Corporate culture.

It's a term, though hard to define, that gets thrown around a lot. Few would disagree that corporate ethics need to improve after recent scandals; regulators are pushing heavily for reforms. But who should take the lead in forcing those changes — government or industry — and how easily they can be accomplished are hot topics of debate.

Those were the takeaways from a spirited discussion Wednesday among industry executives and others that opened the Clearing House's annual meeting at the Pierre Hotel in Manhattan.

Changing bank culture can help the financial services community regain the trust of the people it serves, said Thomas Baxter, the general counsel at the Federal Reserve Bank of New York, echoing similar comments made recently by his boss, New York Fed President William Dudley.

Regulators should seek to influence the nature of bankers' behavior in the course of supervision, Baxter argued. To illustrate the need, he pointed to the recent settlement over foreign exchange trading, in which six banks, including Citigroup and JPMorgan Chase, were ordered to pay $4.3 billion to settle allegations over the rigging of currency benchmarks.

The traders at the center of the scandal operated according to their own set of rules, Baxter said.

"One of the characteristics you will see is those people have loyalty not to the organization, but to their tribe or to their network," he said. "They were the bandit boys."

Others on the panel agreed. The traders operated in a separate "micro-culture" within the organization, according to Gary Lynch, global general counsel at Bank of America.

But reforming culture requires more than rooting out rogue behavior, said Bill Woodley, deputy chief executive officer at Deutsche Bank North America.

Senior managers not only set the tone for an entire organization, but they are also responsible for identifying the more subtle interactions that motivate unlawful conduct, he said.

"It's about attitudes," Woodley said. "I think it's about elements of not pushing the envelope, not always trying to be on the edge of business to gain an advantage, and areas like that are much more difficult to identify."

It's about changing the ways employees conduct themselves, he argued.

"If you actually look at some of the [foreign exchange] examples, executive compensation wouldn't have necessarily taken away all that bad behavior," Woodley said, noting that employees often think that their actions are done in the interest of company goals. "It was much more about being boastful."

Marcus Stanley, policy director at Americans for Financial Reform, said the responsibility on companies is heavy.

"If you don't get deep into the details of what your people are doing ... then you're inviting it and asking for unethical behavior at the lower levels," Stanley said. "That's how the mob operates."

Bankers throughout the panel discussion questioned regulators' authority to push for improvements in the internal goings-on of large organizations.

Recent multibillion-dollar legal settlements have produced a culture of cynicism within financial firms, Lynch said.

"As you know, we paid many billions of dollars to settle allegations--and this wasn't compensatory money or restitution, just fines for conduct that occurred at Merrill Lynch prior to the time that the government required us to close on that deal."

Shareholders are being punished, he said, while prosecutors are scoring political points.

"The question is why should our shareholders be held accountable for conduct that occurred at an institution that they were forced to acquire?"

Paul Saltzman, president of the Clearing House Association, said that banks, without question, should prioritize regulatory compliance as a company value. But he questioned whether bankers have the bandwidth to address the issue of improving company culture, given the increasing complexity of regulators' demands.

"I would say that the cumulative regulatory framework...absolutely inhibits the kind of cultural change that Tom and we all seek," he said.

The debate has been lingering, but picked up momentum in recent weeks.

The New York Fed's Dudley urged bankers last month to clean up their company cultures, or risk being split up.

"It is how people react not only to black and white, but to all the shades of gray," he said in prepared remarks on Oct. 20. "Like a gentle breeze, culture may be hard to see, but you can feel it."

Kristin Broughton is a reporter for American Banker.

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