Public trust in the biggest banks is low. I have 10 specific recommendations to cure the banks of their evil ways. Bankers will not like most of my proposals, but the time has come for radical reform.
The immediate danger is that a continuation of current behavior by many large banks threatens to undermine our global financial system. Christine Lagarde, Managing Director of the International Monetary Fund, has rightly warned that:" Ethical behavior is key to financial stability."
And bankers have parked their ethics in the basement garages of their vast skyscraper head office buildings. Bankers have lost their moral compasses.
The litany of wrongdoing, including criminal actions, pursued by the banks over the last few years is unprecedented. Major banks have been engaged in one or more of the following: cheating millions of home-buyers with sub-prime mortgages; violating American foreign policy sanctions on Cuba, Iran and Sudan; manipulating international interest rates and currency rates; laundering cash for tax evaders and international criminal gangs.
Too many powerful bankers no longer serve their communities and their customers first - rather they abuse their entrusted power to serve themselves first.
The remedy does not rest in even more complicated banking regulations, nor in flinging a few top bankers into prison (an unlikely event given the vast sums that banks pay their defense lawyers).
My recommendations for radical changes in banking to restore public confidence are based in part on two excellent recent reports - "Incentivizing Integrity in Banks" by the anti-corruption organization, Transparency International; and, "Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform,"published by the Group of 30, which is a top-tier "think tank" of mostly former finance ministers and central bankers.
1. Banks must reform their cultures and employee conduct by clearly stating that profit maximization is a secondary priority to that of serving all customers with fairness, integrity and efficiency.
2. Top bankers must be held more accountable by their boards of directors - boards must be willing to fire chief executive officers when major criminal actions have been uncovered within the institution.
3. Boards must ensure that senior managers demonstrate the right "tone at the top" and consistently communicate to all of the bank's stakeholders that integrity is the guiding light for all business operations.
4. Boards should establish precise guidelines for employee conduct and behavior and at least 50% of all pay to bank managers, including the chief executive officer, should be based on culture performance standards.
5. Banks should apply far greater diligence to vetting new employees, especially those who have worked for several rival companies to prevent bad guys switching from one firm to another.
6. Whistleblowers should be encouraged and protected so that managers can be swiftly alerted to wrongdoing.
7. The culture guidelines for good conduct developed by bank boards of directors should be regularly monitored by official banking supervisors to test if they are being consistently applied. Banks that are not performing well should be sanctioned with the supervisors publicly issuing warnings, or imposing fines, or preventing the banks from paying dividends to their shareholders.
8. The positions of chairman of the board and chief executive officer should be divided so that no single person has undue power in a bank.
9. Major banks should appoint chief reputational risk officers who report both to the chief executive and to the chairman of the board and whose mandate is to ensure that the bank's new cultural performance guidelines are efficiently applied across the entire institution, including affiliated and subsidiary companies of the bank.
10. No single employee of a bank should have total compensation that exceeds 20 times that of the average pay of all of the bank's employees.