Banking Sector Money and Morals

The right environment must be created at financial institutions if they are to have ethical business practices, argues a board member of Germany’s central bank.
Thinking about what to do.


What is the role of ethics in today’s financial sector? Past violations have nourished the belief that the current financial system is incompatible with moral standards.

This might be doing an injustice not just to a few bankers, but furthermore the negative headlines hand strong arguments to pessimists.

The task of ethics is to define criteria for appropriate behavior, based on universally-held perceptions of a well-lead life and aided by sensible arguments. Ethics for the financial sector are important if they establish criteria for good behavior.

There are widely different values, cultural influences and ethical practices in the greatly nuanced and complex world we live in. This diversity must be protected because behavioral norms differ for different segments of society.

Every decision is based on values. The more unsteady and inscrutable the financial circumstances, the more significant the orientation on principles and values becomes.

 A bank’s ethics serve to guide the behavior of its employees, including its managers. In explaining disruptions in the financial sector, analysts have looked at general banking conditions and structures primarily instead of individual behavior.

Whether it’s the Libor scandal over the manipulation of benchmark interest rates or money laundering or false advice, many analysts cite incentive structures or influential subcultures in companies and blame the banks or the system as a whole.

There is less focus on the guilt of the individual. Those who carry out the crimes sometimes even become victims. In today's globalized world of finance, there are so many constraints, individual market participants are exchangeable and there's such great pressure to create profits that individual responsibility gets left behind.

The question “What should I do?” has been replaced by “What can I do and what am I allowed to do?"

It seems inevitable that people take advantage of whatever isn’t covered by governmental laws and regulations, as soon as there's a chance of making a quick profit. This view underpins what pessimists believe – though we needn't share that belief – that we are forced to choose between the current financial system or one thoroughly imbued with moral integrity.

Everyday life in lending institutions paints a different picture. When employees are dealing with whether they want to recommend a particular product to their customers or complete a commercial transaction, as a rule they have some leeway.

We can’t ascribe an all-pervading power to the guidelines and instructions a company gives its employees and those that financial regulators prescribe to the institutions they oversee. While they do limit a bank employee’s discretion, they never can nor should they replace it. In a complex world and given growing uncertainty about the future, it's every individual's job to make weighty decisions or offer support in making decisions. Freedom of action is part of daily life.

Such decisions can’t be based solely on circumstances. Every decision is based on values, too. The more unstable and inscrutable the financial circumstances, the more important principles and values become.

The question about the intent and purpose of one’s own actions remains relevant. Ethics deal with the question of how decisions and their possible consequences can be weighed in situations in which there is freedom to act. This is where ethics demands people consider their values.

We can only do justice to the financial sector if we consider the role of the individual. Understanding structural defects doesn’t mean we need to forgive individual wrongdoing. What lies beneath the accusation of a lack of an ethical awareness remains, as philosopher Immanuel Kant observed, self-inflicted mental immaturity.

A freely made decision doesn’t imply that it’s arbitrary. Decisions made within the financial system must take the conditions into account that made it at all possible in the first place. The financial system is not an end in itself – even in an open society. In a financial system, banks, insurers, securities companies and investment funds mediate financial resources between those who supply and those who demand.

The logical consequence for all stakeholders in the financial sector – including regulators – is to ensure moral behavior, regulations and incentives are mutually beneficial, instead of displacing each other.

This key role is the basis for a society’s interest in integrating the financial system into the legal system. The prerequisites for a financial-sector ethic that doesn’t conflict with the regulatory framework must be that people involved ensure a long-term added value for customers, contractual partners and colleagues. The equivalent social value matches the needs of those involved. An appropriate ethic ensures the overlapping of one’s own goals with the value horizon of others.

We shouldn’t succumb to the fallacy that moral standards can exist in a vacuum. The social order and the interpretation of individual freedom are mutually dependent. This is not a new idea. For that reason, certain economic systems cannot necessarily be transferred to countries that are politically and economically less developed.

We cannot accept a simple formula that says excesses in the sector are just caused by individual self interest and can be resolved solely through external regulations. For banks, that means neither an individual ethic is possible over time without good company leadership nor can a well-meaning company structure survive if individuals circumvent it due to the freedoms they have.

However, morals cannot be imposed on people from the outside: It is only possible to create the proper environment. The effects of managers' warning and ethics workshops don’t last long. If people don't see negative consequences for wrong-doing or rewards for desirable behavior, established behavioral patterns are hard to change through words alone.

Financial supervision can have an important influence on the leadership and structures of companies but cannot prescribe motives for individuals’ actions. The logical consequence for all stakeholders in the financial sector – including regulators – is to ensure moral behavior, regulations and incentives are mutually beneficial, instead of displacing each other.

The financial sector has already taken steps in this direction. Modifications in risk management, control functions and compensation are helping promote ethical attitudes in companies. What needs to happen next is strengthening individual accountability, not only for those involved directly in financial transactions but also for management to create the right climate and incentives.

Effective ethics can achieve a lot – and are rewarded with trust and a good reputation, essentials in banking.

And a special return awaits the individual banker who is morally committed: social recognition as an honest person.


The author can be reached at: [email protected]