After the Great Recession of 2008, various governments around the world hoped that strict rules regarding banking activity would prevent a future calamity of that magnitude from happening ever again. Reforms such as the Dodd-Frank Bill, the investigations into LIBOR rigging, and various Basel accords have aimed to place strict rules regarding how much banks can leverage, so that “too big to fail” becomes a thing of the past. Yet according to Stephen Platt, an adjunct professor at Georgetown University and author of “Criminal Capital: How the Finance Industry Facilitates Crime” that was released this month, regulators didn’t go after the most important reason behind the malfeasance: bank culture.
Platt bemoans the emphasis on technical fixes and capital requirements on banks as the equivalent of “putting larger sprinklers into a house full of arsonists” because the culture that promotes excessive risk taking was not checked. Platt confesses that this may be outside the purview of any specific piece of legislation, but it remains a problem that can allow banks to “light more fires” that can re-jeopardize the economy.
A particular instance that Platt said “moved him to tears” was when JPMorganChase CEO Jamie Dimon, in the midst of setting aside close to $1.1 billion for legal settlements for FOREX and other trading cases, said that institutions were “under assault” by regulators, and have begun pushing for the recent curbs placed on derivatives and certain credit swaps to be rolled back. The way to combat this, according to Platt, is to focus more on individuals within the institutions rather than institutions themselves, and insist on greater accountability and technical proficiency to analyze the risks involved with highly leveraged trading.
The Federal Reserve Bank of New York has attempted to curb this behavior by insisting that executives chip in when banks are fined, largely as a result of an undercover investigation alleging that the agency was too soft in their regulatory powers on banks it supervises. Platt hopes that this will help bank executives “set the right tone” within their offices and create meaningful behavioral change.