Name Conduct Costs and ReputationDate 2014-01-06 00:00:00 +0000Text
2013 MSc Candidate, LSE Department of Economic History
In the Geneva Papers on Risk and Insurance (2006), George Stansfield, General Counsel for the French investment conglomerate the AXA Group, asserts that: “Reputation is an amorphous concept. It can change over time (for better or for worse). It is difficult to define. It is difficult, if not impossible, to value.”
Conduct costs are intimately related to this slippery concept of reputation. Increasingly, it seems, large financial institutions operate with disregard for what is “right,” and instead choose to be driven by profit-making creed. Sometimes, perhaps more often in recent memory, they are forced to fork over huge sums of money to regulators, repurchase toxic assets to repent for their sins, and/or allocate millions in litigation fees to save as much face as possible. Their reputations suffer as consequence, the effects of which compound initial sunk conduct costs over time. But what is the effect of the combination of formal financial and informal reputational sanctions on bank behaviour? In other words, does an offending institution learn its lesson?
Perhaps it is too early to tell. One thing, however, is for certain: executives’ hands are by and large tied when it comes to the firms’ profit-making scheme. Investors demand positive quarterly reports. That means, for example, selling financial products of questionable value under equally if not more dubious terms and conditions can be defended as necessary. For businesses in this position, the long run and short run conflate. Reputations can be rebuilt; boards can be replaced.
To what extent then do high conduct costs actually alter the trajectory of questionable behaviour by some of the world’s most powerful institutions? I am inclined to argue that fines, in the eyes of bank executives, no matter their nominal value, can be considered mere speeding tickets when annual profits exceed $10, $20, $30 billion. It appears that they are less a transformative mechanism than a means of “paying to play.”
Quantifying conduct costs is a step toward better understanding the consequences of regulatory redress and its influence on bank behaviour. It is more than an attempt to calculate the costs of sanctions – it is a way to calculate the value that financial institutions place on their reputations. Once conduct costs are quantified accurately and held against subsequent bank activities, regulators can work to impose punitive measures more effectively.
This mission is critical. History indeed suggests that banks will continue to drive over the speed limit.
 The Geneva Papers, 2006, 31, (470–479) . 2006. The International Association for the Study of Insurance Economics, 1018-5895/06. www.palgrave-journals.com/gpp.
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