Investment Bank Culture: A few 'Bad Apples' or a 'Bad Apple Machine' ?

Bloomberg reported this week that a number of banks are having difficulties hiring managers for senior roles in banks as new rules, such as the Senior Manages Regime, come into force. These new rules mean that bankers in job functions with senior level responsibility face potential personal liability for wrongdoings and conduct failures under their watch. Not surprisingly the thought of being led away in handcuffs, or paying personal fines, based on the action of a few rogue traders or salespeople somewhere in your department has a way of focusing the mind.

Naturally senior bankers are nervous. Already charged with the difficult job of navigating the complex and chaotic waters of financial markets, they now potentially face personal liability for the wrongdoing of others. The risk does not end there either; the liability remains for a further 6 years after they leave the role. Our own private conversations with banks reveal that the problems of hiring people for senior roles is actually a much bigger issue than the headlines suggest. Many of these roles are being treated like a 'hot potato', with fast turnover and people imposing their own glass ceilings for fear of becoming someone with 'Senior Manager Functionality'. Hiring people with suitable credentials and knowledge is a tough enough challenge, this is making it significantly tougher. However, there is another less obvious point arising from this which is getting less attention: People from inside banks are avoiding these roles and that reveals something about the banking industry which should be taken notice of. The current system and culture in most banks potentially still cultivates and fosters the very ‘conduct risks’ which banks need to avoid. Despite all the billions spent on mandatory training, monitoring and surveillance, the root of the problems has not yet been adequately tackled. People inside banks know that the problems of recent years were not so much about a few ‘bad apples’, but rather about a ‘system’ which creates ‘bad apples’, and allows ‘bad apples’ to thrive. 

What about current regulatory efforts, shouldn't that provide the confidence that Senior Managers are protected?

Banks have committed vast sums to increased compliance and regulation. The FT last year suggested some bank are committed to an ‘additional’ expenditure of up to $4 billion per year. It is believed around 30% of investment banking revenue is now absorbed by regulatory spend. And yet still the Senior Managers remain nervous. As behavioural consultants working with banks, we have held numerous conversations with people in the industry, and what we are hearing is that there still remains a high level of uncertainty as to how much safer banks are when it comes to 'conduct risk'. - In reality a repeat of further fixing scandals is incredibly low, that door is firmly bolted shut now. In addition, some banks have built excellent monitoring and surveillance systems, I am of no doubt these will help to a degree. However, financial markets are complex, volatile, uncertain, and by their nature are reinventing themselves all the time. It is possible the problems and scandals of the future may already be taking root somewhere. When these future scandals do reveal themselves, initially banks will probably dismiss them as 'unforeseen circumstances' or 'aberrations'. However, use of these terms of defence has now worn thin. The problem is that in all previous scandals and failing, usually the signs have been there all along, just they were ignored due to the revenue being generated. In all these cases, people inside had a strong sense that something wasn't right, even if they could not put their finger on exactly where it was.

How do you change the system that is so well established?

Behavioural change and cultural change in bank’s trading and investment banking businesses require the breaking of deeply ingrained habitual responses, entrenched organizational attitudes, and long held processes and practices. The path to success in these businesses is a well-trodden path which gets passed down from managers to traders and salespeople who become the next set of managers. This creates series of self-reinforcing loops which becomes the system and defines the culture. It is this which creates the ‘bad apples’. At this juncture, I want to make it clear that not all is damned, there are many bright-spots and areas of good culture too. Every bank will have a patchwork of cultures, some bad, some good, and many in between that could be better. It is noteworthy that not all banks were guilty of the Libor or FX fixing scandals, even if all banks had troubled areas. As an example, Credit Suisse, like many tier 1 investment banks was engaged in a host of activities which were hit with huge fines. However, when it came to Libor, and despite being one of the main Libor rate setting banks, their London Libor team were found to have behaved without a single indiscretion. A thorough investigation found not a signal shred of evidence that they were ever involved in any Libor fixing manipulation. This did not come as a surprising to me. I use to work as part of that team in the early 1990s, though not directly in Libor fixings. This team then was highly ethical and conscientious. They were productive and very successful too, but it mattered to them to do the job well and fairly. Anyone engaged in activities that crossed boundaries of impropriety would immediately have been pulled up, and if they continued they would have been asked to leave. Crucially this team largely remained unchanged: There was continuity, consistency and strong management, as well as enterprise, innovation and endeavor.

It would be unfair to say they that the banking system is bad or even rotten, even if does look that way at times. Rather it needs a serious overhaul to improve it. External measures, such as mandatory training, monitoring and surveillance, new 'codes of conduct', only have a limited effect and provide very little 'bang for the buck'. The Senior Managers Regime, and other measures aimed at conduct and behaviour, are getting people's attention. If banks want to really respond to these and the bigger picture, then they need to address the system. This will require real transformation, not short-term measures which are transitory at best. This may not sound easy, but the stakes are high, if banks cannot find senior managers, then they really do have problems.


Steven Goldstein is a leading risk performance consultant and executive coach working with banks and financial market businesses to help them transform their risk culture, to be more productive whilst reducing the risk of future 'Conduct risk' failures. Steven has over 30 years’ experience working in and around financial market FICC businesses. For 23 years Steve worked as a senior trader in rates and FX at leading investment banks, including Credit Suisse, Commerzbank and Standard Chartered. Since 2009 Steven has worked with banks, hedge funds and energy trading firms, helping risk takers, teams and managers transform their performance and behaviours. He has achieved considerable success in his work has led to significant performance improvements and behavioural enhancements. Steven draws on his own experiences, high powered coaching and consulting techniques, and tenets of behavioural finance in his work.
Image 'Rotten Apple Fruit' by samuiblue courtesy of