Yesterday, New York Federal Reserve Chair William Dudley gave an ominous speech about the danger of 'Too Big To Fail' on Wall Street, in part blaming the industry's very nature for its continuation.

The speech was long, but his points were simple — TBTF is alive, and while coming up with a doomsday plan and making banks hold more money is important, it's not enough. Regulators must find a way to change management incentives on Wall Street so that risk is mitigated far before a bank comes close to failing.

If that can be achieved, questions about the size of U.S. banks are less important (though worth discussing with appropriate respect for their complexity).

But how do you change management on Wall Street? Before that question can be answered, Dudley asks his listeners to accept an assertion that the industry has continuously denied.

The Fed Chair said that TBTF is, in part, due to a more sinister, root problem — one that exists deep below the surface of Wall Street firms where regulators can't go. It is a problem with Wall Street's culture.

From Dudley's speech:

Some argue that what I have proposed—higher capital requirements and better incentives that reduce the probability of failure combined with a resolution regime that makes the prospect of failure fully credible—are insufficient. Perhaps, this is correct. After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions. 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. Tough enforcement and high penalties will certainly help focus management’s attention on this issue. But I am also hopeful 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.

Changing a culture is a difficult multi-generational process — best to start working on it now.