Federal Reserve Bank of New York President William Dudley said Thursday any effort to reduce the threat to financial stability posed by massive financial firms also must include compelling banking executives to have more respect for the law and the broader impact on society of their actions.

“There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” Mr. Dudley said. “Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed” as regulators seek to deal with the problem of banks that are considered too big to fail, the official said.

That in part is why reforming the oversight of these financial behemoths is so important. “Tough enforcement and high penalties will certainly help focus management’s attention on this issue,” Mr. Dudley said, adding that “ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.”