Banks, Risk, Culture: What Role Does The Culture of Society Play In Banks’ Behaviour?

The role of the wider society in shaping the culture and risk profile of banks and other organisations might be more important than most people think. Understanding that role is extremely important for bank executives and risk professionals if they are to build organisations that are sustainable, economically and competitively, in the long term.

Two weeks ago I wrote an article entitled; Is Anglo Saxon Culture A Problem For Banking? Surprisingly, in comparison to my other articles on banks, risk and culture there was very little feedback to what I believe is a very important question.

Then, after some time, a friend and professional colleague on one LinkedIn group came back with a most profound statement which reads as follows:

Whilst the article targets Financial Services, I believe the underlying issue is far more pervasive across and throughout society. 

You have only to look at reports on the behaviours of some politicians, authorities, journalists, retail ventures and big businesses to draw parallels on “stakeholder management”. Whether it be reports of supermarkets cutting the margins of producers; governments and local authorities acting apparently against the best interests of those by whom they were elected; organisations taking advantage of their staff or journalists reporting propaganda and gossip in preference to news; we appear to be surrounded by data that indicates society has become desensitised and disengaged from the “personal touch” and “human feelings”. You can even look to reports of lack of respect for teachers in schools, abuses of elderly and vulnerable hospital and care home patients and “road rage” incidents to realise that society as a whole appears to have lost something that was once valued as basic good manners.

The very distinguished writer of the piece above lives in the UK but it is very obvious that the stated scenarios and conditions outlined exist in one form or another in many countries.

In the UK right now we have tawdry tales of the press hacking into the private phones of everyone, from ordinary people to royalty at Buckingham Palace, simply to get ghoulish and titillating details about their lives. That is how much of the press makes its money these days.

While in the US, a small group of Republican Party politicians allied to the so-called Tea Party shut down the government and threatened to force a default on US debt which would have plunged the global economy into meltdown unless their political opponents in the Democratic Party, including the President, bowed to their demands.

In the meantime, the US National Security Agency or NSA has been busy spying on the private lives of everyone including the UN and the Vatican. Further, lest we forget, bankers are just one of the many industries that spend billions of dollars (according to www.opensecrets.org almost $40 billion since 1998) on lobbying in order to persuade Congress to pass laws that are in their particular vested interest.

When all of the above is taken together we are forced to ask ourselves the question: Can one divorce the culture of an organisation and the individuals who work within it, from the culture of the society at large? (In an earlier book, The Human Asset Manifesto, I opined that for several reasons, both good and bad, it was simply not possible to achieve such a divorce).

Which of course leads us to the inevitable query: Are bankers really behaving worse than politicians, journalists and participants in other industries? Or, do bankers only really look worse than everyone else because they are the ones best positioned to take advantage of opportunities in societies where the game no longer seems to be fair?

Getting to the top is in today’s world is a very difficult proposition for the average person. It is notable that all US Presidents since Ronald Reagan were educated at either Harvard or Yale. In Britain, most Prime Ministers are graduates of Oxford and Cambridge who went to private school and that is irrespective of their political affiliation. In both countries social mobility is either stagnant or on the decline and the gap between rich and poor has reached epic proportions.

What does this mean for risk managers, auditors, accountants, HR and compliance professionals who are tasked with safeguarding the integrity and values of the institutions they work in? Does it mean that they have to try that much harder to train and develop basic ethical standards within their organisations while taking into account the environment and social context within which they work?

Before we can fully consider a response to these questions we need to revisit what happened during the subprime financial crisis.

Unlicensed brokers originated mortgage loans that in many cases their customers could not afford. This was particularly the case in respect of starter or Adjustable Rate Mortgages (ARM) which usually had an interest rate which reset at a much higher level in two years—resulting in the homeowner having a much bigger ans thus much less affordable mortgage than the one they started out with.

In many of these instances both brokers and prospective homeowners were aware of the fact that the latter could not afford the mortgage—especially if that mortgage was one of the infamous ninja loans with no evidence of an income or a job. Yet, neither party cared.

The homeowners simply wanted to get on the housing ladder in a frenzied market whatever the consequences. The brokers didn’t care because they were going to collect their fees when they passed the mortgage on to a small to medium-sized bank which in turn didn’t care because it could bundle such mortgages and pass them on to large banks for more fees.

The large banks were not diligent enough in their credit assessment of these mortgages as they could securitise and sell them on to investors. In addition, rating agencies and monoline insurers who respectively rated and insured these securitised mortgages, thus enhancing their marketability, were not as diligent in their work due to the large fees they were receiving for doing the business.

While this was all happening, central bankers and governments proclaimed how wonderful their economies were while newspapers cheerfully echoed the good news and everyone else went out and bought more—mostly on credit of course.

In the final analysis, much of the rest of society was just as responsible for the financial crisis as the bankers. It is perhaps an unsettling thought. However, it does provide one very important lesson and that is that the banks that will be economically and competitively sustainable in the future will be the ones that don’t blindly follow the latest market trend and are also cognisant of how behaviours in the wider society impact strategy, decision-making and the risks within their organisation.

Bankers and risk professionals, including risk managers, auditors, accountants, HR and compliance officers, will need to adapt to this new focus on the impacts of the culture and behaviours of the wider society on their organisation—as well as pay even more attention to developing and nurturing the right culture and behaviours within their organisation.

Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse)

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