Trust in banks has to be rebuilt, Murray says

With only a week to go before the Financial System Inquiry hands its findings to the Government, Inquiry chair David Murray turned his attention to questions of leadership, culture and "human systems" at a lunch in Sydney yesterday.

The FSI report will include many technical recommendations but Murray told guests at the FSC Deloitte Future Leaders Awards lunch that "human systems are far more important than technical systems."

He gave the example of two big US banks going into the financial crisis - each with the same credit rating, same prudential supervisor, same compliance level and same price-earnings ratio.

Murray said: "One virtually failed and one did not go close. How can that be?"

Murray said the big ongoing issue facing the financial services industry in the wake of the financial crisis was the need to rebuild trust. "Many things are happening that call trust into question," he said.

Those things includes the fines being imposed on US banks for bad behaviour, the Libor rigging investigation in the UK and the ongoing concerns about quantitative easing.

He said the community's concerns about banks raised cultural issues, not technical ones.

"We put enormous effort into making machines work properly but we spend far less time on human systems," he said.

Murray said the cultural issues that affected financial institutions were the same as for other businesses, except that banks and other financial institutions were complex organisations where the role of leadership in defining clarity of purpose and of roles (the culture of the organisation) was critical.

He said leaders should pay more attention to the culture of their organisations because culture was "idiosyncratic" and therefore provided scope for competitive advantage.

Another distinctive feature of financial institutions was the extent to which they could affect people's lives if things went wrong.

Murray said part of his thinking on the FSI was about whether banks should be regulated like any other product supplier, which an emphasis on disclosure, or whether they should be regulated like pharmaceutical companies, with health warnings and restrictions on the use of products.

"We are going through a period when trust has to be rebuilt. If we are going to sort this out we are going to need leadership," he said.