By Peter Koslowski
The Ethics of Banking
- Is one of the few books on the ethical side of the financial crisis
- Analyzes the systemic and the ethical mistakes that led to the financial crisis of 2008
- Investigates the role of speculation in the formation of the financial crisis
The Ethics of Banking analyzes the systemic and the ethical mistakes that have led to the financial crisis of 2008. It explores the middle ground between the argument that financial managers cannot be expected to take responsibility for a systemic crisis and the argument that moral failure is the one and only origin of the crisis. The book investigates the role of speculation in the formation of the crisis. It distinguishes between productive speculation for hedging and for securing market liquidity on the one hand, and unproductive and even detrimental hyper-speculation, on the other. The book argues that hyper-speculation goes far beyond the degree of speculation that is necessary for the liquidity of financial markets in a developed economy, and has thus increased the risks of the financial system and will continue to do so. This book offers an ethics of banking and an ethical economy of the financial markets to counterbalance the financial industry’s purely economic approach.
About Peter Koslowski
Peter Koslowski (2 October 1952 – 15 May 2012) was a Professor of Philosophy, especially Philosophy of Management and Organisation and History of Modern Philosophy, at the Vrije Universiteit Amsterdam (VU University Amsterdam).
Table of Contents + Chapter Abstracts
Chapter abstracts have been taken from the book's page on SpringerLink
- Ethical Economy, Economic Ethics, Business Ethics: Foundations of Finance Ethics - Where there is a great measure of influence and power, there must also be a great measure of conscientiousness and moral awareness, because power itself is a moral or ethical phenomenon. Every powerful action must be morally responsible and defensible. An ethical code of conduct for banking and stock trading would therefore seem to be an obvious requirement. If we consider the current discourse in the discipline of economics, however, the literature yields up precious few titles that engage with the ethics of banking or financial ethics.
- The Ethical Economy of the Credit Market - Banks are suppliers of payment-processing and lending services, and operate in the market for these services, where they as suppliers meet the individuals as well as firms which are the demanders and consumers of credit. Banking should be described in terms of the market for credit and payment-processing services, and not in terms of a quasi-state, official “credit-granting” function. Once upon a time, the banking sector and the supply of loans were referred to in terms of quasi-state administration and the granting of loans to applicants. During the recent decades of credit expansion and easy money, credit – especially consumer credit and lending for share purchases – has come to be seen as a type of consumer good that requires no deeper ethical norm-setting than any other consumer good.
- The Ethical Economy of the Capital Market - The need for capital and thus financial resources to finance firms and projects creates its own market in which capital, in its most abstract form, is bought and sold as a securitized, exchange-tradable share of a firm. This established market begets norms of practice and trade in this market, norms of exchange and norms of advice on trading, which arise in the interplay between the capital market’s factual development and the normative rules of ethics and of legislation.
- Insider Knowledge and Insider Trading as Central Problems of Finance Ethics - The stock exchange is the central institution charged with mediating supply and demand in the market for capital. The question of what conduct is appropriate to the matter of the capital market is a matter of intense debate, particularly with reference to insider trading. Indeed, insider trading is a central problem in the economic ethics of the capital market and the stock exchange. In Germany it has been prohibited since 1 August 1994, when the Second Financial Market Promotion Act was adopted. Yet within the various schools of economics and jurisprudence, the debate has not arrived at any consensus on the question of whether or not insider trading is harmful, and hence, whether or not it should actually be illegal.
- The Ethical Economy of the Market for Corporate Control and Corporate Know-How - Buying up qualified percentages or majority holdings of the total shares of a firm is a somewhat peculiar kind of transaction, which makes it justifiable to differentiate between trading in shares to gain control over a corporation and normal trading in company shares. Although trading that has the purpose of gaining corporate control is conducted in the same market as normal trading, namely on the stock exchange, it is obvious that this type of trading conforms to a different pattern.
- The Ethical Economy of the Market for Derivatives: Trading with Values Derived from Other Values for Hedging, Speculation, and Arbitrage - It is useful to differentiate between the market for derivatives and the markets for credit and capital, despite the existence of some structured products which blend elements of credit-market and capital-market products – collateralized debt obligations, for instance. Share options are the classic example of capital-market derivatives, and interest-rate swaps the classic example of credit-market derivatives. Given the more complex nature of the market for derivative products, it seems appropriate to treat this market separately as a market in its own right, even if there are also credit-market derivatives, capital-market derivatives, and hybrid derivative products that can be seen as hybrids consisting of credit-market products and capital-market products, although they are not hybrid securities in the narrower sense, as convertible bonds are.
- Interdependences Between the Financial Markets for Credit, Capital, and Derivatives, and the Challenges the Financial Markets Pose for Ethics - Universal banks intermediate between savings and investments within their own organizations, whereas in the capital market, investors find their own investment opportunities in the market for corporate shares.
- The 'Banking Secret', the Right to Privacy and the Banks' Duty to Confidentiality - Banks are obliged to maintain confidentiality about their business relationships with customers and about their customers’ accounts. They must preserve banking secrecy or the “banking secret” (Bankgeheimnis) as it is called in German. First and foremost, the “banking secret” is just a subtype of the non-disclosure of facts communicated under confidentiality, and of the general class of professional and business secrets that are equally familiar from the medical profession, for instance, or from brokerage activities in the case of insider knowledge discussed earlier. Banking secrecy is the banking industry’s own brand of professional confidentiality and trade secrecy. Any knowledge the bank comes by in the course of the business relationship must not be used for insider gain, a principle that follows from the fiduciary duty; nor must it be passed to others or publicly disclosed.
- Financial Wagers, Hyper-Speculation and Shareholder Primacy - During the period that culminated in the financial crisis, the financial wager had risen to a previously unknown prevalence. The wager’s rise to dominance was evident in all financial markets. It was evident in the capital market, in which speculation on the capital gains of shares had risen dramatically. It was equally evident in the credit market, in which the policy of easy money had driven lending volumes to staggering heights, while the relaxation of requirements for loan collaterals had led to a higher tolerance of speculative uncertainty about debtors, and bad credit collaterals were purchased from the banks by speculative investors in the form of structured products. Finally, it was evident in the market for derivatives, in which something like an explosion of wagers on futures and options had taken place.
- Financial Overstretch: The Epochal Disturbance of the Invisible Hand of the Market by the Financial Industry - The overstraining of the shareholder-value principle, and the inversion of means and ends from the shareholder-value orientation as the means of controlling the firm’s performance to the delivery of shareholder-value as the firm’s sole purpose, resulted in overextension of the speculative side of the management remit in the lead-up to the financial crisis. Management was presented with the essentially unrealizable task of maximizing share-price growth.