Lagarde calls for banks to change culture of short-term risk-taking

Banks need to do more to shake up bonus-heavy pay structures and attack corporate cultures that encourage excessive short-term risk-taking, the head of the International Monetary Fund warned yesterday.

Christine Lagarde, IMF managing director, said since the 2008 global financial crisis much had been done on the regulatory front to crack down on banks and bankers and avoid a repeat of the turmoil.

But in a speech in Washington she cautioned that risks to financial stability were still elevated and the “culture” of the financial sector was at least partly to blame.

She said pay practices needed to encourage the long-term performance of banks and other companies rather than short-term gains. Shareholders also needed to be given a bigger say on pay, while banks should have the power to claw back pay and bonuses in the event of misconduct or changes in performance, she added.

‘London Whale’

More also needed to be done to improve internal risk-management structures, she said, citing the case of JP Morgan’s “London Whale”, in which a trader at the bank ran up $6 billion in trading losses. In that case, “financial risks were either ignored or underestimated . . . Failure happened at both the management and board levels.”

“Regulation alone cannot solve the problem,” she said. “Whether something is right or wrong cannot be simply reduced to whether or not it is permissible under the law. What is needed is a culture that induces bankers to do the right thing, even if nobody is watching.

“Ultimately, we need more individual accountability. Good corporate governance is forged by the ethics of its individuals.”

Regulators around the world have since the crisis placed an increasing emphasis on conduct and risk-management issues amid concerns that banking scandals could trigger new systemic risks.

Federal Reserve chairwoman Janet Yellen said yesterday that regulators had made “significant progress” in addressing distorted incentives that had made the banking sector dangerous during the crisis.

Top priority

Addressing the same event as Ms Lagarde, she cited tougher rules governing capital and liquidity requirements and said the Fed had made improved risk management and internal controls at companies a “top priority”. Lax controls contributed to “unethical and illegal behaviour” by banks and employees, she said. – (Copyright The Financial Times Limited 2015)