Risk Management

03:50 PM
Andrew Waxman
Andrew Waxman
Commentary
Connect Directly
LinkedIn
Twitter
RSS
E-Mail
100%
0%

No Screwups, Please, We’re Banks

Changing a bank's culture is not going to happen overnight, but having the right tools and levers in house will surely make a big difference over time.

The FX scandal for which six banks just paid more than $4 billion in penalties is just the latest in a series of regulatory failures and banking scandals. It's likely that banks will offer additional billions of dollars as penance for FX and other sins. So maybe they should simply adopt a policy of no screwups. At this point, it would seem to be the easiest way to get back to making money. That is easier said than done, of course. How would they go about doing this?

Three places they might start are hypersensitivity to the regulatory environment, applying incentives to change employee behaviors and execution, and data analytics.

In terms of hypersensitivity to the regulatory environment, it is no longer good enough to be aware of the rules governing banks. Banks and their whole staff need to be hypersensitive to the day-to-day impact on how they conduct business. First, the rules governing banks' activities are changing every day, not just in the US but everywhere. They can fall afoul of regulatory authorities simply by not understanding and then executing compliance with the latest regulations. Ignorance, of course, is no defense.

Not only that, but certain rules in some countries and jurisdictions over some of a bank's entities may conflict with one another. It is impossible for even the most brilliant and aware lawyers and compliance officers to keep track of all these changes. Databases, in combination with big data and rules engines, are essential to ensure compliance. It is no longer just a "nice to have." Regulators, themselves aware of the complexities, are now expecting such tools to be in house with their examinees.

Lastly, it is not sufficient for those with oversight responsibilities to understand the rules. Those working in the front office need to understand them and conduct themselves within them.

The second lever is rewarding behaviors that help institute and support a "no screwups" environment. Traders are able to point to their impact on the bottom line, but it is harder for a really good risk manager or operations professional to do so. The impact of cost avoidance is every bit as significant, but how do we measure it? The number and amount of operational losses is one thing. In addition, there is evidence to suggest that clients are attracted to robust operating environments, where assets are perceived to be safe and well managed from an operational perspective. Shouldn't the folks who have established such an environment share in the financial rewards of attracting new clients?

Those in the front office who either take undue operating risks or establish cultures and practices that lead to operational losses and fines should have to eat those consequences. Where it gets tough, as evidenced by these repeated episodes, is forcing bad actors to change their ways. Too often those in operations and control functions are aware of practices that cut across ethical and business rules but have little incentive to say or do anything. If they run afoul of a big hitter, they are likely to lose their job. Support needs to be introduced to ensure that this cannot happen.

The third lever, data analytics, then should be used to provide data in support of regulatory compliance and identifying good and bad behaviors. In the case of monitoring regulatory changes, it is inadequate if not done in conjunction with identifying the impact of those changes on current business practices. There needs to be a direct mapping of what employees need to stop doing and what they need to start doing. Tools are available to help banks do that.

Data analytics are also critical if incentives are to be applied equitably to reward good and bad behaviors. Take the Bloomberg chat rooms that traders reportedly used to discuss their FX conspiracies. Tools to monitor these chat rooms could likely have been deployed effectively to identify the scandal brewing early on. With the systematic availability of metrics and hard data, proper transparency over negative behaviors could be provided without the need for heroics on the part of control functions.

Changing a bank's culture is not going to happen overnight, but having the right tools and levers in house will surely make a big difference over time.

Andrew Waxman writes on operational risk in capital markets and financial services. Andrew is a consultant in IBM's US financial risk services and compliance group. The views expressed her are those of his own. As an operational risk manager, Andrew has worked at some of the ... View Full Bio
Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
Becca L
50%
50%
Becca L,
User Rank: Author
11/30/2014 | 9:09:23 PM
Re: It's about accountability - not "hypersensitivity" or analytics.
I don't think it's too extreme to say that when you talk about personal accountability, that should go beyond reputation and fines, it needs to also include possible jail time. If it can be shown that executives turned an eye to an issue and showed no good faith effort to prevent fraud in the marketplace, there should be real-world punishments. If Sr managment is facing those kinds of repercussions, I'd say that's a powerful motivator for top-down accountability. (let the comment section blow up begin..)
Jonathan_Camhi
50%
50%
Jonathan_Camhi,
User Rank: Author
11/25/2014 | 1:55:07 PM
Re: It's about accountability - not "hypersensitivity" or analytics.
Good point, Greg. That is likely, and it won't be very helpful at a time when Congress needs to be taking action on issues that impact the industry like cyber security.
IvySchmerken
50%
50%
IvySchmerken,
User Rank: Author
11/25/2014 | 11:46:40 AM
Re: accountability
One regulator recently admitted that agencies cannot affect behavioral change. The way they approach this is to levy steep fines on the banks, in the hopes that these penalites will serve as a deterrant. The  fines on the recent FX benchmark rigging cases have been enormous. Banks pay these fines often without admitting any guilt. It will be interesting to see if C-level executives are able to prevent transgressions going forward.
NJ_trader
50%
50%
NJ_trader,
User Rank: Moderator
11/25/2014 | 6:21:48 AM
accountability
There is no accountabiltiy in financial services anymore. Bankers blame regulators, regulators blame underfunding from Congress, consumers blame banks (when consumers screw up), and banking executives never take responsiblity, execpt when the bank turns a profit. 
Greg MacSweeney
50%
50%
Greg MacSweeney,
User Rank: Author
11/25/2014 | 5:47:19 AM
Re: It's about accountability - not "hypersensitivity" or analytics.
To date, regulators have done a very poor job of holding actual C-level executives responsible for their bank's failings. I don't see that changing either, with the new Congress likely to underfund regulators across the board.
Jonathan_Camhi
100%
0%
Jonathan_Camhi,
User Rank: Author
11/23/2014 | 8:41:23 PM
Re: It's about accountability - not "hypersensitivity" or analytics.
That's a great point Matthew. I think that holding senior management responsible is the key to improving culture. But who's going to hold them responsible? I don't know see the regulatory bodies doing it. And if they don't, who will?
IvySchmerken
50%
50%
IvySchmerken,
User Rank: Author
11/21/2014 | 8:33:47 AM
Re: It's about accountability - not "hypersensitivity" or analytics.
I agree that senior management needs to convey zero tolerance for unethical behavior. Andrew's suggestion that those in operations and control areas are the ones that spot transgressions first but are afraid they'll lose their jobs if they cross a big producer, reflects the nature of current culture. Technology can play a role in monitoring activity. The recent examples of FX traders conspiring to rig FX rates (and profit against their clients) in electronic chat rooms shows there are ways to elude management. Did management know about this activity and look the other way?
MatthewS22201
50%
50%
MatthewS22201,
User Rank: Apprentice
11/20/2014 | 5:13:18 PM
It's about accountability - not "hypersensitivity" or analytics.
The easiest way reform banking culture is to hold senior management personally accountable for misconduct and increase regulatory capital.  That's it.  Leadership sets the tone.  All this stuff about "hypersensitivy" and analytics - nothing new.  The hypersensitivity wont exist unless senior management sets the tone.  How do you motivate them?  hold them personally accountable alongside the operators.  Do that - and cultures will clean up in snap.  Guaranteed. 
More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Inside Abel Noser's Trading Floor
Inside Abel Noser's Trading Floor
Advanced Trading takes you on an exclusive tour of Abel Noser's New York trading floor, where the agency broker known for transaction cost analysis, is customizing algorithms for the buy side, while growing its fixed income trading and transitions business.