Banking and Ethics

1. Banking and Ethics Wiesław Gumuła

2. 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.

3. 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

4. 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.

5. Marketization of society • One of issues of the evolution of the world financial system at the beginning of the 21st 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.

6. 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)

7. 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

8. 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 versusunethical consumption of social capital

9. 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).

10. Ethical banks focus on: • Safebank management • Criteria and values for theuse of money • Origin of money • Destination of money • Againstexclusion • Transparency

11. 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.

12. Ethical banks • Small commercial banks • Saving and loancooperatives

13. 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.

14. The nature of moralcowardice • The moralcowardiceisbased on the readiness to do evil (and the actualwrong-doing) while: • youdon’t do itpersonally and directly • you do it with the hands of otherpeople, through the social system orfinancial and technologicaltools (such as money, the Internet, and other devices) • youdon’texperiencenegativeeffects of suchwrong-doing

15. A moralcoward • A moralcowardexperiences a considerablepsychologialdissonance and discomfortwhen he orshedoesevilhimselforherselfdirectly, although he orshewants the wrong-doing to take place. In somecases he orsheis not capbale of wrong-doing. Nonetheless, he orshereallywantsit.

16. Factorsconducive to moralcowardice • Psychologicalfactors (are not the focus of thispresentation) • Sometypes of professionalroles (legalrepresentatives of corporatebodiesorindividuals, plenipotentiaries) • Social and culturalcontexts(sometypes of interpersonalspace and culture)

17. Whydoes the evolution of the worldfinancial system go hand in hand with the moralcowardice? • The evolution of the worldfinacial system isamongothers the process of: • transformation of direct and personal relations betweenpeople to depersonalized and mediated by manyinstruments (e.g. financialinstrumentsincludingmoney, the Internet, and telecommunication services) • transformation of reciprocal relations (interactions) to one-directionbonds(without the possibility of givinganyfeedback)

18. The process of banking the world • the increase in the number of bank accounts – transfer from the cash to cashlesssociety • the rapidgrowth of non-cashpayments (the popularity of electronicmoney) • switch from personal and directcontacts (whicharenatural for cashoperations) to indirectcontacts (youdon’tsee the face of yourcustomeror business partner whileyouusecashlessforms of money) • moneyaccumulated in banks as „the weapons of mass destruction” (in the hands of representatives and plenipotentiaries)

19. 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 one-direction relations (open pension funds, hedge funds) • the victims of wrong-doing find it difficult to point out anyone concrete to blame (since wrong-doers act under the cover of corporate bodies)

20. 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”

21. How to fightagainsttheunethical banking • Macro or micro-prudential supervision? • Resolution • Education • Internal ethical codes • Stigmatization (by INTERNETand other media) • Economic and social movements (social banking, ethical banking)