Lagarde: Banks need a culture overhaul

Christine Lagarde, the head of the International Monetary Fund, says the banking industry still has a long way to go to fully learn its lesson from the financial crisis.

In remarks delivered Tuesday, the global financial leader said that the culture of banking still carries too many symptoms of the pre-crisis environment.

“While some changes in behavior are taking place, these are not deep or broad enough. The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship,” she said in a London speech.

Lagarde noted a number of banks are still embroiled in wide-ranging controversies for bad behavior years after the financial collapse, including money laundering and interest-rate rigging.

While regulators need to hold firm on implementing tough new rules to transition away from the crisis culture, Lagarde said public officials cannot do it alone. She called on the industry itself to reconsider its values and reprioritize.

“We need a shift toward greater integrity and accountability,” she said.

On the regulatory front, Lagarde pressed regulators to keep moving forward on a new rules to rein in “too big to fail” banks. While noting that some steps have been taken since the crisis on a global scale, she argued progress has come too slowly. The rules being written are complex, but Lagarde also blamed “fierce industry pushback” for the laggard approach.

Before the crisis, massive banks critical to the financial system could effectively “hold policymakers to ransom,” she warned.

And contrary to the White House and large financial institutions, Lagarde said “too big to fail” still exists, as big banks still enjoy an implicit subsidy thanks to the perception of a government safety net.

“So clearly, ending too-big-to-fail must be a priority. That means tougher regulation and tighter supervision,” she said.

Lagarde’s comments came as part of a broader speech pushing for a capitalist system that is more inclusive nationwide. In it, Lagarde was harshly critical of growing income inequality, noting that the 85 richest people in the world are worth as much as the world’s 3.5 billion poorest. She warned that if the disparity were to continue, it could lead to social and even political upheaval, as public trust in business leaders and politicians linger at low levels.

“This is a wake-up call. Trust is the lifeblood of the modern business economy. Yet, in a world that is more networked than ever, trust is harder to earn and easier to lose,” she said.