Whether it is the link between millionaire bonuses and reckless trades or between financial models and gigantic losses, the role of financial culture in wrecking the U.S. economy in 2008 has become widely established. Social scientists have been on the frontlines, researching and making this conclusion plain: see, for instance, Mitchel Abolafia’s studies of bond traders, or anthropologist Karen Ho’s vivid descriptions of Goldman Sachs’s recruitment at Princeton.
Unbeknownst to most, however, financial regulators and leading investment banks in the U.S. and U.K. are now turning to culture as the solution to the industry’s problems. In this dramatic reversal, the norms, values, and beliefs that characterize Wall Street banks are being conscripted to limit the risk posed by the financial industry. Culture and ethics are now part of the regulators’ vocabulary, and even specialized tools such as ethnography are included in the regulator’s répertoire.
News of such developments might cause sociologists more trepidation than vindication. How genuine and real, they might ask, is such embrace of bank culture? How safe, they might wonder, is controlling people through norms rather than dollars? And last but not least, how on earth did such a U-turn come to pass?
I’ll start with the latter. In a speech dated October 2014, the President of the New York Fed, William Dudley, argued that “improving culture in the financial services industry is an imperative,” using the word “culture” as many as 45 times. Dudley not only offered an articulate definition of bank culture (“the implicit norms that guide behavior”) but went on to emphasize its importance: “Culture,” Dudley posited, “exists within every firm, whether it is recognized or ignored, whether it is nurtured or neglected, and whether it is embraced or disavowed.”
This speech marked a profound change from the initial regulatory reactions to the crisis. Starting in 2008, regulators have assembled a long list of rules aimed at limiting the systemic risk posed by too-big-to-fail banks. These coalesced in the so-called Volcker Rule, a provision in the Dodd-Frank Act that have made it illegal for banks to engage in proprietary trading. In the U.K., low-risk retail banks are legally mandated to separate their business from their higher-risk investment banking operations. More boldly, the European Commission has mandated banks to limit bonuses to twice the annual salary.
One common feature in this first wave of regulatory legwork has been a focus on the structure of financial organizations. In the regulators’ approach, preventing the next crisis meant slicing off the controversial parts of the banks, fine-tuning this or that compensation practice, or repositioning incentives so that annual bonuses would elicit virtuous behavior.
But effectiveness of such approach was always bound to be limited. As organizational sociologists have long argued, a change in the structure of a company without a corresponding change in its culture is not enough to effect durable change. Instead, it just leads employees to circumvent the new rules and continue with their old ways.
The limitations of structural reform hit regulators hard as news of the Libor scandal broke in 2012. As Donald MacKenzie explained in his lucid analysis of the rate-fixing operation, employees at several banks had submitted fake Libor entries to help fellow bankers profit from their bets. The official review of Barclays Bank’s contribution to the scandal (the “Salz Review”) found that “bankers were engulfed in a culture of ‘edginess’ and had a ‘winning at all costs’ attitude” that contributed to the malpractices.” Culture and ethics, rather than incentives or conflicting lines of business, were the culprit.
Culture thus became the new focus of regulators. The U.K. Parliament, for instance, has set up a commission to study potential avenues for elevating the standards of the financial industry. It recommended the creation of an independent body—independent from both government and industry—to facilitate cultural improvement. The Banking Standards Board was thus created in 2015, funded by member banks and governed by a combination of bankers and independent experts.
The Banking Standards Board has now initiated a new and intriguing policy. In addition to administering a mainstream survey tool, the Standards Board has hired academics such as myself to teach ethnographic research methods to the executives at the banks. In the training sessions, Malinowski and the challenges of participant observation are discussed alongside the use of financial models and risk management. The goal is to equip banks with rigorous tools to describe and conceptualize their culture.
The idea is still at an initial stage, and at this point it offers little more than a glimmer of possibility. As with the cybernetic experiments conducted in Allende’s Chile and described by Eden Medina or the use of behavioral economics by the Obama administration, ethnography might ultimately prove insufficient to effect real change in the culture of finance. But even in these early days of the policy, something is already clear: these are good times to be a sociologist of financial markets.