from any other business.” Here, financial and performance metrics are valuable, as is detail on governance structure, risk frameworks and processes, strategy, and culture.3
“Strengthening accountability is an important deterrent to prevent mismanagement in the future,” - President Biden
The D&O market is being “reset” the paper asserts, with much greater emphasis placed on the efficacy of overall risk governance, and an attendant implication that, in a “flight to quality,” insurers will show preferential treatment for firms that can distinguish themselves by demonstrating superior operational risk governance capabilities. “With a more active regulatory regime,” the Marsh/IoD paper reminds, “individual directors and executives, along with their companies, could face increased claim activity and shareholder scrutiny.” This should focus the mind of any company director or officer confronted by increased personal liability exposure.
“Strengthening accountability is an important deterrent to prevent mismanagement in the future,” President Biden said in mid-March, as banking sector turmoil filled headlines. “The law limits the administration’s authority to hold executives responsible,” he complained. “When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again,” the President emphasized. “Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.”
Other Articles in the Comments, Contributions, and Conclusions Series
“What is it that distinguishes the thousands of years of history from what we think of as modern times?”
Hidden inexactitudes
“Radical Uncertainty”
"Why did no one see it coming?"
The real trouble with this world of ours
More meaningful metrics
“Too Big to Manage”
Drifting into failure
“Lying to Ourselves”
"We have literally no time even to be astonished."
“We need to develop a culture that empowers supervisors to act in the face of uncertainty.”
“Culture, more than rule books…”
“Proactive identification of threats to trust in banking.”
Blitzkrise
The illusion of control
What is Conduct Risk
“Changing banking for good”
Outcomes oriented
Achieving foresight
Trust matters
Mapping and tapping workplace networks
“An Epidemic of Loneliness”
The fourth wave
System shifts
Conduct: the new prudential risk
The costs of misconduct
Has banking changed for good?
Tribulations, and trials
Audit Quality Indicators
Shared interest and collective action
Nothing ventured…
Join The Discussion