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

LONDON (Reuters) - 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.

New York Fed President William Dudley takes part in a panel convened to speak about the health of the U.S. economy in New York, U.S. on November 18, 2015. REUTERS/Lucas Jackson/File Photo

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 WFC.N 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.

Related Coverage

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.

Writing by Jonathan Spicer and David Milliken; Editing by Leslie Adler and Hugh Lawson