Thoughts on Reputation and Governance in Banking

The following is a post written by Professor Ingo Walter, Academic Director of the MS in Risk Management Program:

The epic financial crisis of a few years ago inflicted immense damage on the process of financial intermediation, the fabric of the real economy, and the reputation of banks and bankers. Even today, some five years later, little has happened to restore financial firms to their former glory near the top of the reputational food-chain in most countries. For reasons of their own, many boards and managers in the banking industry have little good to say about the taxpayer bailouts and the inevitable regulatory tightening. In the words for former Barclays CEO Bob Diamond, “There was a period of remorse and apology for banks. I think that period is over. Frankly, the biggest issue is how do we put some of the blame game behind us? There’s been apologies and remorse, now we need to build some confidence.”

There have been some notable exceptions, of course. In the middle of the crisis Josef Ackermann, former CEO of Deutsche Bank and Chairman of the International Institute of Finance (the preeminent lobbying organization for the world’s largest banks), noted in 2008 that the industry as a whole was guilty of poor risk management, with serious overreliance on flawed models, inadequate stress-testing of portfolios, recurring conflicts of interest, and lack of common sense, as well as irrational compensation practices not linked to long-term profitability – with a growing perception by the public that banking was the playground of “clever crooks and greedy fools.” Ackermann concluded that the banking industry had a great deal of work to do to regain its reputation, and hoped that this could preempt damaging regulation. It was already too late for that.

Crisis-driven reputational damage at the firm level can also be inferred from remarks by Peter Kurer, former Supervisory Board Chairman of UBS AG, who noted at the bank’s annual general meeting in April 2008 that “We shouldn’t fool ourselves. We can’t pretend that there has been no reputational damage. Experience says it goes away after two or three years.” Perhaps it does, perhaps not. But the hemorrhage of UBS private client withdrawals at the height of the crisis and immediately thereafter suggests severe reputational damage to what was then the world’s largest private bank.

Read the entire article.

This entry was posted in Reputational Risk, Structured Finance, Systemic Risk and tagged , , . Bookmark the permalink.