“There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” Mr. Dudley said. “Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed” as regulators seek to deal with the problem of banks that are considered too big to fail, the official said.
That in part is why reforming the oversight of these financial behemoths is so important. “Tough enforcement and high penalties will certainly help focus management’s attention on this issue,” Mr. Dudley said, adding that “ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.”
“Imagine how incentives would change if a significant portion of senior bank management’s compensation each year were deferred to be available to cover future capital losses,” Dudley, 60, said today in a speech in New York. “The terms and the form of deferred compensation are an important tool that could be further developed to generate a better set of incentives consistent with our financial stability objectives….”
“We also need to create new mechanisms and incentives for bank management to act early, well before resolution becomes necessary,” Dudley said. “These actions can take many forms -- cutting capital distributions earlier, raising new capital faster, restructuring businesses sooner, and reorganizing senior management and boards of directors more radically when the firm is not performing well.”
Fed's Dudley: 'Deep Seated' Cultural, Ethical Lapses at Many Financial Firms [WSJ Real Time Economics blog]
Fed's Dudley Says Banker Pay Rules Could Help Curb Risk-Taking [Bloomberg]