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Banking and Ethics - Visegrad Summer School

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Banking and Ethics
Wiesław Gumuła
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Thesis
Commercial banks are exposedtoa lot of temptationsto 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 ethicaltosome extent: from being ethical to unethical.ethical banks.Each of them represents a distinct business model.
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Ethical practices of banks
Good customer servicesProximity to customersNot engaging in illegal activities (e.g. laundering dirty money, bribery)Checked origin of moneyAcceptable destination of moneyTransparency of operationsAccountabilitySafe asset managementSustainable lending and investments
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The Double Nature of Banks
The main goal of banks: to makeaprofit.Additional obligations that come from the license of banking:to fulfill macro and micro-prudential regulations,to contribute to the safetyof financial system,to be ethical.Some banks treat these obligations as goals of secondary importance.
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Marketizationofsociety
One of issues of the evolution of the world financial system at the beginning of the 21stcentury. Financial crisis revealed the nature of this process.The process of reduction of richcultural regulations to those market oriented.The destruction of the multidimensional culture space.Banks are involved in this process.
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Three levelsofculture
Values and norms (cultural patterns)Normative roles, institutions and proceduresNormative subsystems:Legal regulationsEthical regulationsCustoms and habitsPrinciplesof effectivenessPrinciplesof efficiencyTechnical indications and instructionsEsthetic rulesReligionWisdomFelicitological values and patterns (How to be happy)
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The process of marketization of society
Something more than marketization of economyThe multidimensional culture space reduced toLegal regulationsPrinciples of effectivenessPrinciples of efficiencyTechnical indications and instructions
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Examples of unethical practices
„Shadow banking”Bundlesof productsStopping giving services in the periods of fearMoral hazard („toobig tofail”)Relational marketingversusunethical consumption of social capital
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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).
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Ethicalbanksfocuson:
Safebank managementCriteriaandvaluesfortheuseofmoneyOriginofmoneyDestinationofmoneyAgainstexclusionTransparency
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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 ofthenecessary conditions of existence and not as a priority.To focus onawide range of stakeholders versus to focus on shareholders.
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Ethicalbanks
Smallcommercial banksSavingandloancooperatives
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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 (toobig to fail).Moral hazard.Moral cowardice.
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Thenatureofmoralcowardice
Themoralcowardiceisbasedon thereadinessto doevil(and theactualwrong-doing)while:youdon’tdoitpersonallyanddirectlyyoudoitwith thehandsofotherpeople,throughthesocialsystemorfinancialandtechnologicaltools(suchasmoney, the Internet, andotherdevices)youdon’texperiencenegativeeffectsofsuchwrong-doing
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Amoralcoward
Amoralcowardexperiencesaconsiderablepsychologialdissonanceanddiscomfortwhenheorshedoesevilhimselforherselfdirectly,althoughheorshewantsthewrong-doingtotakeplace. Insomecasesheorsheisnotcapbaleofwrong-doing.Nonetheless, heorshereallywantsit.
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Factorsconducivetomoralcowardice
Psychologicalfactors(arenot thefocusofthispresentation)Sometypesofprofessionalroles(legalrepresentativesofcorporatebodiesorindividuals,plenipotentiaries)Socialandculturalcontexts(sometypesofinterpersonalspaceandculture)
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Whydoestheevolutionof theworldfinancialsystem gohandinhandwith themoralcowardice?
Theevolutionof theworldfinacialsystemisamongotherstheprocessof:transformationofdirectandpersonalrelationsbetweenpeopletodepersonalizedandmediatedbymanyinstruments(e.g.financialinstrumentsincludingmoney, the Internet, andtelecommunicationservices)transformationofreciprocalrelations (interactions) to one-directionbonds(withoutthepossibilityofgivinganyfeedback)
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Theprocessof banking theworld
theincreasein thenumberof bankaccounts– transfer from thecashtocashlesssocietytherapidgrowthof non-cashpayments(thepopularityofelectronicmoney)switchfrompersonalanddirectcontacts(whicharenaturalforcashoperations) toindirectcontacts(youdon’tseethe face ofyourcustomerorbusiness partnerwhileyouusecashlessformsofmoney)moneyaccumulatedinbanksas „theweaponsof massdestruction”(in the hands of representatives and plenipotentiaries)
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The process offinancialization
From banks to financial marketsBanks made social relations less personal; additionally financial markets make them less secure and less predictableFinancial 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)
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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 lawforbids hatred.No lawforbids – isn’t it stupid – to be a bad man”(AndreCompte-Sponville, 2012)Common agreement allowing so-called “lesser evil”
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Howtofightagainsttheunethicalbanking
Macro or micro-prudential supervision?ResolutionEducationInternal ethical codesStigmatization (by INTERNETand other media)Economic and social movements (social banking, ethical banking)
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Banking and Ethics - Visegrad Summer School