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Banking and Ethics

Banking and Ethics. Wiesław Gumuła. Thesis. Commercial banks are exposed to a lot of temptation s 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:

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Banking and Ethics

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  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)

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