Governance and Culture in the Banking Sector

Abstract

A growing consensus holds that cultural standards are at least as important as formal rules for the effectiveness and soundness of the banking sector. Nevertheless, the banking literature is mostly silent on cultural effects. We present an analysis of banking culture that draws upon prior sociological and economic work on organizational culture. We argue that the most important cultural practices in the financial services sector arose in response to pressing economic and social problems. But, once embedded into market activity, those practices became part of a toolkit that bankers could use in many contexts. In particular, after changes to the technological and legal environment within which bankers operate decoupled cultural practices from their original context, bankers started to deploy cultural devices in new fora where their social utility was less apparent. We examine this argument in the context of the LIBOR and Forex fixings, and we examine a number of policy prescriptions. The recent emphasis upon “tone from the top” is appropriate but, by itself, will be insufficient: culture can only be supervised and influenced by actors who are sufficiently immersed in it to decode the private languages upon which it is built.