Fed’s Dudley says Wells Fargo scandal shows poor incentives at work

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By David Milliken | LONDON

LONDON A top U.S. Federal Reserve regulator on
Tuesday cited Wells Fargo & Co’s accounts scandal as evidence
that incentives to drive performance remain a problem on Wall
Street, saying banks had “a long way to go” to reform their
internal operating culture.

William Dudley, president of the New York Fed branch that
acts as the U.S. central bank’s eyes and ears on Wall Street,
has complained about rotten bank culture for years.

In a speech to bankers and regulators in London, he said the
Wells case showed that “compensation, once again, seems
to be at the center of a scandal”.

It was found last year that thousands of employees at the
U.S.-based bank had opened perhaps millions of unauthorized
customer accounts, a scandal that rocked the bank and led its
chief executive, John Stumpf, to resign.

Dudley, who did not discuss monetary policy or the state of
the economy, said the Wells case appeared to involve “widespread
fraud”.

He added: “Incentives shape behavior, and behavior drives
culture.”

Speaking later at a Bank of England event to promote ethical
conduct in the financial sector, he said bank culture needs to
be improved, suggesting that senior executives lead by example
and that firms reward employees who speak out.

Asked if progress in making banks safer risked being
reversed under the administration of U.S. President Donald
Trump, Dudley said he was still waiting to see what changes
there might be.

“I think we need to see what is actually proposed,” he told
Reuters on the sidelines of the BoE event.

The key was to ensure banks had sufficient capital and
liquidity, and that their individual failure did not risk
bringing down the rest of the financial system, as in 2008.

“Within those broad contours, you can make an adjustment to
regulation. But it would be a real mistake to throw the baby out
with the bath water … (and) made it so that if a failure
occurred, it would take down the whole system,” Dudley said.



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