Lagarde: Individuals, not just banks, must be held accountable

Individuals in the financial industry must be held accountable for serious breaches of duty, stated the head of the International Monetary Fund (IMF) Christine Lagarde, warning that banks often treat monetary fines as business expenses.

Holding individuals accountable for negligent work would be an important element in the process of raising ethical standards in the financial services sector, whose reputation has been called into question by a series of scandals and breaches of duty, Lagarde explained on Thursday at a workshop on banking culture reform at the New York branch of the U.S. Federal Reserve.

“Despite evidence of actual breaches of duty in several cases, the burden of legal sanctions for irresponsible behavior has largely been borne by corporate balance sheets – not individuals,” emphasized the head of the IMF.
“In fact, sanctions directed at financial institutions are perceived as ‘business costs,’ which require appropriate reserves,” Lagarde clarified.

She cited estimates that large banks in the U.S. and Europe have received monetary fines totaling $230 billion over the past six years, which corresponds to the net income that a group of global, systemically important banks generates in a year and a half.

“A good start to strengthen personal accountability would be criminal and administrative liability,” she said.
“The mere exposure to potential criminal liability deters the commission of such acts. The fact is that criminal liability is generally difficult to prove, but if there is evidence of serious breaches of duty, the judiciary should not shy away from prosecuting individuals for criminal or administrative offenses,” emphasized the head of the IMF.

In addition to criminal liability, individuals should, in appropriate cases, also face administrative or disciplinary proceedings, such as losing their license to operate, she said.

“Such changes can provide appropriate incentives for ethical behavior and deter breaches of duty through willful negligence and reckless risk-taking,” added Lagarde.
She expressed satisfaction with the change in attitude of some regulators who have begun to hold individuals accountable, citing the example of Iceland.