Banks have seen their reputations plummet in the years since the onset of the financial crisis, and regaining the public's trust is of paramount importance. By instilling a code of conduct – and including four principles of good conduct within that – financial institutions can start on that journey.

Different countries, cultures, banks, business units and people all have vastly different norms, values and attitudes. This makes creating a universal code of conduct for bankers something of a mission impossible. Yet every bank needs a code of conduct, a set of rules it has to live up to, in order to achieve sustainable profitability.

Bankers are expected to be responsible participants in economic life. But as the financial crisis unfurled, we saw that individual bankers tarnished this image, and with it that of the entire banking industry. But how does one identify a 'bad' banker? Clearly not by their outward appearance. It is the behaviour that is key to the reputation of the banking profession.

It is vital, then, that the reputation of bankers be re-established as decent and reputable businesspeople, and this can only be done by looking at their actions. Since banking is built on trust, banks need to act by addressing the issue of adequate ethical behaviour. More than just set up a code of conduct, they have to 'live' that code if they want to rebuild confidence and regain trust.

Anything not forbidden is allowed?

Norms, ethics, values and culture in general differ between people, generations, companies and countries. Broadly speaking, there is no such thing as 'best practices' or a universally valid code of conduct, nor are there any numbers by which to gauge good conduct. This is what makes this discussion so complex.

The question that arises is: can culture be regulated? There are a multitude of laws, regulations, guidelines, recommendations and instructions to define the behavioural standards that every bank and every banker has to meet. And not only policy-makers and regulators but also bodies such as the G30 have tackled this topic. The European Banking Authority stipulates that institutions have to consider conduct risk as a sub-category of operational risk. This puts the onus on banks to identify, assess, monitor and control that risk. What is more, capital requirements exist for operational risk including conduct events. In addition, each institution is expected to implement a code of conduct, and most major banks have already done just that.

However, the challenge facing banks lies in encouraging their employees to apply this code of conduct in their everyday working life. Naturally, regulation fosters good conduct, but a bank needs to specify clearly the values its bank culture stands for. Not everything that is not explicitly forbidden is allowed, and a code of conduct needs to spell out to management and staff how they should behave.

In the following I will describe some values which, in my opinion, should be included in a bank’s code of conduct bearing in mind the objective of a sustainably profitable bank.

The four principles

There are four principles for good conduct. First, banks need to think about good governance. The behaviour of individuals in companies is guided, not least, by the 'tone from the top'. It is therefore up to the board and senior management to address and prioritise good conduct. Desired values and behaviour have to be promoted. By the same token, it needs to be made clear that the consequences of misconduct may come in the form, say, of a reduced bonus or a career stop.

Indeed, the desired behaviour has to be adopted and encouraged by all management levels. Thus, middle management, which acts as a kind of direct role model for staff, has to be sensitised. If employees are judged purely according to financial or business criteria such as revenue or profit, they will stay focused on delivering positive operating figures rather than aspire to morally acceptable behaviour. Of course, business-related criteria are not bad per se, but an institution’s goal has to be sustainable long-term profitability, and that is built on ethical conduct and trust. So, to achieve a change in mindset towards a culture of good conduct, incentives need to be set correctly.

The second value I would name is responsibility – at the individual and the company level. Each individual has to be responsible for his or her own actions. And each individual lives by their own conscience and moral compass as well as by social values, a code of conduct and, of course, laws that tell us if an action is good or bad. However, our moral compass or social values often differ, so it is important to accept one’s own accountability and be prepared to bear the consequences.

Companies, for their part, have to accept responsibility for complying with legal requirements that govern matters of compliance. More important still is 'corporate social responsibility'. This is a kind of self-regulation by which a company pledges to act responsibly towards its stakeholders, meaning its owners, employees, customers, communities, citizens or even its country. Stakeholders’ expectations usually differ from binding rules, but if companies value responsibility they will nonetheless endeavour to satisfy these rules.

Third, sustainability has to be another principle of good conduct in the dynamic banking environment. A bank that generates short-term profits may appear attractive at first glance, but in the long run only the banks that value sustainability will survive. Even if that means short-term costs or missed profits, the long-term benefits will outweigh them. Winning customers’ confidence, cementing customer loyalties and building up a good reputation are tasks that take time and are costly, but they are necessary nonetheless. This holds especially true for the banking industry, because the customer’s trust is all important to successful banking.

Incorporating the principle of sustainability into a bank’s code of conduct will help prevent misconduct. Additionally, remuneration schemes have to be aligned with banks' business and risks strategies in order to encourage sustainable banking. For instance, bonuses need to be set in a multi-year framework to sufficiently reflect a bank’s business cycle. Sustainability is in everyone’s interest, as it ensures the long-term well-being of companies, their employees and their stakeholders.

Last but not least, sincerity is a key value that warrants inclusion in any self-respecting code of conduct. Sincerity – personal integrity – is mainly a character trait. Sincere behaviour by individual employees strengthens a company’s reputation. Conversely, if customers feel badly advised by a banker who puts his or her own interest over theirs, this will harm the reputation of the company and may result in lost customers or even litigation.

This list, though not exhaustive, gives an indication of the values which I believe deserve to be part of any bank’s code of conduct.

Implementing the code

The board and senior management of each bank have to decide which values are to be prioritised and laid down in a code of conduct. For this reason, codes of conduct will differ from bank to bank, but there is nothing wrong with that – to a certain extent, diversity helps to ensure a resilient and effective banking system and enables it to cater for different needs.

Given that the public reputation of a company hinges on the behaviour of all its employees, ultimately everyone has to be mindful of behavioural norms, but none more so than the board and senior management. It is they who must take the initiative by setting incentives for morally good behaviour and exemplify that behaviour by their own actions.

Of course, if a bank values a certain kind of behaviour, not only should the current management and staff live up to it, future staff should, too. The regulator’s task, in my view, must therefore be to provide a regulatory frame of reference by which banks can set the right incentives, encourage good conduct and drive cultural change. But it is up to each individual bank to take the necessary action by implementing a code of conduct. And when a code of conduct has been put in place it must be actively applied. Each and every one of us can start by looking at and reflecting on how we conduct ourselves as we go about our daily business.

Andreas Dombret is a member of the executive board of the Deutsche Bundesbank.

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