we were making an “ up ” or “ down ” decision per their requests. either we “ objected ” or we “ did not object. ” we want banks to have good capital planning processes and make intelligent decisions with respect to capital. we don ’ t want to determine their capital actions or what their distributions should be. they need to be able to do this. fifth, with respect to disclosure, this decision was left to individual firms. in some cases, banks disclosed whether we objected or not to their plans for distributions, while in other cases they simply announced their intention with regard to future capital distributions. so what have been the lessons from our stress test exercises? one key issue during the financial crisis was the unwillingness of banks to proactively raise capital so they would be better prepared to withstand a “ bad state of the world ” scenario should that transpire. banks didn ’ t want to do this for two reasons. first, capital raises might signal that they were, in fact, weak. second, the capital raises would be dilutive. in particular, in many cases the expected share price would be higher without dilution even admitting the possibility of a “ bad state of the world ” scenario. the problem with this approach was that each individual bank ’ s decision not to raise capital to protect against the “ bad state of the world ” scenario increased the likelihood of the “ bad state of the world ” scenario. there was an important externality. if a bank raises additional capital, it doesn ’ t just make its own bank stronger, it also makes the entire banking system more stable. yet it reaps only a portion of these benefits. this was the collective action problem that the scap was designed to remedy. perhaps, i can best illustrate the problem via two figures. in figure 1, banks have sufficient capital. the mean value of capital is well above zero, the distribution is narrow, and none of the distribution falls below zero – everyone believes the bank is solvent. in figure 2, losses push the distribution of capital to the left and uncertainty about the value of the assets widens the distribution. thus, unlike the case in figure 1, a portion of the distribution falls below zero. the bank may be insolvent. thus, the bank is likely to encounter funding difficulties. the point of the scap was to push the probability distribution back to the right by adding capital – and to narrow it by creating more certainty about how much capital the banks need. by moving

reset to the first principle of service, playing a role in the world that contributes to “ human flourishing. ” 8 if you don ’ t believe me, listen to the archbishop : it is possible to do good and do well at the same time. and remember one of attributes that attracts the best and the brightest to an organization is the prospect of quality work. having a work force that feels they are contributing to the greater good should benefit the organization in its effort to recruit the best minds, but also in the effort to recruit those with the best hearts ( who presumably will be less likely to become malefactors ). the last item that i will leave out is “ short termism. ” permit me to describe the concept. with increasing frequency, people working in a financial services firm have no loyalty to their employer because they do not intend to work there long. instead, the idea is to get some experience and a decent bonus and then move to the next employer – or, if the bonus is large enough, to work for oneself. 9 10 given the specialization that tends to accompany various financial services, people with near ‐ term career horizons tend to develop loyalty to the special group of individuals with whom they transact business and who might provide the next job opportunity. these specialized bankers or traders increasingly resemble independent contractors or freelancers – careerists with no institutional loyalty. in foreign exchange, for example, we saw people orchestrating a manipulative scheme across a network of individuals at many institutions. this is all rational and understandable – specialists need the long - term allegiance of their network to continue to ply their trade, and this allegiance is far more consequential than loyalty to the organization currently employing them. so, when in conflict, career trumps institution. some of this is simply generational ; there is more employment mobility now than thirty years ago. 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 )