Good morning. As is customary, allow me to thank IESE and, in particular, Juanjo Toribio for his kind invitation to participate in these sessions, which can now certainly be described as a classic.
The regulatory effort launched after the crisis, aimed at strengthening the banking sector, is practically complete. This is confirmed by authorities ranging from the FSB to the European Commission and the European Central Bank (in its supervisory capacity): we must move past the regulation phase and promote the implementation of the approved reforms. Thus, the possibility of a Basel IV package that would increase global capital requirements is dismissed, and it is accepted that if “unintended consequences” of the regulatory reform are identified, it could be corrected in specific areas (a good example being the initiative regarding securitizations included in the Capital Markets Union project).
Within this new implementation phase, moving from regulation to supervision, the growing importance of supervision focused on conduct and culture stands out. And within this field, the most innovative aspect is precisely the promotion of banking culture. It is to this matter that I will devote the bulk of my speech: what we understand by banking culture, the reasons why its promotion and improvement are so relevant at this time, and what its practical consequences are. Before beginning my presentation, I must recall that this issue is by no means new, especially in this institution: Rafael Termes dedicated significant efforts to the relationship between ethics and banking. The crisis and its consequences on trust, in a sector where trust is key to maintaining relationships with customers, only bring these types of issues to the forefront of debate and current affairs. That is, the crisis drives the need to address these matters, moving away for a moment from theoretical, moral, or philosophical debates (which are undoubtedly relevant and necessary) and trying to narrow the discussion to more operational and practical issues.
The problem with the term culture is its undeniable breadth. The Royal Academy refers to the “set of lifestyles and customs, knowledge, and degree of artistic, scientific, and industrial development of an era or social group.” The Oxford Dictionary speaks of “ideas, customs or social behaviour of a particular people or society.” And the Group of Thirty (I) defines banking culture as the mechanism that provides the values and behaviors that shape conduct and contributes to creating trust in banks and a positive reputation among the main stakeholders involved in the bank, both internal (employees and managers) and external (shareholders, customers, suppliers, etc.). Banking culture refers, in short, to the practices and customs that govern the work of a bank’s employees and, more importantly, determine their relationship with their customers. This banking culture, also described as “what is done when no one is watching,” goes beyond conduct (culture, like investor protection regulation, inspires conduct) and is broader than values. Furthermore, culture will also be determined by the characteristics of the business and the bank’s risk appetite: an entity dedicated to serving rural communities in the American Midwest will not have the same banking culture as a bank based in Singapore dedicated to serving professional clients. Even within commercial banking, the culture of each entity may differ depending on the characteristics of its customers and its own approach to the problem. In fact, the success or failure of each entity in this area will lie in the difference, both in definition and practical application.
An interesting approach is the one proposed by Bill Dudley, President of the Federal Reserve Bank of New York, who states (II) that “culture refers to the implicit norms that guide behavior in the absence of regulations or rules of conduct—and sometimes applies despite those explicit restrictions. Culture exists in every entity, whether explicitly recognized or ignored, and whether it is embraced or rejected.” Alberto Musalem, also from the New York Fed, has emphasized (III) the importance of the environment, indicating that it determines culture and that when ordinary people operate in an unsuitable environment, unsuitable things end up happening and vice versa (“This is part of being human, we observe and adapt“). Finally, the UK Financial Conduct Authority has noted that “culture is important to us as a regulator because of the role it plays in driving behaviors in firms and its direct impact on our objective, which is to ensure that customers get the outcomes they are entitled to” (IV).
The reasons why improving banking culture and conduct is presented as an urgent necessity are obvious, but it may be worth highlighting some of them. The essential point is that a bank with a culture of integrity, of respect for its core values, is a bank that retains the trust of its customers, and in a business based on trust, that represents the very long-term sustainability of the bank. In short, doing the right thing is good for business. On the other hand, the cost of litigation associated with failures in culture and conduct has not only meant a substantial drain on resources for entities but also an erosion of their credibility, to the point of questioning their very viability. A third reason arises from the need to prevent the generation of spontaneous subcultures within an organization. The so-called FOREX scandal was a wake-up call, as it involved entities that had made a considerable effort to improve their corporate governance and where there was a perception that the tone from the top, from the board, was appropriate. This scandal revealed that if those reforms did not permeate the entire organization, inappropriate subcultures could persist, jeopardizing all the theoretical progress made. Finally, let us consider that in another type of banking, commercial banking, the problem arises from the millions of interactions between bank employees and customers.
Therefore, in an environment of increasing demands, where a few cases can lead to regulatory or jurisdictional reactions that are very costly in terms of resources and image, the only way to establish a zero-tolerance policy is by focusing on a preventive approach, based on extending an appropriate banking culture throughout the entire organization.
In short, the concept is abstract, but the need for its implementation could not be more practical: it is not about doing the right thing only as a moral matter, but because it is in the bank’s own interest, as its survival in the medium term is at stake in this field of ethics and culture. In a business where trust is the fundamental pillar, it is of vital importance to ensure that appropriate banking culture and conduct are firmly rooted in the organization.
Before describing the practical elements of this reinforcement of banking culture, it is worth reflecting on what it is not. Improving banking culture is not a mere matter of corporate governance; it goes much further. Proper corporate governance that reinforces accountability and the correct governance of the entity is undoubtedly one of the main supports of this cultural transformation. It is a necessary but not sufficient condition to achieve that cultural change.
Nor is it a mere matter of regulatory compliance with rules of conduct or regulations concerning the relationship between the customer and the entity. It is about combining a traditional regulatory compliance approach with a preventive one to minimize risks.
Nor is it a purely formal exercise, a matter of checking a box or establishing a virtual process disconnected from a bank’s daily operations. The litmus test lies not so much in the definition of the constituent elements of banking culture, but in their practical implementation. As mentioned, it is not an exercise to be carried out because there is external pressure—which indeed exists—but it must be implemented because the bank’s survival depends on it. And finally, culture cannot and must not become a supervisory issue. Precisely because of the breadth of the concept and the need for it to be implemented with specific characteristics from entity to entity, it would be a very serious mistake to turn it into another supervisory requirement. Not only would it distort the concept and its practical utility, but it would also jeopardize the necessary diversity of banking models (including their culture) and turn this preventive exercise into one of mere regulatory compliance. This does not preclude an expectation that supervisors, while they will not determine the constituent elements of each entity’s banking culture, will pay increasing attention to monitoring banks’ efforts in this area. And not only those responsible for supervising rules of conduct, but also solvency supervisors (as any matter affecting a bank’s viability in the medium term falls within their competence).
But let us move on to the core of the efforts regarding culture. The first and most obvious pillar is for entities to understand and embrace the importance of efforts in this area, establishing clear corporate values and reinforcing them through concrete actions and, above all, through an active internal communication policy. This internal communication element is important and must include the possibility of receiving feedback from staff on this general framework, as well as systems for reporting specific problems. The second major pillar lies, as already mentioned, in proper corporate governance that provides the necessary tone from the top for banking culture efforts. Those efforts to implement appropriate corporate governance must include a special sensitivity of the board toward reputational risk; supervision of values and conduct that, in practice, translates into intense dedication to this matter at the board level; internal and external leadership by the board and senior management that not only reinforces the positive message of culture and values but also emphasizes the negative consequences of any action that conflicts with those values; and interaction with shareholders, customers, suppliers, and other market participants to capture any improvements that should be introduced. (V)
Another fundamental element of this strategy to improve banking culture is the establishment of clear incentives to ensure that the appropriate tone from the top is transmitted throughout the organization (not only does the “tone from the top” matter, but also the “echo from the bottom” and the “mood in the middle”). And those incentives must be symmetrical, that is, reinforcing appropriate behavior but also penalizing bad practices through relevant disciplinary measures. This is key to addressing the persistence of inappropriate niches or subcultures. Furthermore, systems must be designed to monitor the implementation of culture within the organization (something easier said than done, I fear). This effort must be extended to the level of managers involved beyond senior executives or those reporting directly to the CEO.
Educating staff on the bank’s values and its culture will be fundamental in all banking organizations. Only a repeated effort to remain faithful to the values and aligned with the culture defined by the organization can prevent problems from arising. Negative reinforcement elements must also undoubtedly be included, such as potential consequences for remuneration, promotion, and employment associated with behavior contrary to the bank’s culture. Furthermore, the use of concrete examples, both positive and negative, based on the entity’s own experience, reinforces the spread of change within the organization.
Allow me a brief aside to highlight that, once again, financial education, understood from the perspectives of both the customer and the bank employee, is called upon to play a complementary but fundamental role in this effort.
From a control point of view, the essential element for minimizing the risks of behavior contrary to the entity’s values lies, first and foremost, with the business managers, the most relevant factor both for transmitting a new banking culture and, more difficultly, for preserving it. This primary responsibility is fundamental for changing current approaches, which are more based on ex-post systems and are therefore less preventive. Obviously, risk management and control services and regulatory compliance (including internal audit) represent another basic pillar of establishing and maintaining banking culture, as they perform monitoring work that, while more traditional, remains key to detecting dysfunctions in time.
As a relatively new control element (VI), mention should be made of systems that allow employees to confidentially report situations that go against the entity’s culture and ethical standards (including, of course, regulatory breaches). These systems, which are even regulated in the Single Supervisory Mechanism, must not only guarantee the anonymity of the whistleblower in their work environment but also establish internal procedures to ensure that reports are investigated and have no consequences for the whistleblower.
An additional line of defense refers to personnel policy, that is, penalties for those employees whose actions conflict either with the rules or with the bank’s culture and ethical values. Penalties will range from the mildest (warnings, etc.), through sanctions and loss of remuneration, to the harshest, including dismissal.
Supervisory authorities have already announced that, while they understand it is not desirable to specifically regulate something as unique and somewhat ethereal as banking culture, they will monitor the procedures put in place by banks in this area (VII). In other words, although supervisors cannot determine the culture of each entity, they will closely monitor these issues within Pillar II (of the SREP) (VIII). Indeed, we are not only referring to conduct supervisors, who are traditionally interested in these matters. To the extent that the experience of both the crisis and subsequent years has shown how governance and conduct problems jeopardize the solvency of banks and ultimately their very survival, prudential supervisors are showing growing interest in these matters. Of course, it will be essential for the actions of the various authorities to be as aligned as possible, not only to limit the supervisory cost for banks but, above all, to ensure the consistency of the message. To the extent that the reinforcement of banking culture and the entity’s values constitutes a preventive defensive barrier, the risks of overlap will be relatively limited.
I have already mentioned repeatedly that banking culture, by its nature, should not be subject to regulation. But, if I may insist, past experience shows us that to avoid detailed regulation on a subject, strong international standards are needed in terms of codes of conduct, transparency, and monitoring of programs for implementing appropriate banking cultures; therefore, we should not give up on promoting international best practices in this area.
In this sense, it is worth pausing briefly, before concluding, on some international experiences related to this matter. First, the Dutch Central Bank launched a corporate culture supervision system in 2011 focused on the Board, which includes such innovative aspects as the incorporation of psychologists into supervisory teams to evaluate group dynamics within a bank board (IX). And although some may find this innovation not very reasonable or overly modern, some indications show that the Single Supervisory Mechanism or SSM (X) could incorporate some elements of this approach into its supervisory tools.
Another initiative, also Dutch, is the one carried out by that country’s banking association. This association developed a bank employee code of conduct (under the title “Future-oriented banking” (XI)) which, although not strictly part of the initiatives to promote an appropriate banking culture (as these are specific to each bank), does represent an interesting contribution, beyond the cultural differences that may underlie the various approaches. This document includes a bank employee oath, something that may seem symbolic but, in the Dutch legal context, is not: to the extent that the code of conduct is a deontological code (not very different from that of a doctor, for example), its breach can lead to civil liability toward third parties and the loss of employment in the banking sector. That is, far from being symbolic, it establishes a framework of individual responsibility for the bank employee. And it represents an interesting and, more importantly, credible self-regulation initiative.
Allow me to conclude. Initiatives regarding banking culture and values are not new, and at this institution, IESE, this is obvious. It is necessary to highlight that, unlike previous approaches, these have a more practical orientation: how to establish a corporate culture and how to maintain it over time, with the logical evolutions in a matter that must be dynamic. In the end, if a specific corporate culture is not developed, driven consciously from the top, another culture will be generated without control and probably inappropriately, as we saw in the FOREX scandal. Of course, it is not an easy matter, as only through testing and practical operation over time can it be verified whether it works or not.
In any case, I hope these words have been sufficient to highlight the growing importance of this matter. AEB member banks, in this as in other areas, are demonstrating their leadership and their rapid ability to adapt to changes in the business, regulatory, and supervisory environment. Thank you very much.
(I) See Group of Thirty, “Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform”, July 2015.
(II) William C. Dudley, “Enhancing Financial Stability by Improving Culture in the Financial Services Industry”, October 20, 2014, New York Fed.
(III) Alberto G. Musalem, “Why Focus on Culture?”, November 23, 2015, New York Fed. iv Clive Adamson, Director of Supervision, FCA, “The importance of culture in driving behaviours of firms and how the FCA will assess this”, April 19, 2013. v As for institutional investors, they are also recommended to establish bank governance as a priority when investing.
(VI) Here it should be remembered that the 2006 Unified Good Governance Code for Listed Companies, or Conthe Code, contains a recommendation regarding whistleblowing, specifically in recommendation 50, section d). Furthermore, this inclusion is inspired by an EC Recommendation of February 15, 2015, referring to the role of non-executive or supervisory directors in listed companies.
(VII) Danièle Nouy, “Towards a New Age of Responsibility in Banking and Finance: Getting the Culture and the Ethics Right”, November 23, 2015, ECB.
(VIII) See, again, Nouy (2015).
(IX) See DeNederlandscheBank, “Supervision of Behaviour and Culture: foundations, practice and future developments”, 2015.
(X) “With regard to material risk takers, we are considering making use of less conventional tools and techniques to improve our understanding of the behavioural and personality aspects of the risk-taking activities and of the dynamics of specific boards”, Danièle Nouy (2015).
(XI) The document has three parts: a new Social Charter, an update of the Banking Code of Conduct, and the bank employees’ oath, which is also new.
José María Roldán, Chairman of the Spanish Banking Association
