Vulture culture

Bank culture powwow blends carrot, stick, naivete

Fixing Wall Street's culture is on US regulators' minds. The Federal Reserve held a closed-door powwow on the subject on Monday. Senior banking executives and board members spoke, as did two of the Fed's own bigwigs, who outlined ideas for pay structures, risk management and personal and institutional punishment. Their suggestions blend a mix of carrot, stick and naivete.

Even since the crisis, bad behaviour has still popped up regularly. The practitioners of high finance are good at talking about putting clients first, but traders still step over the line, in foreign exchange markets for instance, and conflicts of interest in M&A deals still crop up. Many firms even still let bankers trade the stocks of companies they might work for.

So it makes sense to consider changes that will outlast bankers' short memories. Fed Governor Daniel Tarullo had some decent suggestions, tapping, for example, former UK regulator Thomas Huertas' idea of a scorecard for "conduct risk". This would simply involve working out which products and businesses might be more prone to dodgy behaviour and monitoring them properly. He also recommends firms pay and promote not just rainmakers who bring in revenue but employees who spot risks and speak up to prevent losses.

New York Fed President William Dudley went further on pay. His idea is for a portion of bonuses to be paid with debt, deferred for up to 10 years and clawed back to pay legal costs and the like. Parts of this are workable. A few European banks already use debt as part of pay packages, and HSBC defers some executive compensation for a decade. In some respects it's a new take on the old partnership model, which Dudley worked under at Goldman Sachs.

Dudley also floated the idea of a central registry of industry wrongdoers. It's a nice idea, but has all the makings of a bureaucratic nightmare.

Official failings still need addressing, too. Regulators regularly drop the ball - on Tuesday, for example, the Fed's inspector general dinged the watchdog for not heeding its own employees' 2009 warnings about JPMorgan's derivatives trades. These cost the bank more than $6 billion three years later.

Dudley did, though, proffer the ultimate sanction, suggesting that if banks keep screwing up, they'll be broken up. He may well have to follow through on that one day.