Culture, it’s universally agreed among banking regulators, is important. It’s important in terms of managing risk-taking, and it’s important in terms of the social licence of banks.

It’s also agreed that regulators can’t regulate culture. As a British regulator said last year, “it is not something that has a tangible form. As supervisors, we cannot go into a firm and say ‘show us your culture’.” Regulators can only regulate inputs into culture — like discouraging short-term remuneration, and encouraging stronger and more personal accountability by senior managers and directors.

Instead, regulators talk about culture a lot. The New York Fed has for three years been running conferences on banking culture, in which regulators, ethicists, senior bankers and academics discuss how to improve culture. Similar conferences are held in Europe. Former regulators denounce the industries they regulated. Consulting firms, sensing the money to be made in an emerging mini-industry, issue reports about culture.

In the end, though, all the talk about culture goes nowhere. Banks continue to break the law. Last year, in the wake of Wells Fargo being pinged US$185 million when over 5000 staff created fake bank accounts, Time reported evidence that banking culture was actually getting worse, not improving. Major banks have been collectively fined well over US$100 billion since the financial crisis, for crimes ranging from defrauding customers and rigging interest rates to money laundering and helping drug cartels.

The Australian Prudential Regulation Authority, too, has been talking about culture in recent years. In fact, it’s been talking about culture and risk since well before the financial crisis. But the focus on culture has sharpened considerably in recent years. In 2013, APRA told the industry it was going to focus more on risk culture. In 2014, chairman Wayne Byres said that changing financial industry culture represented the final phase of the long-term regulatory response to the financial crisis. In 2015, Byres warned that banks needed to fix culture by changing the structure of incentives. That year, he was joined by ASIC and the Reserve Bank in talking about problems with bank culture. And APRA established new requirement for each bank and insurer board that it:

“…forms a view of the risk culture in the institution, and the extent to which that culture supports the ability of the institution to operate consistently within its risk appetite, identifies any desirable changes to risk culture and ensures the institution takes steps to address those changes.”

Then, last year — to somewhat mixed reviews — APRA produced an “information paper” on risk culture which explicitly: “observed a much stronger focus on risk culture by the Boards of regulated institutions. This is a welcome development.” 

After many years of talking about culture, and four years of greater APRA focus, where are we at on bank culture? As in the United States, it seems, we’ve gone nowhere fast. Now APRA has decided — evidently in close consultation with Treasurer Scott Morrison — that an independent inquiry into the Commonwealth Bank’s culture is warranted.

It’s hard not to regard that inquiry as an admission of failure by APRA — an acknowledgement that its efforts both to talk the industry into a better culture and its regulatory efforts to encourage that improved culture have, at least in the case of the CBA, failed. This is, after all, a bank that was raided by the Australian Federal Police in 2016, a bank the board of which declined to tell APRA, ASIC or the RBA about extraordinarily serious allegations in relation to money laundering.

Culture, as everyone insists, can’t be regulated — at best it will be outpaced by changes in the industry and in any event will be heavy-handed. You can only encourage banks to improve their culture, and discourage the degradation of that culture. But ultimately the discouragement has to be something altogether stronger than tweaking remuneration rules and imposing obligations on directors. It’s time to stop talking about culture and start the kind of heavy-handed regulation that banks live in fear of. They’ve forgone their opportunity to demonstrate improved cultures. And simply continuing to talk about culture means there’ll be more Wells Fargos and more CBAs.