On Thursday 21 November, the Systemic Risk Centre (SRC) and the Department of Management of the London School of Economics and Political Science (LSE) hosted an event on the “Challenges and opportunities in reforming bank culture”. Jean Pierre Zigrand (Co-director of the SRC), and Daniel Beunza (Department of Management, LSE), first welcomed the audience and the panellists, and underlined how this event aimed at launching an on-going conversation between sociology and finance. Such conversation is necessary to better understand the role of culture in banking, and to bring culture back into the conversation at a time when process- and structure- oriented solutions dominate the thinking surrounding future crisis prevention. This first event therefore gathered academics and practitioners, from both finance and sociology to discuss, from the various viewpoints, the challenges and opportunities in reforming bank culture.
Asked on his view on risk culture, Michael Power (LSE Centre for the Analysis of Risk and Regulation) defined it as the quality of risk taking within an organisation, and underlined how much this quality depends on “small things” such as the monitoring of compliance within procedures, or the frequency of Business Continuity Plan updates. Building a good risk culture, he noted, is a perpetual and dynamic balancing of trade-offs, such as, for instance, the choice of positioning the risk function within the organisation as an overseer or a business partner. He argued that the current debate on caution only might be unbalanced, and that a focus on a limited number and important trade-offs, rather than ethics and morals, would be more efficient.
Joris Luyendijk (The Guardian) then shared the findings of his anthropological study of 200 plus bankers in the UK, focussing on three commonalities: a shared narrative of “horror stories” on being (or seeing others be) laid off; a work environment characterised by life-changing incentives, minimum punishment and high opacity; and a social isolation of bankers within a bubble, where the loss of contact with relations outside that world, turned finance from a job into an identity. He reflected on the implications of said unstable environment, which can foster little loyalty and security, and could explain how rigging and unethical behaviours perpetuate with no reaction on the part of those in such a fragile position.
The third panellist, Peter Ewing (Financial Conduct Authority), shared the regulator’s perspective on how it can address the issue of culture in banking. He first remarked how essential culture change is if regulators wish to have a forward-looking role, and to prevent crises rather than to post-manage them. Considering that the regulator aims at reaching the right outcome for consumers and markets that operate ethically, he listed the main levers he assesses when reviewing companies: were ethical values, such as treating customers fairly, at the core of the companies’ culture? Did the top drive culture, with factual evidence of the CEO’s commitment and actions? And were the financial incentives consistent with these values?
Concluding the panel with his experience as a sociologist in a trading room, Daniel Beunza (Department of Management, LSE) related how his fieldwork contradicted the general view of traders, as materialistic and individualistic characters. The head of the trading room which he observed, privileged communication and collective work and was instrumental in creating this culture. The experience offered an insight into what an alternative banking culture could be. Daniel summarised that, to evolve towards an alternative culture, banks need to shift from a culture of innovation to a culture of responsibility, from a focus on internal value creation to a focus on external value creation, and from limited people-orientation to a strong interest in management and in people.
The lively Q&A with the audience revolved around the relationship between culture and structure. All the panellists agreed that they were highly interdependent, remarking that focus in structure was a result of pragmatism. All insisted on the need for heightened communication on cultural change, in order to root change in meaning and to make it persistent, or, as one panellist put it, to “change the DNA of the bankers rather than just train the animal”. To the question of whether separating retail and investment banking was important, panellists considered it as a major stepping stone, as some attributed the lack of internal drive for change in banks to the fact that the “too big to fail” principle allowed them to ignore the major market failure that had taken place in the crisis. Other topics of discussion included: the efficiency of principle-based regulation, whether ignoring tail-risk and tolerating criminal behaviour were the same, and how one could interpret the spread of cultural issues in other areas of banking, referring to the PPI mis-selling problems in retail-banking.
The second panel gathered practitioners from the consulting and financial area, to discuss from a pragmatic angle the challenges posed by the reform and transformation of banking.
Quentin Millington (Noble Stamp) told of how managers still underestimate the difficulty of change and the need for priority setting to effectively implement change. From his experience in working on issues such as leadership standards and the review of core values in large financial institutions, he presented a number of insights, including how changes need to work to enter the culture, and how management taking ownership for HR transformation initiatives is essential for change to happen. He also emphasised the benefit of discussion amongst involved parties, as current differences between regulators make change even more difficult.
Jan-Peter Onstwedder (senior risk-manager in a major financial institution) then shared his view on current issues in bank risk culture. He focused first on the ‘bubble’ of finance, which, coupled with human bias for short term interest, and badly designed incentives, could only lead to something going wrong eventually. He then considered how the business had become so complex, that it was not possible to expect anyone to take personal responsibility for it, and how therefore, cultural change through a call for personal responsibility ethic could not happen. He reviewed practices that, to him, could bring benefits, citing the existence of strong role models, open group meetings and ‘peer reviews’ of risk exposure to foster a collaborative and transparent culture.
From a corporate angle Jorge Alcover (Goldman Sachs International) illustrated how Goldman, following client concerns on conflicts of interest, had implemented independent recommendations to change culture. According to Alcover, ensuring that clients have knowledge of Goldman Sachs’ 14 business principles at point of hire and establishing a Standards Committee or further attention to reputational issues are essential elements to implement a culture of accountability.
Finally, Nina Andreeva (University of Cambridge) noted that although it is difficult to quantitatively track changes in bank culture, she has seen qualitative evidence of such change both in her risk management experience and her research on financial stress testing. She posed the question whether such change could be sustained in the future and emphasized that more needs to be done in order to avoid pre-crisis practices from coming back. Lastly, she underlined that while moderate regulation is necessary, excessive regulatory involvement had the potential of creating a culture of either box-ticking or game playing, which might be counter-productive to the aims of the regulators.
The Q&A session that followed explored the issues of ‘face time’ and lengthy working hours in banking, how regulatory constraints might be pushing risky activities into the shadow banking sector, as well as the potential conflicts between global and local cultures for international banks. Panellists concluded in agreement on the role of academia to inform decisions in financial institutions, and urged people to continue sharing experiences, perspectives and vocabulary between academia and practitioners through events such as this one.