Weekend Reading: Mourning in America — What Next for the Culture Reform Agenda?

By: Stephen J. Scott , Founder & CEO of Starling

Well, that was exhausting.

The close to the U.S. general election last week will, no doubt, excite many emotions — among them, relief that the event is finally behind us. At least with a colonoscopy you get a good nap. In the course of a general election, by contrast, the nation probes around its bowels with eyes wide open. The experience is both revealing and deeply unpleasant.

For my own part, the election has inspired an unlooked-for sense of optimism. Regardless of how one may have wished the race to conclude, perhaps the most important conclusion is this: democracy works. Pundits will parse the election results for years to come but, even at a cursory initial glance, it is clear that this election was largely decided by "the working class."

And, in my view at least, that is how things should be. I may not always agree with popular sentiment but, in a governmental system that truly aspires to be one "of the people, by the people, and for the people," popular sentiment is perhaps the central concern. A leader may hope to reshape popular sentiment — indeed, that may be the principal task of leadership — but it can't be ignored when it runs the other way: you can't lead if you're not followed.

In keeping with his honorable example of life-long public service, President Biden pointed to precisely this when he reminded Americans, "You can't love your country only when you win." I have a feeling history will recall that line.

Among despondent Democrats, the soul-searching has already begun. They'd do well to heed the advice of political scientist Ruy Teixeira — formerly of left-leaning think-tanks like The Brookings Institution , the Progressive Policy Institute , and the Democratic Leadership Council , and yet currently a Senior Fellow with the traditionally conservative American Enterprise Institute .

In an interview with the Wall Street Journal last week, Teixeira takes inspiration from Bill Clinton. "Clinton was used to talking to people who didn't agree with him. And I think Democrats need to discover that again," Teixeira said. "They need to ask themselves, 'How do we talk to people who don't agree with us?'"

Indeed, this is a lesson that many may need to learn and re-learn. In what has been called the "biggest election year in history," with voters in over 75 democracies taking to the polls, the Financial Times notes that "Every governing party facing election in a developed country this year lost vote share, the first time this has ever happened."

In the U.S. last week, whether among immigrants, women, the working class, and even LGBTQ+ voters, early evidence suggests that many felt their vote was simply taken for granted. That must change if losing parties are to recapture governing power — and if the newly elected are to keep it.

"I've had it with this shit."

Working class voters aren't alone in feeling unheard. Less than two weeks before the election, JPMorgan CEO Jamie Dimon made headlines when he gave voice to a frustration felt by many in banking. "I've had it with this shit," Dimon said. Though typically outspoken, even for him the remark was … um … unambiguous.

The last four years have been characterized by what critics have termed a "tsunami" of regulation, and antipathy between banking sector executives and industry overseers has grown fraught. "I think, if you're in a knife fight, you'd better damn well bring a knife," Dimon said. "It's time to fight back."

And fight back the industry has. In the U.S., after a remarkably effective lobbying campaign, efforts to push through the Basel III 'Endgame' were stalled last summer. "It seems that, 16 years after Lehman, implementation fatigue has started to set in," Financial Stability Board Chair Klaas Knot remarked late last month, warning of economies "in free fall" should another crisis strike.

I spent the week of October 21st at the IMF/World Bank meetings in Washington. Sensing a shift in the wind, the mood among many banking sector regulators seemed almost mournful. After 15 years of macroprudential policymaking focused on solving the "too big to fail" problem with amply plumped up capital cushions, efforts to implement proposed capital reforms appear to have been torpedoed.

"The work to fix the banking system fault lines exposed by the GFC is not done," warned Erik Thedéen, Chair of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank. "We need to lock in the financial stability benefits of implementing the outstanding Basel III standards in full and consistently, and as soon as possible," he urged. It was a sentiment I heard repeated by many of the global figures from officialdom who had gathered in Washington.

Perhaps unsurprisingly, industry attendees had other priorities. Many believe that regulation has run amok, and that regulators have opted for pugilism over dialogue. Moreover, many feel that the capital reforms proposed by the Basel accords are poorly calibrated to economic reality, that they will produce unlooked for harm, that they will fail to achieve the stability at which they aim, and that, in pushing their reform agenda, regulators contravened the norms of due process.

For many industry figures, the election thus represented an opportunity to push back on unchecked regulatory zeal, and to insist that their voices be heard. The post-election mood on Wall Street has been jubilant.

After efforts to press ahead with the Basel III Endgame stalled in the US, the Bank of England pushed its own capital reform planning into January 2026. And after last week's election results, calls to slow or soften the reform agenda have grown across Europe as well. If the banking sector overseers gathered in Washington fretted last month that their capital reform agenda had slowed prior to the election, they're now likely concluding that the proposals are dead-on-arrival.

Personnel is policy

Thus stymied, the battlespace now shifts to supervision.

"Regulation is the highly choreographed process of generating public engagement in the creation of rules," wrote Wharton professor Peter Conti-Brown in a 2021 article published by Brookings. Banking industry executives, who complain that the process is less well "choreographed" than it should be, have now grown suspicious of efforts to achieve through supervision what regulators cannot achieve through further rule-writing or capital offsets.

Conti-Brown describes supervision as "the mostly secret process of managing the public and private responsibilities over the risks that the financial system generates." He observes that the supervisory process is enshrouded by a "culture of secrecy" that affords supervisors a form of unchecked discretion. "What supervision looks like on the ground depends almost entirely on what supervisors think they are trying to accomplish," he writes.

Heady with victory in their pushback against what they consider regulatory over-reach, some bankers and industry advocacy bodies are targeting "the administrative state" and any attempt at a supervisory end-run that aims to achieve "regulation by enforcement." Such concerns are sure to be front of mind as a new administration takes shape in Washington.

"Supervision remains the most important tool in the federal administrative toolkit for changing the way we understand the business of banking," Conti-Brown argues. "If the public is going to have a say in the kind of supervisory system we should have, then the appointment process is likely the first and last chance to do it." Wall Street executives are well aware of this, of course.

Incoming administration officials are likely to target the inscrutable 'supervisory discretion' that Biden officials have emphasized. "Supervision is a craft," argued Acting Comptroller of the Currency Michael Hsu last September, in a speech offered at a joint European Banking Authority / European Central Bank conference. Effective supervision, Hsu suggested, is characterized by "good judgement" and an "unwavering commitment to public service."

Perhaps, but the wisest among us can reach different conclusions when rendering judgement, and even the most well-intentioned people can disagree about how the public is best served. It is therefore not unreasonable that bankers might question supervisory judgement and motives.

And when such questioning erupts into public view — "I've had it with this shit" — because of the secrecy with which much supervisory work is done, the public can only wonder whether 'greedy bankers' or 'out-of-touch' supervisors have the better argument. How can we know?

Thus it is unsurprising that bankers have shown a greater readiness to sue the government and to bring their complaints into the court of public opinion. If they are to avoid becoming mired in litigation that will further undermine public confidence in already troubled institutions, U.S. bank regulators will need to establish a new, more collaborative dialogue with the industry.

Safety & Stability v Growth & Competitiveness

In his Brookings article referenced above, Peter Conti-Brown offered a schema by which to assess "Paradigms of Supervision." (Figure 1) If the dominant paradigm over the last four years has been that of the punitive "Systemic Risk Manager," going forward, I expect we'll see politicians in most markets pushing regulators in the direction of more collaborative "Management Consultants."

Across the globe, concern for the systemic risk problems of the Financial Crisis has faded in public consciousness. Wearied by Covid-wrought disruptions, and furious about inflation and perceived economic inequities, people are more concerned about their declining future prospects than they are about past crises.

Politicians have taken note, and yesterday's 'safety and stability' agenda has been displaced by today's demands for 'growth and competitiveness.' In the EU, for instance, the prospect of a more protectionist U.S. has prompted a greater focus on competitiveness, along with calls to relax bank capital rules.

And in the UK, where the City of London contributes some 12% of the total tax receipts that fill government coffers, Parliament has issued bank regulators a formal competitiveness mandate. "Growth is the cause that binds us together," Prime Minister Keir Starmer proclaimed in a speech delivered at a mid-October International Investment Summit.

"We recognise that the jury is out on whether the [Financial Conduct Authority] is helping to achieve growth," FCA Chair Nikhil Rathi offered at the annual Mansion House City Dinner last month. But, "how do we keep improving performance on primary [safety and soundness] objectives, whilst firing on all cylinders on the secondary [competitiveness mandate], too?"

"Unelected officials should not have pet objectives of their own, Prudential Regulation Authority head Sam Woods argued at that same event, in a speech entitled "Competing for Growth." The PRA is, "committed to our new [competitiveness] objective, and [we] are taking concrete steps to improve our regime's contribution to UK growth and competitiveness," Woods insisted.

"Parliament has spoken, and we will deliver," Woods said, before emphasizing that the regulator achieves impact on economic growth "by maintaining financial stability." And here we see what will likely define future debate. While some will call for a wholesale easing of regulatory 'burden,' and others will emphasize the need to implement the Basel accords, some will insist on balance.

"It is a fundamental misconception to frame safety and competitiveness as opposing forces," ECB Supervisory Board Member Elizabeth McCaul argued last month. "A stable and secure financial system forms the bedrock of long-term competitiveness." McCaul is right, in my view.

But the operative question is how stability and security are to be achieved without putting growth and competitiveness at risk. Heretofore, regulators have sought to answer that question through a mix of capital controls and supervisory judgement. These answers have now fallen flat.

What answers should we look for going forward, and how are they to be reached?

A Pro-Culture Agenda is a Pro-Growth Agenda

As we have tracked closely at Starling Insights, over the last decade, banking sector regulators in a majority of global markets have concluded that culture matters. They are right.

Alas, as I have complained previously, discussion of the topic of culture among the global regulatory community is unhelpfully muddied when culture is conflated with governance. "Do we expect 'risk culture' to determine the efficacy of risk governance, or are risk governance mechanisms meant to enforce the desired precepts of risk culture?", I asked in a recent post.

And things grow muddier still where a bloated "culture change industry" prescribes approaches to "culture problems" that serious business leaders can usually dismiss as utter bullshit. Perhaps as a direct consequence, when firms are confronted by accusations of suffering from ills cultural in nature, their well-honed instinct is to turn to lawyers rather than silly ‘culture change experts.'

And as I’ve also noted previously, those lawyers are issued a consistent mandate: "Contain this! Shield the company from costs where you can, and shield me at all costs." This reflects yet another sad reality: in the banking sector, well-resourced culture change initiatives seem most often to be remedial in nature.

As the head of one such program for a major global bank once told me, "Senior leadership here commits resources to a culture program like this only when regulators have a gun to their head — and as soon as the gun is turned away, the program loses attention and resources." I’ll have more to say about that in a future Weekend Reading post.

For now, however, let me conclude with this. Done rightly, investment in effective culture risk governance yields a competitive advantage. It reduces exposure to avoidable costs and boosts operational performance across corporate functions and profit centers alike.

This benefits firms, their shareholders, their employees, their customers, and it will thus better placate wary supervisors. Firms should recognize this and invest in culture risk governance proactively rather than remedially.

And regulators tasked with maintaining safety and stability, while at the same time hoping to promote growth and competitiveness, should look to culture risk governance as a means of squaring the circle. Viewed rightly, a pro-culture agenda is a pro-growth agenda.

I’ll have more to say about that in the weeks to come as well. Meanwhile, I’m interested in your views. Please join the conversation by leaving a comment here.

This piece first appeared in Starling Insights' newsletter on November 10, 2024. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights.