PRINCETON – So far, the Volkswagen scandal has played out according to a well-worn script. Revelations of disgraceful corporate behavior emerge (in this case, the German automaker’s programming of 11 million diesel vehicles to turn on their engines’ pollution-control systems only when undergoing emissions testing). Executives apologize. Some lose their jobs. Their successors promise to change the corporate culture. Governments prepare to levy enormous fines. Life goes on.
This scenario has become a familiar one, particularly since the 2008 financial crisis. Banks and other financial institutions have enacted it repeatedly, even as successive scandals continued to erode confidence in the entire industry. Those cases, together with Volkswagen’s “clean diesel” scam, should give us cause to rethink our approach to corporate malfeasance.
Promises of better behavior are clearly not enough, as the seemingly endless number of scandals in the financial industry has shown. As soon as regulators had dealt with one case of market manipulation, another emerged.
The trouble with the banking industry is that it is built on a principle that creates incentives for bad behavior. Banks know more about market conditions (and the likelihood of their loans being repaid) than their depositors do. This secrecy lies at the heart of financial activity. Polite analysts call it “management of information.” Critics consider it a form of insider dealing.