How (not) to define banking culture

The Group of Thirty has recently published a report entitled Banking Conduct and Culture. The Group of Thirty is a high-profile think tank covering global finance with members such as Paul Volcker, former Chairman of the Fed; Mark Carney, Govenor or the Bank of England; and Mario Draghi, President of the ECB. As the subtitle indicates, the report is meant as a “call for sustained and comprehensive reform”:

“There must be a sustained focus on conduct and culture by banks and the banking industry, boards, and management. Firms and their leaderships need to make major improvements in the culture within the banking industry and within individual firms.” (p. 11)

A lot about the report is to be recommended. It provides a good overview of current interventions to improve organisational culture in banking. It urges leaders of banks as well as regulators to move beyond lofty value statements, towards a firm integration of an ethical culture into banks. It does so by calling for a “fundamental shift in the overall mindset on culture”, and making ethics count when designing incentive structures, performance management, and promotion paths.

Alas, the report fails at providing a helpful definition of organisational culture. It fails in ways that some very old-fashioned conceptual analysis could have prevented. Continue reading

Ethical Government Bonds

Pacta sunt servanda – contracts must be kept. This legal doctrine is only acceptable from an ethical perspective if certain conditions in addition to the consent of the contracting parties have been met. These conditions include the requirement that the parties to the contract understand its content; that none of the parties dominates the other; that the background conditions that regulate how difficult it will be for either party to satisfy the terms of the contract should be sufficiently stable and predictable; and that the parties to the contract are identical to the persons bound by it.

The sovereign debt contract common today violate these requirements. Consider Greek debt: The officials in the Greek government and the members of the Greek parliament do not just enter a contract on their own behalf when they decide to issue government bonds, but they force tax obligations on Greek citizens and even their progeny to cover the servicing, and perhaps repayment of the debt. How onerous this tax burden is depends on the economic development of Greece in the next couple of decades, which is neither predictable nor likely to be stable.

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Financial Ethics: Taking Responsibility for the ‘Stupid Stuff’

Ethics in financial services is suddenly a major concern for the most prominent US bank supervisor.

In a speech at the Bank of England on 20 January 2015, Thomas C Baxter, Executive Vice President and General Counsel of the New York Federal Reserve Bank, proclaimed, “At the New York Fed, we have made ethical culture a priority for financial services.”

As tangible evidence of this priority, the New York Fed held a workshop on 21 October 2014, on ‘Reforming Culture and Behavior in the Financial Services Industry,’ in an effort to understand the causes of ethical failures and to develop strategies for improving the ethical cultures of large financial institutions.

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