But compensation plans bear some degree of responsibility as well. Annual bonuses that reward immediate book value without reflecting tail risk to the organization reinforce short termism. Changing the time horizon for compensation will be a significant feature of meaningful cultural reform. 10 Conclusion The principal benefit to a financial services firm in having a strong ethical culture is the avoidance of bad banker behavior. Bad banker behavior often leads to enforcement actions that can carry significant monetary fines, that can inflict destructive damage to the organization’s reputation, and in the worst case, that can cause the death of a franchise (recalling that all financial services firms depend upon public confidence to survive). A strong ethical culture also attracts the best and the brightest personnel, who will seek out the bank as the place to build a career doing high quality work, for fair compensation, with people they like and respect. As for those with whom the bank does business, they may come to see the organization as customer focused, looking to serve them well, and not turning them into the next “profit opportunity.” Finally, from the perspective of the supervisory community, an industry comprising personnel who have a strong ethical culture will be a safer and sounder industry, certainly safer and sounder than an industry full of miscreants. This could be a powerful factor toward financial stability. Thank you for your kind attention. 7  Christine Lagarde, “Economic Inclusion and Financial Integrity,” Address to the Conference on Inclusive Capitalism,” May 27, 2014.

This observation is of special relevance precisely in times of crisis, when some bank managers may be more tempted to pursue “gambling for resurrection” strategies. Likewise, as market participants understand that banks will have stronger motivation to employ better technologies for risk management, one would naturally expect the industry to move to a safer plateau, with its capital, therefore, enjoying a lower risk premium, all other things being equal. To summarise, while I think that a reasonable degree of procyclicality of the supply of loans is a logical feature of the credit market, I sympathise with the idea that all kinds of regulations affecting banks, from accounting to prudential ones, should try to minimise or compensate for the risk of excessive sensitivity of bank lending policy to cyclical conditions. Indeed, the latter would normally appear when banks are poorly capitalised and lending decisions are based on inadequate risk assessments and driven only by current market conditions, a natural terrain for unplanned drastic swings in credit policies. I believe that all investment in technology and human capital, enhanced transparency, and better and pre-emptive risk management based on improved control structures and corporate governance will entail significant improvements not only to the stability and soundness of the financial system, but also to its efficiency in the allocation of resources. This, in my view, should benefit the cyclical behaviour of the banking system and also, it is very likely that it will be around a superior trend. 5.