Supervisors on Supervision

“The one quote that always comes to mind is from Chuck Prince at Citi, who said, ‘As long as the music is playing, you’ve got to get up and dance.’ So, if bad culture becomes the accepted norm for the industry, then it's a systemic risk.”

“Assessments of management should serve as a leading indicator of expected results, not a trailing indicator of obvious problems. 

We do expect to act to pre-empt and anticipate poor conduct, and society has a right to expect this.”

“It goes beyond what you see at the board level. It’s about how the organization runs at the end of the day. Everyone gives you lip service — they laugh at your jokes. But when they go back to their desk, they talk about how stupid your joke was. That's the operational culture. Then there's the deep culture: the group that goes golfing together, the group that goes on vacation together. If you're not attuned to those subcultures, you may find that what you think is happening in the organization is not what's actually happening.”

“The international regulatory community has yet to establish precisely how we are to create and embed supervisory cultures that are appropriately intrusive, skeptical, proactive, comprehensive, adaptive, and conclusive.”

“It is important that leadership of the supervisory agency promote and continuously assess the culture of the supervisory organization itself.”

“I believe you [make progress] when you start talking about how to change supervision, not just how to change a bank's culture. We need to change the way we do things as regulators. This cannot be an exercise in how to change bank culture without thinking about ourselves as supervisors.”

“When you ask boards of directors a hypothetical question: ‘What happens when you have a trader who blows through all of your limits and loses $2 billion?’ They say, ‘Well, you fire him, you throw him out, you call the police.’ Okay. ‘Same trader blows through your limits and makes $2 billion?’ The answers you get are, ‘Ah, well, we should warn him. We should write a stern letter. We will withhold 10% of his bonus.’

The issue is not whether they made or lost money; the issue is that they blew through the limits. They have no respect for your middle and back office, and that's a management problem. 

If you don't know the subcultures of the organization, people might start to fudge, to cheat, to hide. If you don't have an open culture where people feel comfortable talking about something going wrong, you'll find that people simply lie. Once they've started fudging the numbers, when things turn bad, they'll turn bad in an angry way — they’ll drop significantly past where you thought they would be.”

“Every financial institution you walk into has the vision and mission on the wall: ‘We treat everyone fairly, we support our community, let's all row together.’ That's fine for the lobby, but the board sometimes doesn't go beyond that. There are levels of culture in an organization that the board may not actually know about. 

For example, what have been the most significant disagreements you have had at the board? If every decision has been unanimous, the chair has probably either beaten them down or hired all their mates. The same goes for the guts of the institution.”

“The supervisory culture and supervisory practices that surrounded Silicon Valley Bank failed completely in identifying, escalating, and rectifying poor culture, governance, and risk practices in the bank. That was a supervisory culture problem just as much as it was a bank culture problem.”

“There's often no interaction between the regulator and the industry outside of the inspection, when you've both got your armor on and are ready to do battle. That is a problem.”

“I think the ‘M’ in CAMELS is something that needs to have better emphasis, not de-emphasis. The ‘M’ should be a leading indicator, not a trailing one. Unfortunately, in the supervisory process, it is trailing. If earnings are bad, management must be bad. If earnings are good, management must be good. 

It shouldn't be that way. The same management who had good earnings is usually the same management that had the bad earnings. The problem is that supervisors have a hard time saying that management's not doing the right thing when all the numbers say that things are good. My answer [to banks that object to culture questions because of their strong financial performance is that] we want you to keep those numbers. We want to help you keep those numbers consistent. When you have bad governance, bad policy, or bad culture, those numbers can go out of control quicker than you can correct them.

That is what we're trying to achieve, and we're trying to achieve it together. If you start this culture debate with, ‘How am I going to enforce this?’ you’re going to have issues. Culture is hard enough to define, even more difficult to supervise, and nearly impossible to enforce in a traditional manner.”

“Often management is downgraded to ‘poor’ by bank examiners only after the symptoms of bad management have manifested in weak financial results.”

“It is nearly impossible to say, ‘The earnings are questionable, but I'm going to rate management as good because they've got a plan.’ 

Management is always treated as a trailing indicator, never a leading indicator. You could have poor management with good numbers, and you could have great management with bad numbers. But the numbers always guide the management rating, and it should not be that way. Management should guide the numbers. 

‘If the numbers are good, we're good’ is a great way of doing things until, all of a sudden, it’s not.”

“In my experience, the best way to start understanding culture issues across an industry is through a thematic or horizontal review. 

Don't make culture issues part of the individual inspection. Make them part of horizontal reviews where you grab a piece of culture — let's say, adherence to loan policy — across the entire industry. Then you can follow up on that when you go to the individual inspection.
As a supervisor, I can't give you, the company, much in the way of direct benefits from participating in horizontal reviews. But I can give you leeway if your organization wants an acquisition, wants to grow in different areas, or wants international expansion, because you've got good governance. 

A bank supervisor is not going to say who is good, but in these horizontal reviews, you also don't say who's bad. When you highlight a practice that identifies good culture, a bank knows, ‘That’s me.’ We're not telling you who the others are, but on this list of 30 banks, you're number six. Now you can do what you want with that information. Now you can create a race to the top. 

You could also lengthen the supervisory cycle. If somebody's got a good culture, we only look at them every two years instead of every year, or we do a reduced scope. If I trust your culture, I don’t come back for two years, or I only do a limited update next year.”

“Virtually every publication on culture asserts that the ‘tone from the top’ is critical in any organization… However, more important than what is being ‘said’ at the top is what is being ‘heard’ and experienced in the middle. Front-line supervisors are the ones who translate the tone from the top and communicate supervisory culture outward to the regulated community. 

And this is precisely where the message gets obfuscated. 

If the experienced culture of the organization is not consistent with the tone from the top, action is needed… It may well involve altering message delivery so it is properly heard, understood, and acted upon.”

“It is far too easy for many to conclude that additional capital and liquidity are the answer to culture issues. But increased capital should not permit for a tradeoff that allows bad culture to prosper.

Credit Suisse had one of the highest capital standards in the world. It didn't help. That's a culture issue. No amount of capital or liquidity saves a bank — even a G-SIB — from weak management and poor corporate culture.”

“Staff must also feel supported in decisions they take — a particularly important point when confronting recalcitrant boards and management teams.”

“Culture needs to be part of the inspection process and the training and development process for supervisors from day one, because it's not. Nor is management. That's left to the person in charge of the inspection to make a judgment at the end of the day based on their gut feeling. There needs to be much more uniformity than just somebody with 10 years of experience knowing better than somebody with three.”

“This is an issue for international standard setters to take up…. Bringing supervisors together… to explore how best to replicate good practices around the world would be a welcome endeavor.”