An open discussion about ethics in financial services and banking.
8 Dec
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So I wrote an article about HBOS, Northern Rock, Bradford & Bingley, Abbey, Lloyds TSB and Alliance and Leicester banks in the UK in which I questioned if putting profits over people was the desired outcome and someone, who reported works for a major bank said the following in response.
1. Banks lend to MAKE MONEY. Defaults on loans are not in their interest.
2. Banks are NOT charities, nor are they public bodies. The fact the government supported Northern Rock is a reflection of the competence of government and I personally think the bank should have been allowed to become insolvent. Nationalizing banks would kill the economy because there would be less incentive to MAKE MONEY.
3. Bank charges are there to MAKE MONEY, as well as penalize people who don’t manage their finances. I have previously had a terrible credit rating (after badly managing my own finances) so my bank refused me a current account and instead gave me a ‘card-cash’ account which I COULDN’T abuse, so never got any bank charges. This was appropriate and sensible and got me sorted. In the long run I will stay with the bank so they can continue to MAKE MONEY. Penalties (in all walks of life) will hopefully bring a bit more personal responsibility into society.
4. Businesses are there to MAKE MONEY
5. Do you work for NOTHING? Or are you on benefits? Can you get a job or are you trapped under something heavy?
6. If banks didn’t exist modern society wouldn’t be anywhere near it is today. If you disagree with this then I trust you are want to revert to Constable country (where the pictures don’t show the death and suffering everywhere).
7. Banks are NOT natural monopolies like gas, electricity, rail, post services etc. They should be allowed to compete and I trust that since there are so many of them competition is reasonable. Think about it - if you don’t screw with your current account banks won’t hit you with charges and you will not pay monthly fees so effectively they hold your cash for a very reasonable fee (the difference between what they pay you in interest and what they charge other banks in interest).
8. I work for a REPUTABLE bank. We strive (every day, constantly) to ensure we meet both the letter AND spirit of the law. We have a reputation to maintain and ACTIVELY REFUSE business that could damage this reputation, even if we know we can MAKE MONEY from a particular transaction.
9. Banking is NOT interesting, fulfilling, life-affirming or anything you would want your kids to do. People work in banks because they can make MORE money than if they were a teacher. If teachers earned the same as bankers there would be a lot more teachers, and no banking system to pay the teachers’ salaries. Sad yes, but true. Banks are the engine room of the economy and trust me they are just as un-glamorous. You need to be smart but smart people get bored more easily - hence the higher salaries. If you can suggest a better system for driving an economy then we would all like to hear it (with the exception of Stalin-creating politics of-course).
The person leaving the comments felt very strongly about defending the banks right to MAKE MONEY but missed a discussion about what, if any, the ethical or moral responsibility is there of banking and financial services to grant prudent access to credit. Does responsibility in lending mean that the bank is to only be responsible to maximize profit by engaging in loans or extensions of credit which are risky or sub-prime? Or does responsible lending mean that banks should refrain for extending credit to people that might maximize profits but also maximize risk at the same time?
Why is it that the morals and ethics of general society do not carry through to the banking and financial services industry. The typical reaction I get from people when I ask if we owed each other money and I couldn’t pay, what would you expect of me, is communication and a plan.
Yet it is my experience that when customers of banks run into financial problems and reach out to banks for consideration that the front line answer is generally that there is little to no help available. Either the banks internal policies and procedures prevent a sufficient modification to the repayment plan or lenders want to avoid any reporting of loans that would show poor performance. In both cases the banking position is one of little to no meaningful help or assistance for the consumer in trouble.
If societies ethics and response would be to be flexible and seek a balanced solution, and the bank does not strive to do that, are the banks morals or ethics out of balance with societies and not reflective of the moral norm?
What do you think about that situation and what do you think the ethical goal of the bank should be on the lending side and on the collection side or should the moralities and ethics be the same on both sides of the bank?
Finally, should the morals and ethics of business attempt to mirror those of society or should business ethics serve as enforcement of the corporate profit goals?
6 Responses for "Should Banking Moral and Ethical Norms Match Those of the Culture or Society?"
This response to this question come from a banker who did not wish to be identified.
• Banks, like any other business, are designed to maximize profits to their shareholders, with consideration, of course, to the overall stakeholders, including the society. Consideration is a relevant term, and therefore, the concept of ethical or unethical bank emerges. Many banks have separated their contribution to society from doing their business by creating specialized “Corporate Social Responsibility†departments to pay their dues without interrupting the business. The other major consideration practiced by banks is to be commercially sensible. For example, not to break any law, not to cause any individual or business to go insolvent, not to sell risky investments without putting the right disclosure, so on and so forth.
• There is severe competition in the banking industry. With time, profitability became not only measure of success, but means to survive. Higher profits mean continuing to be in the business and secure more deals, gaining the trust of shareholders and governments and ultimately contribute to the state’s economy. When banks grow, they diversify, they acquire other banks, and they go global and pay more taxes!
• Many theorists spoke of ethical banking or Islamic banking and many forms of integrating human and moral factor into the money-making-machine model of the modern financial institution. Unfortunately, so far, when practiced, these theories were used to dominate, manipulate and monopolize the business of banking for a large client base, misleading the audience while generating profits, folds higher than conventional banking. Until today, we haven’t seen real value introduced based on adapting an ethical model. So for me, I prefer my bank to continue doing business as is rather than preaching something that I don’t believe it’ll practice.
• The financial sector is highly regulated and protected by governments and therefore, their bylaws, models, policies and procedures and pretty much standard, despite some twists in the business plans, they are all written to protect the rights of the shareholders and clients alike, increase profitability of the banks, reduce market and credit risks and ultimately stabilize the economy. And therefore, the staff of the front office is very unlikely to bend rules and be considerate to a case of an individual delinquent loan, as described in your article. I don’t see this as being out of balance of the moral norms rather than just being inline with laws of doing business (not necessarily banking specific).
• To address your last question: you and I, as human beings have good and evil within ourselves, if for example I wanted to live by certain morals and ethics, I would use more good than evil in evaluating a certain situation. This is less applicable in business terms, because we cannot leave things open for personal judgment, we have to put standards and simply live by them. However, it will defiantly come to an individual at the end of the day, he or she will decide to go the extra mile and apply “what he or she think is rightâ€. I don’t believe in ethical business as much as I believe in ethical humans.
My experience with banks is that it is in the banks best interest to make sure you are alright. If I loan money and then go bankrupt I have a problem, but so does the bank. No company in the world profits from screwing its customers and the bank is no exception.
On the other hand; it is ALSO my experience that banks think different. They have only one rule by which they live and that is to minimize risk. If you end up becoming a risk to them they will try to cut you off as quickly as possible. This might seem unacceptable to ‘people’ but it is just business to banks.
>What, if any, the ethical or moral responsibility is there
>of banking and financial services to grant prudent
>access to credit?
Banks do have an ethical responsibility to grant prudent access to credit. It’s never ethically responsible to mislead someone when you know that entering into the arrangement is inappropriate or deleterious for the person with whom you’re engaging in business.
But what’s happening in the current mortgage crisis bears a resemblance to what has happened during economic downturns when people have invested in mutual funds or other investment vehicles without a clue about their volatility. The investment companies have a responsibility to disclose the risk (and the SEC requires them to do so), but do investors really read these warnings on prospectuses or other documents in heady economic times when they see colleagues and friends reaping big returns? How many people really have an idea how volatile the mutual funds are in their 401(k)s or 403(b)s, let along know what stocks those mutual funds are invested in? It’s only when their portfolios take a hit that they begin to voice outrage about being in an inappropriate investment. There’s little complaining if they’re in an investment inappropriate to their income if they’re doing well.
Yet the responsibility to fully inform someone is no different in good times or bad and neither should be the responsibility of granting prudent access to investments or to credit.
Some of the responsibility falls upon the consumers entering into these agreements to understand what they are entering into. But the greater responsibility falls upon the lending institutions or investment companies to create mechanisms that make it difficult for people to get into situations they have no business being in.
While a motivation for loosening restrictions may have been to make credit available to a broader constituency than had been eligible before, these loans would not have been made if they weren’t deemed as potentially profitable. So if the intent was to tap an untapped market of unknowing and unsuspecting borrowers who would certain to fall into serious financial problems once the credit markets turned, there is no ethical justification for preying on consumers who should have been deemed ineligible to borrow beyond their capacity from the start.
>Does responsibility in lending mean that the bank is to
>only be responsible to maximize profit by engaging in
>loans or extensions of credit which are risky or
>sub-prime? Or does responsible lending mean that
> banks should refrain for extending credit to people
>that might maximize profits but also maximize risk at
>the same time?
Banks may have a responsibility to increase profits, but that doesn’t diminish their responsibility to do so ethically. In the long-term, lending to those who can’t afford to take on loans does not benefit the borrower or the bank. It’s short-term thinking to believe otherwise. In this case ethics and good business match up…or at least should have.
>Why is it that the morals and ethics of general society
>do not carry through to the banking and financial
>services industry.
Who says they don’t? They should. A bank or any other business may be responsible to their shareholders, but they are also responsible to other stakeholders, whether those are their borrowers, the community in which they opportunity, or their employees. Heskett and Kotter in their book Corporate Culture and Performance do a nice job of pointing out how dramatically better companies perform when they pay attention to all stakeholders and not just to the bottom line at the exclusion of all else.
>If society’s ethics and response would be to be
>flexible and seek a balanced solution, and the bank
>does not strive to do that, are the banks morals or
>ethics out of balance with society’s and not reflective
>of the moral norm?
Not necessarily. A bank cannot be expected to become insolvent to repair the wrongs done by lenders and borrowers. Similarly, companies had no obligation to restate the strike price of stock options of some employees after the stock market drops. This doesn’t mean that banks shouldn’t attempt to be fair in their practice with borrowers, but banks (and other businesses) must weigh their responsibility to all stakeholders, not solely the borrowers who find themselves in trouble.
>What do you think about that situation and what do
>you think the ethical goal of the bank should be on
>the lending side and on the collection side or should
>the moralities and ethics be the same on both sides of
>the bank?
Banks should re-examine their lending policies to ensure that appropriate loans are made to borrowers who can afford them. If they can provide alternatives or refinancing so a borrower can find a viable option without violating their responsibility to their other stakeholders they should attempt to do this.
>Finally, should the morals and ethics of business
>attempt to mirror those of society or should business
>ethics serve as enforcement of the corporate profit
>goals?
See earlier comments.
Jeffrey Seglin
http://www.jeffreyseglin.com
rightthing@nytimes.com
According to shareholder theorists such as Nobel laureate economist Milton Friedman, managers ought to serve the interests of the firm’s owners, the shareholders. Social obligations of the firm are limited to making good on contracts, obeying the law, and adhering to ordinary moral expectations.
In other words, banks are economic centers which must run their business with the view of maximizing profits for the shareholders, given the constraints put by Government on its operations, and taking into account certain ethical consideration about the lending activity. It is thus left to the Government to shape the operations of the bank to the culture of the society by passing regulations. If bank adhere to these regulations, they will automatically be in tune with the ethical norms of the culture of the society, and at the same time following a policy of stakeholder maximization.
I would like to submit a functionalist view into this discussion. Such a view focusses the ethics question to the function (or telos - purpose) of the bank-institute within society.
It seems to me that the function of the institute ‘bank’ is to finance ‘the’ economy, both enterprises and households. Now, there are a number of good reasons for running this institute as private businesses and not as nationalised entities, one is that it allows the function to be carried out objectively, meaning without the interferance of political positions as to what types of industry to finance or what houses one would buy.
In this sense, banks are not about making money, rather they are about financing the economy. The profit-issue is means to that function, and as such the profit made by the bank is justified to the extent that it safeguards the fulfilment of its societal function. In other words, it is justified if we accept that making profit will allow banks to continue to finance the economy.
So does the government have any say in it? Well of course, but restricted in scope. The government’s role is to ensure that banks, as a crucial institution within society, fulfill their function. Government sets the playing field. (Note that shareholders’ rights are ensured by government.) It therefore makes sense that government issues laws and regulations that ensure the societal function of banks to be fulfilled. Rules on transparency is a good example of that. A bad example would be regulation excluding certain industries to invest in. If government wants to get rid of certain industries (adult entertainment, tobacco, clusterbombs are often heard as candidates to get rid off) then it should forbid such activities rather than allow such activities but forbid banks to invest in them or to administrate such investments.
An analogue reasoning applies for investments in corporations that have been convicted. Courts are there to convict corporations, that is the function (telos) of courts, not of banks.
But any practice by banks or within banks that endangers the societal function of banks must worry us and government should develop and implement regulation that avoids such risks.
Hence I repeat my central point: banks are about financing the economy. Banks making profit is about ensuring that they will be able to continue financing the economy.
The problem with “banks are about financing the economy. Banks making profit is about ensuring that they will be able to continue financing the economy” is that bankers have been driven by greed. As a result, they have been prone to work of the packaging of their deals rather than on the commercial aspect of their business.
I have been saying that SIVs are nothing different than Enron’s practices. The lack of subtlety has irked more than a few. In terms of the law, indeed the statement is incorrect. But when you consider that the whole exercise was meant to remove bad debt from the balance sheet, where do you come out?
I wrote as early as July that UBS and Citi had more write-offs to make. If the strict rule of the lowest of market or cost is applied, there still are more write-offs in the air. HSBC at least has put the funding of SIVs back on their balance sheet.
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