New York (New York) Reflections

I spent an excellent few days on the sun dappled streets of the Big Apple last week.

In theory I was there for the New York Fed's Governance and Culture Reform Conference[i] and surrounding events. In reality it was (also) to catch up with friends and colleagues, and because I enjoy the craziness.

My main take-aways were:

Expensive Coffee

“I don’t need an inspirational quote – I need coffee”

Wow – it’s an expensive place[ii]. Using my own FlatWhiteCoffee Index? , you are lucky to get change from $5 a cup.

(I have just checked[iii] – the USA comes in 7th in global Flat White prices – with Denmark coming 1st at $5.62)

Note - asking for a Flat White Coffee[iv] in NYC leads to puzzled expressions in most outlets. They may try and convince you it is a Macchiato, or even more disastrously add cold milk to a regular filter coffee. Madness.?

Try Little Collins on 3rd Ave between 44th & 45th if you are struggling.

Over Confidence

“king of the hill, top of the heap”

Confidence and a brash NYC are synonymous. Some people name skyscrapers after themselves.? It might be rubbing off on the bankers.

At the opening of the NY Fed Conference a question was asked to the audience on:

“how would you rate the financial service sectors progress in building stronger organizational cultures in the past 10 years”

The results were as follows:

• Excellent 3%
• Very Good 20%
• Good 50%
• Fair 24%
• Poor 3%

Well that’s OK then, we can all sit back, relax and enjoy the expensive coffee.

It chimes with the comments of the Deutsche Bank CEO in November 2023 that Banking culture has ‘completely changed’ since the financial crisis[v].

Quite what hard evidence leads to such a positive view is difficult to divine.

Perhaps the wobble in early 2023 can be classified as the latest in a “series of one off events” (is there a word for that?).

Or maybe blind-spots and misbehaviour have migrated to the regulators[vi] and politicians (are they mutually exclusive?).

A later poll question was - “In what areas has your organization progressed?”.

The responses were as follows:

• Developing a consistent approach to behaviour and culture across the firm - 57%
• Regular scanning of the behavioural landscape across the organization to identify outlier teams and areas of focus - 31%
• Building a capability that has expertise in behavioural science and psychology - 22%
• I haven’t seen any progress - 15%
• Using advanced behavioural analytics - 11%
• Don’t Know - 8%

So there is a sense that financial services organizations “feel” they are progressing on recognizing what culture is, but advanced methodologies to understand the day to day behavioural realities within firms are lagging.

If 69% of firms are not “regularly scanning the behavioural landscape across the organization” then the positive assurance they have on the state of their culture piques my interest.

Where does it come from?

Luckily many Senior Leaders “know” what is happening in the culture of their large international organizations, as well across the wider industry.

A follow up question could therefore be ?- is that: a) True or b) Over-confidence.

At the conference James Gorman, the Chairman of Morgan Stanley (and prior CEO), noted that:

“the most important cultural issue in an acquisition is whether the target's values align with the acquirer's and everything else is optional”.?

A noble sentiment , although it does beg a couple of questions:

• Firstly, a company’s espoused values often bear little relationship with the reality of their ongoing behaviour. The purpose statement of the UK Post Office is: “We’re here, in person, for the people who rely on us”.
• Secondly, if what was meant was aligning how employees actually behave – how do they know what that is, in both the acquirer and the acquired? And once a firm is purchased, how is it assessed going forwards?

The Technological

“a brand-new start of it”

No current conference in any sector would be complete without having a section on the promises and dangers of AI.

Not just because it is buzzy, cool and cutting edge, but as the quantum of data available and the power of analytics is increasing exponentially.

For organizational culture and behaviour this includes:

• Advanced methods for data gathering, insight and analysis that can help you “see” aspects of your culture not previously visible;
• New tools to help influence and shape culture;
• The opportunities and threats of the wider adoption of AI and other technologies within firms, in how they themselves impact behaviour.

There is not enough time or space in this article to add further details, or to describe the uses of Large language models (LLM) and Social network analysis (SNA) et al, but a couple of initial thoughts:

• As noted in the above poll - those currently using “advanced behavioural analytics” is 11%, indicating that despite the enthusiasm there is a long way to go;
• Much effort and budget in Banks continues to focus on traditional surveillance, looking for the bad actor rather than environmental or team drivers of behaviour – this needs to change if work is to become predictive rather than detective.

One cautionary tale from NY on the dangers of introducing new technology is a livestreaming public art installation called the "Portal” which links New York[vii] with Dublin.

The organizers billed the exhibit as a way to “embrace the beauty of global interconnectedness".

It was paused after repeated bad behaviour, including transatlantic nudity[viii].

The Technical

“wake up in that city”

There is a need to reframe behaviour and culture from the fluffy to the technical.

Many risks in banking are framed in technical terms, and with an acknowledgement on the need for skilled resources, expertise, budget and headcount.

As an example Cyber risk is a critical area in resilience, and subject to huge industry wide and regulatory focus.

It would be a brave Bank Chief Executive who does not invest in a cyber capability, and one who would rapidly find themselves with regulatory special measures and sanctions.

At the conference Raymond Dorado of the New York State DFS also noted that examiners needed to bring in new skills and expertise in cyber to tackle the emerging risks.?

James Gorman also raised cyber security as an example of an advanced capability needed in all banks, and which it is difficult for the smaller firms to scale.

This is all true, and a vital area of focus for firms. However, I am interested not just in what is said, but what is left unsaid.

A key risk that is existential, and ended a number of banks in 2023 was not used as an example.

Raymond didn’t talk about the imperative to bring in behavioural expertise to the regulator.

James didn’t flag the lack of behavioural capability in SVB, Signature, First Republic and Silvergate (or indeed Credit Suisse).

As with the above overconfidence (bias) this may be because there is a sense that this is already done (or perhaps because it is deemed too fuzzy or esoteric).

This topic includes:

• The human brain which has been described as the most complex structure in the known universe, with c.86 billion neurons and over 100 trillion connections[ix],
• The interactivity across thousands of people, adding multiple layers of complexity into behaviour and decision making.
• The insights and expertise derived from organizational and cognitive psychology, behavioural science, neuroscience, physiology, endocrinology, evolutionary science, anthropology etc

Perhaps it is time to reframe and elevate human and behavioural risk within organizations from a fluffy subject to a technical and scientific challenge, with the attendant skills and focus.

New Amsterdam

“Even Old New York was once New Amsterdam”[x]

The English took over New Amsterdam in 1664 and renamed it New York. A flavour of Amsterdam has found it’s way back into the city with the aroma of cannabis wafting down the streets, following the legalization of recreational marijuana in 2021.

One further habit it would be useful to see introduced from the Netherlands is the prominence and profile given to behavioural expertise in both the regulators and banks.

The DNB and the Dutch Banks have long advocated for informed behavioural risk management insight and capability[xi].

Big Barrels or Big Apples

“vagabond shoes”

At the close of the conference James Gorman said:

“To manage the behaviour of individuals is really hard and you need to be constantly looking for outliers, cutting them off and reaffirming your core values,"

Scanning for outliers is a useful thing to do, but the quote stresses individuals (not teams, locations or processes).

This gives the sense that culture derives from:

• Hiring the right people
• Firing the wrong people
• Training and communications

Whilst these are undoubtedly important, they are partial explanations and can lead to misdirection.

It is time for the Big Apple to embrace the Big Barrel. ?

A key focus in the conference was on Accountability. However, this needs to be the accountability of senior executives and management for the wider firm, including what is prioritized, where resources are concentrated and what is role-modelled.

Responsibility for actions made or left unmade doesn’t just apply to the individual employee, but to those who construct and maintain the wider environment.

Are we in an echo-chamber? (are we in an echo chamber?)

“Start spreading the news”

Seeing so many familiar faces in NY and enjoying a convivial conversation and a beer was a delight.

But is there the possibility that the already-converted are talking to themselves?

Are we in danger of falling for the “I’m not biased-bias” and re-enforcing our righteousness inside our own tribe?

It is incumbent on us all to ensure that those who have the power of decision making over resources, headcount, time and budget are engaged and convinced in the need to embrace more advanced approaches to bank behaviour and culture.

This is less comfortable than a furious agreement within our own clan, but essential to progress.

New York City has been described as the cultural capital of the world[xii], so where better to start engaging across different groups.

2025 & Thanks

“Come on, come through, New York, New York”

Having re-read my ramblings I don’t want to leave the impression of negativity.

I am a coffee cup half full sort of person.

The value of the week is not just in the excellent NY Fed event itself, but in the ecosystem around it. In the industry get-togethers, the supervisors own forum, the sharing of best practice, and the after work drinks.

This should be encouraged, nurtured and built upon, with many others brought into the conversation.

Nonetheless, what is needed is a step change in engagement and progress, if the industry is not to repeat the crises of the past.

Looking forward to 2025, and an intervening year of action and urgency.??

Reading

For a full recording of the Conference see: https://www.newyorkfed.org/newsevents/events/banking/2024/0521-2024

For a summary of 10 years of the NY Fed Governance and Culture initiative see: https://tellerwindow.newyorkfed.org/2024/05/15/ten-years-of-governance-and-culture-reform-taking-stock/

For reading recommendations from the Conference speakers see: https://www.newyorkfed.org/medialibrary/media/governance-and-culture-reform/reading-recommendations-from-culture-conference-speakers

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#BehaviouralRisk; #BehavioralRisk; #BehaviouralScience; #BehavioralScience; #RiskCulture; #BankRisk; #RiskManagement

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Notes & References

[i] New York Fed's Governance and Culture Reform Conference 2024 - https://www.newyorkfed.org/newsevents/events/banking/2024/0521-2024

[ii] Money Week - Most expensive cities in the world to visit – 14th May 2024 - https://moneyweek.com/spending-it/travel-holidays/most-expensive-cities-in-the-world-to-visit

[iii] https://coffeestics.com/

[iv] A flat white is a coffee drink based on espresso with micro-foam of steamed milk. Compared to a latte it is smaller in volume and with less milky foam. A flat white therefore has a higher proportion of coffee to milk, allowing the espresso to dominate the flavour while being supported by the milk

[v] Banking culture has 'completely changed' since financial crisis, Deutsche Bank CEO says - Nov 29, 2023 https://www.morningstar.com/news/marketwatch/20231129395/banking-culture-has-completely-changed-since-financial-crisis-deutsche-bank-ceo-says

[vi] Probe finds misogynistic 'boys club' culture at US bank regulator. FT https://www.ft.com/content/8b83e054-fa95-4145-8f88-38d4ebe1f0cd

[vii] The NYC portal is located on the Flatiron South Public Plaza at Broadway, Fifth Avenue, and 23rd Street. If you are in Dublin – try the junction of North Earl Street and O'Connell Street.

[viii] A video link, called the 'Portal', between New York City and Dublin has been reopened after previously being shut down. Sky News - 23 May 2024 - https://news.sky.com/video/a-video-link-called-the-portal-between-new-york-city-and-dublin-has-been-reopened-after-previously-being-shut-down-13142022

[ix] The Staggering Complexity of the Human Brain. Psychology Today. Damian Pang. September 2, 2023. https://www.psychologytoday.com/us/blog/consciousness-and-beyond/202309/the-staggering-complexity-of-the-human-brain#:~:text=Key%20points%201%20The%20human%20brain%20has%20been,its%20structure%20with%20consciousness%20as%20the%20greatest%20mystery.

[x] From the 1953 song – “Istanbul (Not Constantinople)" by Jimmy Kennedy and Nat Simon. Numerous cover versions have been recorded, most famously by They Might Be Giants

[xi] De Nederlandsche Bank – supervising culture directly - https://www.frc.org.uk/library/standards-codes-policy/corporate-governance/corporate-culture/de-nederlandsche-bank/? How Banks Are Using Behavioral Science to Prevent Scandals – HBR April 2020 https://hbr.org/2020/04/how-banks-are-using-behavioral-science-to-prevent-scandals

[xii] New York, Culture Capital of the World, 1940–1965 / edited by Leonard Wallock ; essays by Dore Ashton et al. Will Gleason (March 11, 2019). "Citing its diversity and culture, NYC was voted best city in the world in new global survey". TimeOut.

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