EthicsBite™

The head of the New York Fed said in a speech yesterday that there is an “important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust.  There is evidence of deep-seated cultural and ethical failures at many large financial institutions.”  The remarks came in  this speech given by William C. Dudley, the President and CEO of the Federal Reserve Bank of New York.

His topic was “Ending Too Big to Fail.” Dudley first discussed various regulatory efforts to prevent another international banking disaster and how to reduce the risk of failure. Near the end of this speech he honed in on the ethical tone and business culture that is all to prevalent on the Street, in our opinion. Readers of this blog know that we often focus on the ethical issues of the banking industry and the need for both organizational and industry culture improvement.

Mr. Dudley’s statement in context said:

“Some argue that what I have proposed—higher capital requirements and better incentives that reduce the probability of failure combined with a resolution regime that makes the prospect of failure fully credible—are insufficient.  Perhaps, this is correct.  After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust.  There is evidence of deep-seated cultural and ethical failures at many large financial institutions.  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.  Tough enforcement and high penalties will certainly help focus management’s attention on this issue.  But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.”

Good points, Mr. Dudley.