These remarks, of course, are coming from the guy who heads the same organization recently accused by a whistleblower of coddling bankers. Which reminds me of a neighbor I used to have: "Joey, don't touch those cookies, it's almost time for dinner." As Joey rippied open the cookies, she'd say, "Well, only take two." As Joey grabbed as much as he could hold, she'd say,"All right, just don't let your little brother see them." Joey ran into the living room to show the cookies to his brother -- who promptly ran into the kitchen to get some. "Oh, I just don't know what to do with them," she'd sigh. I can't imagine why this Think Progress story reminded me of that!

Bankers must fix a business culture that encourages bad behavior, Federal Reserve Bank of New York (FRBNY) head William Dudley told Wall Street executives in a speech on Monday. Without sweeping changes such as making managers pay regulatory fines out of their own pockets, he said, banks will force regulators to break the biggest firms up into smaller companies.

Citing “ongoing occurrences of serious professional misbehavior, ethical lapses, and compliance failures at financial institutions,” Dudley accused the bankers of repaying taxpayer bailouts and political deference to the financial sector with self-enriching malfeasance. “The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system,” the regulator said.

Cultural failings are difficult to reverse in large institutions. When those institutions control the financial health of the world economy, a culture of rule-breaking and risk-taking can end up destroying trillions of dollars of wealth for billions of people far outside that system.
The way big banks structure worker compensation helped drive the risky and dishonest deals that made the financial crisis so catastrophic, as William Black and other finance experts have convincingly argued. By linking pay to short-term outcomes, banks created a culture that encouraged staff and executives alike to make decisions that would boost returns in the short-term without regard for their long-term consequences.

Years after the crisis, there is still a cultural willingness to break the rules for personal gain. A 2013 survey of bankers found that one in four would break the law for a big enough payday. That ethical problem is more severe among younger members of the field, 38 percent of whom would cheat to win if given the chance.

In his speech, Dudley rejected the idea that bank abuses are caused by “a few bad apples,” instead blaming “the culture of the firms” which “is largely shaped by the firms’ leadership.” In addition to changing how they lead their companies in the day-to-day conduct of business, Dudley said, executives should rewire how they are paid in ways that would tie banker pay to regulatory compliance and to better outcomes for the broader economy.

Failure to effect cultural changes of this sort would ultimately mean “that your firms need to be dramatically downsized and simplified so they can be managed effectively,” Dudley said.

The comments come a little less than a year after Dudley’s last major public warning to bankers. Last November, the FRBNY president made headlines for suggesting that bankers believe themselves to be above the law. Then as now, Dudley said a “cultural shift” was necessary to prevent a repeat of the meltdown that caused the Great Recession.