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International Business Restoring trust in banking system ‘economic imperative,’ top group says

Jean-Claude Trichet, former Chairman of European Central Bank speaks at the closing luncheon at the Economic Forum in Montreal on June 12, 2013.

Christinne Muschi/The Globe and Mail

An influential group of leaders in international finance says that the world's largest banks have a lot of work to do if they want to restore public trust, years after the financial crisis redefined a number of institutions as reckless risk takers and wrongdoers.

The Group of 30, composed of central bankers, regulators and economists, believes that many global banks are failing in their reform efforts.

"Restoring trust in banking is a public duty and economic imperative," Jean-Claude Trichet, G30 chairman and former president of the European Central Bank, said in a statement. "Restoring public confidence needs to be a top priority for major banks and is long overdue."

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The comments followed the release of a study that examined banking's corporate culture through more than 70 interviews with top executives at financial firms in 16 countries. In particular, the interviews looked at how firms champion ethical values and punish unethical behaviour: Collectively, they received a failing grade.

"Banks and banking today stand in disrepute," the report said.

"The banking community as a whole needs to repair the damage done by failures in culture, values, and behaviours, and should tackle the challenge with renewed vigour and purpose to achieve tangible improvements in outcomes and reputation."

While some firms have begun to make improvements, it added, others have not even begun or are failing in their efforts at change.

The report did not name names. However, it lands amid continuing convulsions within the global banking sector, as regulators enforce new rules and capital requirements that are forcing banks to redefine what they do, how they do it and where – following allegations of money laundering, rigging interest-rate benchmarks and other financial shenanigans.

"We know that there continue to be investigations of alleged wrongdoing by banks and that the pressures on official authorities to introduce new regulations will rise," Mr. Trichet said in his statement. "Banks need to demonstrate the capacity to reform themselves."

As a result of the new regulatory atmosphere, some observers are calling for JPMorgan Chase & Co. to be broken up, while the heads of Deutsche Bank AG, Credit Suisse Group AG, Standard Chartered PLC and Barclays PLC have been ousted over slow progress in making changes.

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The Group of 30 is not a regulatory body, and therefore does not have the power to enforce any of its recommendations to global banks.

However, its current roster of members include some of the most influential names in finance and economics, including former U.S. Federal Reserve Board chairman Paul Volcker, Bank of England Governor Mark Carney, ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda.

They believe that banks need to focus on the so-called building blocks of corporate culture: values and conduct.

"Focusing on values and conduct is a more practical approach, since these are observable and measurable, can be specified as principles embodied in bank standards and linked to incentive structures, and can be explicitly linked to broader stakeholder objectives," the report said.

Specifically, boards of directors and top executives have to ensure that they set the right tone, which is then carried through the organization. As well, compensation plans should be reformed so that incentives are not awarded to individuals who do not meet a threshold of acceptable behaviour. Regulators should be able to monitor these cultural policies and practices.

The report concluded: "The desired cultural shift will require leadership, persistence, and consistency to overcome years of entrenched behaviours and attitudes, and to ensure that the changes are lasting rather than ephemeral, or merely short-term window dressing."

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