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Karen Egger Headshot

Banks Need a Culture Shock

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The bad practices that precipitated the financial crisis have become the central point of yet another U.S. lawsuit. Barclays Bank is the subject of an investigation for allegedly failing to comply with the law, just days after the U.S. government announced it is seeking $1 billion in a civil suit filed against Bank of America, alleging fraud in the granting of loans in the pursuit of quantity versus quality, a charge the bank denies.

But can legal actions like this change the reckless growth culture that contributed to the crisis in the first place?

The short answer is, unfortunately, no. Most financial institutions are still a long way from embracing the ethos of transparency and integrity and the real reforms necessary to win back the trust of their customers and ordinary people who still bear the brunt of the brutal recession that followed the crash.

The financial sector continues to lobby against more robust regulation, their top managers pay lip service to reducing bonuses but few have changed their incentive structures in a meaningful and sustainable manner. Pay incentives are still largely tied to short term financial goals.

And the same "revolving door" between regulators and industry continues to spin. Spending on lobbyists in Washington, D.C. -- always high -- soared in recent years from $80 million in 2006 to $102 million in 2011. In the latest U.S. election cycle, Wall Street firms are once again among the biggest financial contributors to politicians seeking election.

Total fines imposed on a handful of institutions could be paid out of the quarterly earnings of just one of the big banks. This is hardly sufficient to act as a deterrent.

All this sends the wrong message. What we need is tougher resolve from the regulators to rein in recklessness and a rethink how Wall Street makes its money. There are lessons to be learned from history. That is why Transparency International, the anti-corruption organization, put together a selectivetimeline of actions by financial institutions that contributed to the financial crisis of 2008. We need to learn from the mistakes of the past and act now if we are to avert a repeat.

We call on governments and the industry to implement badly needed and meaningful reforms. The Group of 20 leading economies has both a financial reform plan and an anti-corruption plan. Immediate implementation of these agendas would be a good first step to making the global financial system safer, but, as we have emphasized to G20 leaders, they need to go further.

Financial institutions themselves also need to take the lead. JPMorgan, Lloyds TSB, UBS and Citibank have said they are reviewing their pay and bonus policies. This is likely a reaction to a mini-surge in shareholder protests earlier this year, which saw a handful of compensation committee proposals from financial institutions rejected, most famously at Citigroup. This is a positive step, but the industry should now put in place -and not only discuss- sustainable remuneration policies and procedures that take a long term and qualitative approach.

In addition, there should be much greater public disclosure of all aspects of bank activity- details of their governance and organisational structures (both on and off balance sheet), the loans they make and how they make them, and their financial contributions to the countries where they operate.

Transparency too often means sharing information between regulators and banks while leaving the public in the dark. This cosy arrangement has failed us before. Taxpayers must not be expected to bear the financial risks while private interests reap all the financial gains.

Finally, banks should not be permitted to negotiate confidential settlements of the claims against them. A full and transparent hearing of the facts is needed to restore trust and integrity to the banking system.

Greater transparency would allow a wide set of stakeholders -- shareholders, creditors, analysts, the financial media and civil society organizations -- to do their job of exposing and monitoring excessive risk taking and other short-term approach.

In the world of high finance, instilling a culture of integrity is not an easy sell, but it is a necessary one. As we have seen over the past years, too much is at stake.