Financial Shenanigans

Banks Need Culture Change

  • Why it matters

    Why it matters

    Recent bank scandals, whopping legal costs and executives’ strategy of denial show it’s time for a new breed of banker to take over, the author argues.

  • Facts

    Facts

    • Fifteen of the largest banks paid $266.5 billion in penalty fees and legal provisions between 2009 and 2015, according to the Conduct Costs Project in Britain.
    • U.S. banks’ earnings dropped 7.3 percent in 2014’s fourth quarter from a year earlier, due in part to increased costs to settle legal cases related to sales of risky mortgage securities before the crisis.
    • Wednesday in London, chief executive Stuart Gulliver apologized to Parliament for the conduct of HSBC’s Swiss private bank. The activities included helping clients evade taxes.
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    Audio

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Collusion in tax evasion, manipulation of prices for precious metals and scandals in foreign exchange trading —a long list of well-founded concerns have once again been hurled at a number of banks in recent days.

It is a list that speaks volumes about the state of a once so self-confident industry. And which has also prompted the well-worn litany of reactions from the banks’ executive suites: It’s a matter of old cases from the past. Investigations are proceeding apace. And what’s more, the affected areas of business have already been completely reformed, eliminated or subjected to significantly stricter controls.

So everything is hunky-dory at the financial institutions, the change in corporate culture is well under way — or so you might think.

Between 2009 and 2015, 15 of the largest banks paid a breathtaking 173 billion pounds, or $266.5 billion, for penalty fees and legal provisions.

But skepticism is called for in the face of a striking accumulation of legal infractions and scandals. In recent years, numerous traders, asset managers and even advisors to private clients were disciplined, fired or, in rare cases, even put on trial because they disobeyed rules. Between 2009 and 2015, according to the Conduct Costs Project in Britain, 15 of the largest banks paid a breathtaking 173 billion pounds, or $266.5 billion, for penalty fees and legal provisions.

This figure alone shows something is fundamentally out of whack at the banks. Unfortunately, many of the current cases demonstrate that no more than lip service has been paid to the change in corporate culture on the top floors of financial institutions.

Thus this week Stuart Gulliver, chief executive of Britain’s HSBC, commented on the tax-evasion scandal at its Swiss subsidiary with these words: “It seems to me that we measure large companies with higher standards than we apply to the military, the church or government bureaucracy.”

Such statements, made under pressure, unfortunately match what we often hear top bankers speaking in private: The belief that they actually did everything right and feel unfairly treated by politics and the media. Sometimes this attitude bursts through the public facade, as in the case of Mr. Gulliver or, a few years ago, with the then-head of Barclays, Bob Diamond, who permitted himself to say that the time of repentance was over for bankers.

Top bankers also never tire of pointing out that this or that scandal is a lamentable but isolated occurrence, and that the people involved have been disciplined or fired. But ever since the financial crisis, the problems have piled up to such an extent that the theory of lone operators has come to be doubted by even the most enthusiastic fans of the banking industry.

One of them is Mark Carney, the Canadian-born, highly respected head of the Bank of England. Exasperated by the unending series of scandals, he said recently that it is a matter not of rotten apples as postulated by the banks themselves, but of entire rotten barrels.

The strategy of denial practiced by the upper echelons of the banking industry fatally recalls the attitude of the tobacco industry in the 1990s.Just like the banks before the financial crisis, the top dogs of that industry refused for decades to engage in more transparency. And for many years, they in various ways exploited politicians, scientists and the media for their purposes — only to be ultimately unmasked and overwhelmed with legal proceedings costing billions.

Of course many of the people who today head large banks are not directly responsible for the misleading advice, furtive manipulations and legal transgressions of past years. But in view of the repeatedly apparent intransigence, a question arises as to whether there is need for change at the banks’ top echelons.

A changeover that, instead of favoring the highly specialized investment bankers who gained their spurs in the Wild West era before the financial crisis, would once again promote bankers from other sectors, even classic generalists. Younger bankers who have more readily recognized the signs of the times and, with genuine conviction, advocate a change of corporate culture.

The many justifications offered by top bankers are all too reminiscent of the quip by the writer Ödön von Horváth: “Actually I’m quite different, but I so rarely have the time to show it.” Perhaps the financial institutions again need managers who take more time to be different.

 

To contact the author: d.schaefer@handelsblatt.com

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