Banking and Ethics Wiesaw Gumua 1 Thesis Commercial

Banking and Ethics Wiesław Gumuła 1

Thesis • Commercial banks are exposed to a lot of temptations to work in unethical ways. And some of them do it. • Small banks are more likely to act in an ethical way than large ones. • There are two types of commercial banks: – conventional banks that tend to be ethical to some extent: from being ethical to unethical. – ethical banks. • Each of them represents a distinct business model. 2

Ethical practices of banks • Good customer services • Proximity to customers • Not engaging in illegal activities (e. g. laundering dirty money, bribery) • Checked origin of money • Acceptable destination of money • Transparency of operations • Accountability • Safe asset management • Sustainable lending and investments 3

The Double Nature of Banks • The main goal of banks: to make a profit. • Additional obligations that come from the license of banking: – to fulfill macro and micro-prudential regulations, – to contribute to the safety of financial system, – to be ethical. • Some banks treat these obligations as goals of secondary importance. 4

Marketization of society • One of issues of the evolution of the world financial system at the beginning of the 21 st century. Financial crisis revealed the nature of this process. • The process of reduction of rich cultural regulations to those market oriented. • The destruction of the multidimensional culture space. • Banks are involved in this process. 5

Three levels of culture • Values and norms (cultural patterns) • Normative roles, institutions and procedures • Normative subsystems: – – – – – Legal regulations Ethical regulations Customs and habits Principles of effectiveness Principles of efficiency Technical indications and instructions Esthetic rules Religion Wisdom Felicitological values and patterns (How to be happy) 6

The process of marketization of society • Something more than marketization of economy • The multidimensional culture space reduced to – Legal regulations – Principles of effectiveness – Principles of efficiency – Technical indications and instructions 7

Examples of unethical practices • • • „Shadow banking” Bundles of products Stopping giving services in the periods of fear Moral hazard („too big to fail”) Relational marketing versus unethical consumption of social capital 8

Example of ethical banking • The movement of social banking. • European Federation of Ethical and Alternative Banks (FEBEA). • Start in 2001. • Mission: developing ethical and solidarity-based finance. • Memberships: banks, savings and loan cooperatives, investment funds. • Customers (about 500 000 in Europe). 9

Ethical banks focus on: • • • Safe bank management Criteria and values for the use of money Origin of money Destination of money Against exclusion Transparency 10

What differentiates ethical banks from conventional banks • Value oriented versus result oriented. • Maximizing social capital and helping customers versus maximizing financial capital. • Ethical banks treat receiving profit as one of the necessary conditions of existence and not as a priority. • To focus on a wide range of stakeholders versus to focus on shareholders. 11

Ethical banks • Small commercial banks • Saving and loan cooperatives 12

Why are small banks more likely to act in an ethical way than large ones? • Breaches of ethics are more costly for cooperative banks than for large banks (too big to fail). • Moral hazard. • Moral cowardice. 13

The nature of moral cowardice • The moral cowardice is based on the readiness to do evil (and the actual wrong-doing) while: - you don’t do it personally and directly - you do it with the hands of other people, through the social system or financial and technological tools (such as money, the Internet, and other devices) - you don’t experience negative effects of such wrong-doing 14

A moral coward • A moral coward experiences a considerable psychologial dissonance and discomfort when he or she does evil himself or herself directly, although he or she wants the wrong-doing to take place. In some cases he or she is not capbale of wrong-doing. Nonetheless, he or she really wants it. 15

Factors conducive to moral cowardice • Psychological factors (are not the focus of this presentation) • Some types of professional roles (legal representatives of corporate bodies or individuals, plenipotentiaries) • Social and cultural contexts (some types of interpersonal space and culture) 16

Why does the evolution of the world financial system go hand in hand with the moral cowardice? • The evolution of the world finacial system is among others the process of: – transformation of direct and personal relations between people to depersonalized and mediated by many instruments (e. g. financial instruments including money, the Internet, and telecommunication services) – transformation of reciprocal relations (interactions) to one-direction bonds (without the possibility of giving any feedback) 17

The process of banking the world • the increase in the number of bank accounts – transfer from the cash to cashless society • the rapid growth of non-cash payments (the popularity of electronic money) • switch from personal and direct contacts (which are natural for cash operations) to indirect contacts (you don’t see the face of your customer or business partner while you use cashless forms of money) • money accumulated in banks as „the weapons of mass destruction” (in the hands of representatives and plenipotentiaries) 18

The process of financialization • From banks to financial markets • Banks made social relations less personal; additionally financial markets make them less secure and less predictable • Financial markets build and promote onedirection relations (open pension funds, hedge funds) • the victims of wrong-doing find it difficult to point out anyone concrete to blame (since wrongdoers act under the cover of corporate bodies) 19

Moral cowardice culture as a result of the society marketization • making money as the dominant value (the myth of the Midas’ touch) • “greed is good and legal” “No law forbids egoism. No law forbids contempt. No law forbids hatred. No law forbids – isn’t it stupid – to be a bad man” (Andre Compte-Sponville, 2012) • Common agreement allowing so-called “lesser evil” 20

How to fight against the unethical banking • • • Macro or micro-prudential supervision? Resolution Education Internal ethical codes Stigmatization (by INTERNET and other media) Economic and social movements (social banking, ethical banking) 21