Lately, there has been no shortage of scandals involving fraudulent, predatory, and otherwise ethically unacceptable behavior on the part of large financial institutions. Much of this behavior was also directly implicated in the generation of unsustainable levels of risk in the financial system, which led to the global financial crisis of 2008-2009. Not surprisingly, policymakers and financial regulators around the world are increasingly and deliberately vocal in their criticisms of the financial industry’s systematic failure to maintain high ethical standards of business conduct. In effect, this concerted ‘ethics turn’ in financial regulation recasts firms’ ‘risk culture’ as a crucial determinant of success, or failure, of the post-crisis search for systemic financial stability.

In a recently published article, I take a critical in-depth look at this phenomenon. The purpose of my article is twofold. First, it surveys the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies key conceptual and normative limitations of that debate. Second, the article pushes the debate beyond its current limits by shifting the focus away from the predominantly individual entity-level analysis toward the broader systemic dynamics of modern finance.

Mapping out the principal themes in the current debate on the ethics and culture in the financial services industry is an important analytical exercise, especially because that debate is so wide-ranging as to appear lacking in coherence. This exercise brings into relief the post-crisis shift in our collective understanding of how various cultural factors fit into and shape the dynamics in the financial sector. It also yields several important insights into what is missing from the conversation, and why ‘improving culture’ of finance in practice remains such a frustratingly elusive task. I argue that, for all its richness, the current debate is not able to generate a cohesive and workable solution, to a great extent, because it operates on the basis of a fundamental misdiagnosis of the problem as a micro-level phenomenon. The principal focus of academic and policy discussions is on an individual financial services firm, a discrete corporate entity whose organizational culture constitutes the primary object of proposed reforms. It is implicitly assumed that ‘correcting’ the norms and attitudes toward risk-taking within individual financial firms – via such familiar means as ‘better’ compensation practices or ‘more effective’ corporate governance – would automatically improve both the industry-wide risk culture and the long-term stability of the financial system.

My article challenges this paradigm and offers an alternative, macro-structural approach to reforming the culture of risk-taking in the financial sector. It starts with a common-sense premise that individual firms are not free agents exercising their morally salient organizational choices in a vacuum. These firms are interconnected elements of a bigger whole—the market, the industry, the financial system, the economy at large—and their individual (or micro-level) choices and strategies reflect certain fundamentally collective (or macro-level) choices and strategies. Each firm continuously absorbs, processes, operationalizes, and hierarchically orders specific norms and responds to specific incentives generated within these surrounding institutional layers. The real problem with financial institutions’ culture, therefore, is much more fundamental than simply ‘wrong’ compensation practices or ‘tone from the top’ at individual banks. How ‘ethical’ or ‘unethical’ the financial industry’s conduct or shared norms are is an issue inextricably linked to the broader question of how effective or ineffective the financial system is in discharging its basic social function. Accordingly, a meaningful change in the culture and practice of risk-taking at the level of a financial services firm requires, first and foremost, a meaningful change in the basic structure and dynamics of its surrounding layers and, ultimately, of the financial system as a whole.

On this basis, I argue that in order to make individual banks’ internal ethical standards and cultural practices more ‘other-regarding’ and conducive to prudent risk-taking, it is critical to change how the broader institutional context in which these banks operate—the market, the industry, the financial and economic system—incentivizes continuous generation and amplification of socially excessive risk. In this sense, ‘improving culture’ in finance is an inherently systemic challenge, which can be met fully only if the focus of reforms is expanded beyond the narrow limits of the firm to encompass the outer structural layers of the financial system. Until we find the right structural means of preventing excessive generation and accumulation of systemic financial risk on a macro-level, we will search in vain for plausible means of fostering a socially responsible risk culture in the financial sector. The key to making modern finance ethically sound is to make it structurally sound, and vice versa. My article takes the necessary first step toward operationalizing this basic insight and re-orienting the familiar debate toward some of the less familiar, but potentially far more effective, systemic solutions.

Saule T. Omarova is a Professor of Law at Cornell University Law School.