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A man walks next to a Bank of America branch in New York in this October 24, 2012.


U.S. and European banks have recently racked up penalties that could total nearly $20-billion (U.S.), prompting calls to reform the financial industry's practices with a zero-tolerance crackdown, rather than pushing for more regulation.

Bank of America Corp. is expected to pay between $5-billion and $8-billion to settle its latest mortgage-related case and Dutch lender Rabobank just agreed to pay more than $1-billion for its employees' roles in manipulating the London interbank offered rate, a key benchmark for pricing countless securities around the world. This follows JPMorgan Chase's still-tentative $13-billion settlement with the U.S. Justice Department.

As the list of bad behaviour grows, more members of the financial community voice a common complaint: The more the watchdogs regulate, the more they miss the mark.

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"Regulation dumbs down cultures," Ed Waitzer, a partner at Stikeman Elliott LLP and the former head of the Ontario Securities Commission, said in an interview. "It causes people to focus on compliance rather than on 'what's the right thing to do?'"

Even the Basel Committee on Banking Supervision, the top banking regulator that decides how much capital banks must have on hand to cushion themselves against bad loans, released a paper this summer suggesting that its own rules might be too complex. In their place, the regulator wonders if strong but simple capital rules may be the best way protect banks during economic downturns.

That sentiment is catching on, especially because morals are hard to teach. Harsh, yet easy-to-follow, rules might be the best way to quickly change cultures because they immediately ensure that no one is above the law. And because public perception of the financial sector is already so bad, time is of the essence, so "you need a bunch of zero-tolerance rules," Mr. Waitzer said.

Even bank chiefs are starting to stress the need to reform culture. Outgoing Bank of Nova Scotia chief executive Rick Waugh is an advocate of better risk management, and the best way to do that, he argues, is to alter the organization's values. Scotiabank started its own transformation by putting its chief risk officer at the table for all major strategic decisions, sending a message to group heads that the risk team must support their ideas.

"If you don't have a uniform, consistent, risk culture, you run a big risk of getting it wrong," Mr. Waugh recently said.

However, the calls for simple but effective rules aren't designed to marginalize regulators. Professor Anat Admati at Stanford University's Graduate School of Business, who wrote the influential book The Bankers' New Clothes – which argues for major reforms – stressed that regulators are especially important for bank governance because there are so many stakeholders on the lenders' balance sheets, and regulators can serve as mediators between all parties.

There is a growing concern that shareholders especially are pushing banks to take more risks because they want higher returns on their equity. That attitude recently landed U.S. business news channel CNBC in hot water after a number of its anchors suggested that JPMorgan Chase doesn't deserve to be in the doghouse because it makes money for shareholders. Similar opinions were voiced when the bank lost about $6-billion on its infamous "whale trade," a bet using derivatives that went awry.

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Prof. Admati stressed that profits to shareholders can't be the only metric that matters. It is not enough to simply pay a fine and move on, she said. "It matters how you made your money."

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