Wall Street is always looking for a new way to impact the financial markets. Can
ID: 459056 • Letter: W
Question
Wall Street is always looking for a new way to impact the financial markets. Can regulators really stay a step ahead of Wall Street in trying to prevent future excesses? Consider that just a short decade ago, Enron executives were viewed as "The Smartest Guys in the Room" (and were portrayed as such in the CNBC documentary that analyzed why Enron outsmarted regulators). Enron was continuously supported and aided by investment bankers. Who will bankers, investors and hedge funds try to outsmart next?
Explanation / Answer
As they emerge from years of bruising fines, layoffs and losses, big banks are trying more than ever to monitor employee attitudes and values to avoid future problems.
But they also have little choice: Senior officials with the Federal Reserve and other agencies in recent weeks have made it clear that they believe bad behavior at banks goes deeper than a few bad apples and are advising firms to track warning signs of excessive risk taking and other cultural breakdowns. Still, even regulators acknowledge culture is a difficult thing to measure.
Industry experts say qualitative components, such as how banks monitor and measure risks, appear to be a greater focus this year in addition to the number-crunching aspects of the tests.
The result is a rush at firms including J.P. Morgan Chase & Co. and Wells Fargo & Co. to crunch the numbers on things like how often employees go to happy hour to how they score on a happy-to-grumpy ratio. One consulting firm hired by a major bank determined it was a red flag when employees used the word “workaround” in internal communications, indicating a willingness to bypass set rules or policies.
Privately, bankers and their advisers worry that regulators will use “culture” as a blunt instrument to find fault with banks on a range of matters, since the subject is by nature qualitative. BB&T Corp. Chief Executive Kelly King recently called culture “the new rabbit” Washington is chasing.
Bank culture, especially at large institutions, can range from how a teller interacts with customers to how highly paid traders make decisions and weigh obligations to their clients against the bank’s. That can make it different than other industries.
Wall Street more than other industries provides a mechanism that feeds the risk taking. Traders in particular are often incentivized to be confident and aggressive, and it is often those employees who rise to the top at the banks.
As a result, all the largest U.S. banks are grappling with how they might measure culture.
“The industry is sort of having a culture moment,” said Susan Ochs, founder of the Better Banking Project at the nonpartisan think tank New America Foundation. Ms. Ochs said she is discussing with bankers, consultants and regulators assessment tools that could be used across the industry based on her research.
Her group is part of a cottage industry of consultants and other experts that has developed around this issue. According to people familiar with the matter, banks are collectively spending tens of millions of dollars on such consultants.
Among other things, the Better Banking Project is developing an analytical survey for banks to give to employees to tease out ways of thinking that could turn into potential problems. For example, it is looking to identify cultural trends in a bank where employees believe selling complex products makes them seem smarter, or that pay is the best measure of success.
Promontory Financial Group, which is separately working with several global financial institutions, is measuring the response time by management to audit challenges, which could represent tension among departments. The firm is also helping clients craft action plans to put into place if a regulator reports weakness in the institution—even informally—and then tracking them internally to ensure they reach senior officials, said Elizabeth McCaul, a former New York superintendent of banks who now leads Promontory’s New York office.
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