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At a closed-door conference attended by senior bankers, regulators, and some academics, Federal Reserve Governor Daniel Tarullo and Federal Reserve Bank of New York President William Dudley used their bully pulpit to do something unexpected. Instead of focusing on how to bolster bank stability — channeling more capital toward the largest institutions, curbing their riskiest activities and determining how to manage a failing bank without bailing it out — the officials discussed the bankers themselves.

Tarullo focused on managerial misbehavior, arguing that managers who do not comply fully and willingly with regulations should face tougher sanctions than they do now. Instead of blaming “a few bad apples” for wrongdoing, he insisted, institutions should implement controls that prevent “bad apples” from poisoning the organization. To this end, organizations should embed respect for law, regulation, and the public trust in internal compensation systems.

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