NY Fed President William Dudley encouraged financial institutions to ensure that incentives are aligned with responsible behavior, that policies and rules cannot be manipulated for profit and that controls are in place for the early detection of misconduct.
Mr. Dudley argued that the financial crisis and several post-crisis scandals were influenced by bank incentives that encouraged misconduct. Examples included (i) LIBOR manipulation, in which banks colluded to affect the rate for their own benefit, (ii) foreign exchange rate rigging, which involved the front running of client orders, and (iii) an unauthorized account creation scandal, where bank employees created accounts to hit quotas. Mr. Dudley noted the scale of the misconduct and expressed concern that the Forex manipulation took place even after details about the LIBOR-related misconduct were made public.
Mr. Dudley identified several areas in which incentives could be strengthened. In particular, he argued that managers should assume greater personal liability for misconduct, and noted that internal policies and controls should be in place to encourage staff to take early action and pay more attention to red flags.
Mr. Dudley further emphasized the necessity of a robust regulatory framework that is both efficient and transparent. He encouraged productive collaboration between regulators and banks, and stated that such a non-adversarial relationship can be mutually beneficial despite divergent interests in certain areas. In addition to effective regulation and supervision, Mr. Dudley argued, a bank's culture is crucial to ensuring a healthy financial system.
Mr. Dudley delivered his remarks to the U.S. Chamber of Commerce in Washington, D.C.
Commentary / Steven Lofchie
Mr. Dudley suggests that senior bank executives should be partially liable for any fines paid by the bank, apparently without regard for the need to prove any wrongdoing on the part of the executives. That does not seem quite fair, and it would certainly provide a remarkable "incentive" (to use Mr. Dudley's terminology) for experienced individuals to decide that they would not want to be senior bank executives.
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