Federal Reserve

Professional Conduct Codes for Bankers?

By Emmett Carrier, J.D. Candidate 2018 | Posted on

Two weeks ago, the general counsel of the Federal Reserve Bank of New York issued a statement at the Yale Law School that everyone “should be concerned with culture in financial services.” Such a comment should not be very surprising due to the role that large banks and other financial institutions played during the economic crisis in 2008. Banks have since been vilified, and rightfully so, for their excessive and risky decision-making which led to one of the worst recessions in United States history.

So, how does one correct a culture built around a capitalistic and opportunistic mindset, where the survivor of the fittest can reap a massive monetary award, in order to prevent another collapse? One approach, which has been implemented elsewhere around the world, is to implement a pseudo professional code, much akin to the code of ethics policing lawyers, accountants, and doctors.

To analogize, here is an example from the California Rules of Professional Conduct, which states a lawyer’s duty with respect to client confidentiality. California is unique in this aspect, as California Bar members are expected to protect their client’s confidentiality at “every peril” to himself or herself. Could such a noble requirement find any success in the banking community?

The difficulty, firstly, is the current toxic culture of the banking community, where investment bankers are often at odds with procuring the highest fee for their respective bank, while at the same time providing competent and fair services to their client. More often than not, bankers will do what’s in the best interest for themselves and employer, and put the client second. This isn’t evil, this is just human nature.

The other difficulty lies in the roles that investment bankers provide. In contrast with lawyers and doctors who serve a primary focus to their client, large banks not only provide advisory services, but also serve as middlemen who operate between buyers and sellers. Charging interest rates and providing loans and capital can go against the idea of getting your client “the best deal.”

Of course, with any installation of an ethics code, the issue arises of how to police conduct. Lawyers and doctors can lose their licenses or face malpractice lawsuits for their unethical behavior, but no such remedies exist, outside of criminal penalties, in the banking community. One idea is to create a database of banker misconduct. By tracking “bad apples” in the financial world, bankers would be incentivized to be on their best behavior, as failing to do so would result in future difficulty of finding a job. While this practice and the potential of implementing ethics codes sounds good on paper, real change will not occur until there is a fundamental shift in the banking culture that does not reward risky and dangerous bets in the financial markets.

Professional Conduct Codes for Bankers (PDF)

Fed Governors Have Grown More Exposed To Politics

By Diego Sendagorta Laso, LL.M. Candidate 2017 | Posted on

On October 5, 2016, President and CEO of the Federal Reserve Bank of Richmond,
Jeffrey M. Lacker delivered a speech in which he discussed the U.S. central bank’s governance. He warned that members of the U.S. Federal Reserve’s Board of Governors in Washington can be subject to political influence because they are “less insulated from the political process.”

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Five Major U.S. Banks’ Living Wills Fail to Pass Regulatory Muster

By Myriam Denis, J.D. Candidate 2016 | Posted on

On April 13, 2016, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) jointly announced that five major banks – JPMorgan Chase, Bank of America, State Street, Wells Fargo and Bank of New York Mellow – failed to fulfill an important regulatory requirement of the Dodd-Frank Act, the major piece of legislation introduced in 2010 by Congress following the 2008 debacle. The “living wills” provision of the Dodd-Frank Act demands that big banks provide regulators with carefully drafted plans for how they would deal with a potential bankruptcy. This ambitious section seeks to make it easier for bank regulators to oversee potential bankruptcies by providing an orderly method to avoid the kind of chaos that followed the Lehman Brothers’ bankruptcy. The current process requires banks to submit updated living wills every year. Whether living wills pass muster critically hinges on whether they are “credible.”

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Capital Outflow from Emerging Markets, Role of IMF and Central Bankers

By Shodhan Babu, LLM Candidate, 2016 | Posted on

The understanding in conventional economics that the free flow of capital to developing countries results in the increase in investment rates has come under review by the International Monetary Fund. In the past year emerging-markets have seen a net outflow of one trillion dollars. Emerging markets faced a similar collapse in 2008 and 2009 when the huge influx in 2006 and 2007 was followed by huge outflows. As a result of these outflows, financial instability in emerging countries has become more apparent as the value of the local currency drops drastically against the dollar. In turn, both the price of imports is rising substantially and the value of the debt in dollars is rising to unsustainable levels.

The reasons for the outflow is the prospect of the Federal Reserve raising interest rates from near zero percent for the first time in about a decade. The excess supply of oil has also resulted in the price of oil dropping which has adversely affected countries such as Brazil, Russia and Venezuela, which depend on oil exports. The Federal Reserve has cited the health of the US economy as the reason to increase the rate of interest but has not taken any decision with regard to the extent or the time of the rate hike. This uncertainty has resulted in foreign investors taking out money from emerging economies to find safer places of investment. While most governments have passed reforms and cut down on their foreign borrowings and abandoned fixed exchange rates, they have been unable to prevent domestic companies from foreign borrowings.

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