desired culture. through our supervisory process, we have seen that a number of firms have started this process by developing or refining employee surveys and 360 feedback processes to target issues of behavior and bis central bankers ’ speeches culture. some firms are incorporating case study discussions into training programs to highlight ethical dilemmas and decision - making. some are revamping senior level promotion criteria to reinforce what are the desired characteristics and behaviors of leaders. these efforts are at various stages in terms of their depth, breadth and maturity. supervisors will need to see how these frameworks evolve, and more importantly, see evidence of how these efforts yield results in the form of more open and routine escalation of issues, consistent application of “ should we ” versus “ could we ” in business decisions, rigor in identifying and controlling of conduct risk, and how compliance breaches factor into compensation. measurement and accountability for progress in developing a healthier culture across the industry is paramount to us as supervisors and central bankers. an important measurement of progress is employees ’ assessment of their firm ’ s culture. to this end, we encourage the industry to harness the various individual efforts that have been initiated at a number of firms in order to develop a comprehensive culture survey. this anonymous survey would be fielded across firms each year by an independent third - party and the results shared with supervisors. having a common survey instrument would promote benchmarking of, and accountability for, progress on culture and behavior. a core element of any firm ’ s mission and culture must be a respect for law. federal reserve guidance advises that banks should strive to “ [ m ] aintain a corporate culture that emphasizes the importance of compliance with laws and regulations and consumer protection. ” 4 to maintain such a culture, senior leaders must promote effective self - policing. if audit uncovers an instance of fraud in one unit, the firm ’ s leadership should ask, “ where else could this behavior occur? ” if the press reports fraud at a competitor in a particular business line, the same self - assessment should apply. “ could this happen to us, could we have a similar problem here? ” when fraud is detected, boards and senior leaders must ensure that they are informed promptly, and that a thorough inquiry is undertaken at once. the senior leaders of financial firms, and those who report to them, must also be proactive in reporting illegal or unethical activity. early self - reporting sends a powerful message to employees and to regulators about a firm ’ s respect for law.

. how can better incentives help? in my example, for matters to work properly, i think it is important that all the players – traders, compliance, risk and legal, have the right incentives to behave in the way that is appropriate and that aligns their interests with the broader interests of the firm in rooting out bad behaviors. one way in which incentives can be shaped is through the structure of compensation. i believe that a proper compensation system can be an important tool for enhancing culture, promoting financial stability and rebuilding the public trust in the financial industry. incentives matter for individual behaviors and decisions in all industries, including the financial industry. some might argue, however, that risk - takers are drawn to finance like they are drawn to formula one racing, and that regardless of risk or reward, these types of individuals will always want to push the boundaries. this logic might lead one to conclude that incentives are unlikely to be an effective tool to limit excessive risk - taking and to promote more ethical behavior in the financial sector. i disagree. first, the degree to which an industry attracts risk - takers is not pre - ordained, but reflects the prevailing incentives in the industry. after all, risk - takers have options. second, and, more importantly, incentives matter even for risk - takers. in my speech on ending too big to fail, i stressed the importance of reducing the likelihood that large financial firms would face insolvency, as well as the need for a credible resolution plan that does not involve taxpayer money. compensation policies can play a useful role in reducing excessive risk - taking. similarly, compensation policies can complement an improved culture, and play a role in reducing unethical and fraudulent behavior. individuals who decide to bend the rules or to step over the line usually do this in the context of an assessment of the expected risks and rewards of their actions. this implies that one objective should be to rebalance the scales so that the expected risks from unwanted behaviors are more likely to outweigh the expected rewards. the expected risks are a function of the likelihood that an individual ( or set of individuals ) is caught and the attendant consequences. the expected rewards include any financial and psychic benefits to the individual from the behavior if undetected. improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an obligation to behave properly, and be prevented by others from carrying out bad behavior. in addition, a strong culture can also