Starling mentioned in an article by Jacob Schlesinger
Richard Ketchum, chairman of the Financial Industry Regulatory Authority, or Finra. SHANNON STAPLETON/REUTERS
When a top Wall Street regulator issued its examination priorities for 2016, the checklist included a mix of conventional benchmarks: cybersecurity, anti–money–laundering controls, liquidity and the like. But for the first time, the amorphous notion of supervising “culture” made its list, too.
“Given the significant role culture plays in how a firm conducts its business, this year…we will formalize our assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices,” Richard Ketchum, chairman of the Financial Industry Regulatory Authority, Wall Street’s self–regulatory organization, wrote in his letter introducing the plan.
Mr. Ketchum elaborated on the unusual campaign in his May 23 speech to Finra’s annual conference with an address titled “Commerce and Compliance: It’s Nota Culture War.” In the speech he used the “c” word 47 times.
That heightened emphasis on ethos reflects a growing attempt by financial supervisors to formalize what has become a popular, but still nebulous, fixation.William Dudley, president of the Federal Reserve Bank of New York, helped kick off the trend with a speech three years ago exhorting Wall Street to clean up its culture,following up with two conferences on the subject over the past two years. “Culture has a major influence on the outcomes that matter to us as regulators,” declaredAndrew Bailey, one of the U.K.’s top banking regulators, in a May 9 speech on the topic in London. “We talk often about credit risk, market risk, liquidity risk, conduct risk” he added. “You can add to that hubris risk.”
Culture has become the “third wave of regulation” promulgated post crisis, analysts for two Washington consulting firms, Hamilton Place Strategies and Starling, wrote in a recent report titled “Culture–Prudential Regulation.” (The first two waves were micro prudential, focused on firm–specific measures, and macro prudential, targeting industry–wide trends.)
This regulatory cultural awakening is both logical and illogical from the bureaucrats’ standpoint.
Logical because regulators remain frustrated with what they perceive to be continuing scandals and misbehavior at big financial firms. And they continue to express disappointment with how the management at financial firms has implemented post crisis mandates. Such criticism came most recently when U.S.
banking regulators in April rejected five mega banks’ “living wills,” plans designed to show they could go through bankruptcy without requiring a taxpayer bailout. This was the second time these institutions got failing grades on their blueprints, following a similarly harsh verdict two years ago.
Illogical, because, well, how exactly do you regulate culture?
“Culture is not like capital. There is not a standard template that can be applied across the industry,” the Hamilton Place–Starling report observed. At the end of last year, the U.K.’s Financial Conduct Authority dropped as unworkable a sweeping plan, announced just a year earlier, to examine whether banking–industry culture was “driving the right behavior.”
“As supervisors, we cannot go into a firm and say ‘show us your culture,’” Mr.Bailey, who is set to take over the FCA in July, said in his May speech devoted to trying to articulate the right balance for regulators going down this path. “We can,and do, tackle firms on all the elements that contribute to defining culture,” he said.But “it is not for us as regulators to prescribe culture, that would not work.”
Read the full article at The Wall Street Journal