norman t l chan : how can the banking industry regain the moral and ethical high ground it once enjoyed before the global financial crisis speech by mr norman t l chan, chief executive of the hong kong monetary authority, at the asian banker summit, hong kong, 15 april 2015. * * * emmanuel ( daniel ), helen ( wong ), hans ( eichel ), gary ( stern ), ladies and gentlemen, 1. it is always good to see the asian banker summit return to hong kong. it has been four years since our city last hosted the summit in 2011 when i talked about the monetary authority ’ s supervisory philosophy on universal banking. a lot has happened since then. but of particular relevance to us here today are the significant waves of regulatory activity we have witnessed in those intervening years. activity both in terms of rolling out new standards but also, very visibly, in enforcement action. libor manipulation in 2012, followed by forex rigging, sanctions breaches, money laundering and a fairly constant stream of mis - selling allegations – structured bonds, mortgages, payment protection insurance. 2. against this background, i have to say that i was pleased to see the thorny subject of ethical behaviour within the financial services industry as a key theme for this summit, although i would like to confine my remarks today to the banking industry and not the entire financial services industry. i was really encouraged by the implicit acceptance, in putting this on the agenda of a banker ’ s summit, that it is primarily for the industry to seek to regain the moral and ethical highground it once enjoyed. i wholeheartedly agree. this is not something which can, or should, be regarded as a “ policing ” or “ enforcement ” matter for the regulator. getting caught out, taking the fine as a “ cost of doing business ” and moving on with making money, is just not acceptable as a sustainable banking business model going forward. i do not subscribe to the view that banks ’ primary role is to generate maximum shareholder value, leaving the regulator to worry about the safety of deposits and the interests of the banks ’ customers. now, don ’ t get me wrong i am not thinking of banks as break - even utility operations but, making a reasonable return should be a result of what banks do – to quote jack welch when talking to the ft a few years ago “ shareholder value is a result not a strategy ”. 1 3. having a licence or franchise to take deposits, which represent the

the case that other commercial banks have been structured as public joint stock banks with limited liability since the 19th century. so if limited liability has existed for two hundred years, in at least commercial banking, with the attendant potential “ agency ” risks ( i. e. shareholders with limited skin in the game and managers with relatively little capital invested ), what else has been at work to create the problems which so vividly surfaced in the global financial crisis? what has changed : bank management 9. first, bank employees ’ time horizons have shifted. by this i mean that in the past employees, for a variety of reasons, tended to be much more “ stable ” in the sense of their ties to a given employer. an employee might join a bank, work their way steadily up through its ranks and then, on retirement after 30 or 40 years of service, receive a pension from the bank. so the employee identified their near and longer term future with that bank : another form of “ skin in the game ” and alignment of interest. however nowadays, not many banks offer pensions and it is much more common for employees to advance their own careers, as “ freelancers ”, by hopping from one institution to another to secure promotion or higher pay. in these circumstances, employees naturally identify less with the employing institution as their future is not, in their mind, inextricably linked with it. they work at banks not for banks. 2 10. now this is of course also a two way street, in the sense that banks in their turn can on occasion nowadays be very adept at severe downsizing if market conditions turn. so loyalty works both ways and has over the years declined. what has changed : incentives for risk - taking 11. business profiles and activities have also changed over time. simple deposit - taking and lending businesses have been combined with investment banking, securities and capital markets, and even proprietary - trading activities, to form large, complex organizations, raising clear issues of cultural compatibility across businesses with very different objectives, time horizons and employee profiles. in an environment where near term profits are very highly prized and rewarded, it is all too easy to see how the more aggressive of the approaches introduced into the mix ( with the power of traders rising in line with trading profits in buoyant report of the uk parliamentary commission on banking standards “ changing banking for good ”, volume ii paragraph 120. bis central bankers ’ speeches markets ) might prevail in shifting a culture from a client focus to one that is