Ethics in Banking Essay Example
Banks are financial institutions the main function of which can be generalized to the creation of wealth. The performance of any banking institution in the world is measured by their capacity to maximize the financial base. It means that banks are evaluated on how they set their monetary policies to maximize financial assets in the given periods of time. The banking industry is the most important industry in controlling every aspect of the world economy. The reason is that governments, non-governmental organizations, as well as the general population, entirely rely on banks for any financial operation. Banks simply control the world. Therefore, the question of ethics in the banking industry is essential to analyze their great responsibility. The essay seeks to examine ethics in banking in relation to the government. It is especially focused on the takeover of banking by the government. The paper also points out the consequences when banks do not follow the ethical code of conduct.
Banking ethics simply refer to ethical or moral principles that a certain bank may choose to follow. These ethics guide a bank during its operations. In banking ethics, there is no one universal code of ethics that has been set. Thus, banks have the right to set up their own ethical conducts. It is then their task to try and appeal to customers, partners, as well as investors. Banks go through the verification of partners and investors to determine their ethical standing. Thus, investors venture into banks with ethics on mind. Ethical banking seeks to establish an ethical bank. Ethical bank is the one where investors should not run a business not taking bank’s ethics into account. It also means that a bank seeks not to compromise its ethical policies and standings. It does not accept any investment that is against ethics. Ethical banking promotes investment opportunities that encourage social and environmental enterprises.
Ethical Banking and the Government
The banking industry is faced with several ethical questions in its operations. There are also different consequences as far as these policies are concerned. There are a lot of economic, social, and environmental issues arising in this century. It means that the banking industry has to make a lot of ethical decisions, especially as far as government control is concerned. The financial crisis that occurred between 2008 and 2011 was caused by the banking sector. The reason is that it is a section of the economy that is responsible for controlling all financial investments in it. Governments all over the world were left collecting the pieces of a broken economic structure (Labaton Sucharow LLP, 2012). It raises great concern for ethical principles that governments should stick. Independence in the banking industry was responsible for this crisis because governments could lend and borrow money without any limitation from state banks. Therefore, it is necessary to examine the banking industry in detail as far as ethics are concerned. Much work has to be done to estimate ethics in banking for its effectiveness.
Citizens of different countries have been left discussing on whether governments should apply monetary policies fully to control baking institutions across the globe after the financial crisis of 2008. However, there are many implications and factors to consider before one is to come to a proper conclusion. The survey that was carried out in the United States of America on whether governments should control their operations proves that employees have a different point of view on the problem. About 20 percent of employees in the banking industry feel that they would break the law if they can access insider trading that would make them millionaires. About 25 percent of all employees have experienced misconduct in the past and have not reported on it. The most astonishing statistics in the survey show that 40 percent of the interviewed employees said that to make it, the banking industry required illegal and unethical conduct. It specifically shows how those employed in the banking sector feel about ethical banking. The statistics can still be applied today, but it was rather strong in the years prior to the financial crisis. Thus, the issue of ethical banking is critical (Wehinger, 2013).
The scandals that have occurred in the banking sector in the past have further questioned the ability of the banking industry to stick to the ethical code. Such scandals include a serious scandal when several traders from banks across the world colluded to manipulate banking rates. These interbank lending rates determine what millions of people in different countries pay for their mortgages. They also determine profits that people receive from their savings in individual banks. Such a scandal plays a major role in creating a low level of confidence in the banking sector as unethical one. It also questions the role of the government in these matters. For such a scandal to happen, the supervision and regulation of an individual government must have been poor or even unavailable. The presence of scandals in these reputable financial organizations shows that the financial sector has performed cynical and even destructive actions. Too many of these actions actually threaten the lives of citizens across the globe. The reason is that banks are responsible for the control of resources to individual citizens and even the government. It may lead to the misallocation of funds and resources, financial crises, as well as negative or low returns and interests of pension funds.
The public has shown cynicism and anger towards the banking industry in the previous decades. Especially, it happens after the misappropriation of funds such as poor investment of pension funds to obtain negative returns. Different economic researchers have accused the banking industry of disregarding the clients’ interests and even denigrating them. Different clients have also noted that banks advised people to invest in products and stocks, of which other companies were trying to get rid. The reason is that the partners themselves and stakeholders undertake investment projects that have potential profits. Therefore, the code of ethics for banks in terms of putting their clients ahead of organizational gain is actually a hoax. It does not mean that banks should not be profit-making investments. However, they should not make money at the expense of their clients. The main objectives of banks are to assist clients in savings, investments, and lending. Therefore, they must make their profits from service charges and interest rates (Bryfonski, 2010). Rather than targeting the client’s savings, they should develop ways to assist the client in making financial decisions to invest savings in profitable ventures. Therefore, the concept of an ethical bank has not become a reality.
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Government intervention has taken place in the banking industry. In every economy, there are banks and other financial institutions that are privately owned as well as a central bank or a reserve bank is controlled by the government. The government bank or the reserve bank acts as a controller of interests and the flow of currency in the economy. For example, in the United States, the Federal Reserve Bank controls the lending rates of commercial banks. It determines the interest rates that commercial banks charge to their customers. Governments also control the flow of currency from commercial banks to the public. The aim of it is to control inflation as well as the value of currency. Government control is also available in specific banking institutions. The government sets specific laws for commercial banks, which they have to follow. The government is not engaged in the control of other banking operations. Thus, the banking industry is independent in terms of its dealing with clients. It is evident in the lack of uniformity in the industry. Different banks have different lending rates, mortgage interest rates, as well as the terms of service (Groarke, 1998).
The lack of total control of the banking industry raises the question of public welfare. The public’s trust in the banking industry has been lost after the financial crisis. That is why banks have attempted to make several changes to gain it back. For example, several banks have tried to reduce their exposure to risks through deleveraging of assets, coming up with effective risk models, and reducing shadow banking activities. Banks are now focused on gaining back their home markets rather than competing with each other in the global market. In some countries, the government has intervened to create two separate banking entities, dividing into investment banking and retail banking. It has put retail banks away from the risks faced by investment banks. Thus, retail banks are now safely back, offering savings, credits, and other financial services. On the other hand, investment banks have focused only on offering investment advices instead of financial services. However, economists and bankers who support universal banking do not agree on this form of banking control (Reynolds & Newell, 2011). They say that the fact that the government has separated these two activities does not necessarily mean better management in the banking sector. They believe that the solution lies not in government control but better risk modeling and financial signals.
There are also different ways in which governments have decided to control banking operations. Several governments, especially in free trade areas, such as Europe, have joined to set new laws in banking. The main objective of these laws is to increase liquidity and capital requirements for commercial banks. Governments coordinate these requirements in an international setting. The laws are set to adopt more binding and tougher capital regulations in order to improve the risk management of these banks. Earlier on, before the financial crisis, the public saw the banking sector as a too big enterprise to fail. It was not the case of the financial crisis of 2008. Now, government efforts aim at reducing this threat. The laws are intended to make stakeholders in the banking industry realize that banking is an investment like no other and requires particular attention. The laws encourage individual banks to evaluate their ethical code of conduct to create a universal banking sector (Wehinger, 2013).
Other individuals in the banking industry have undertaken different programs to regulate banks. The main form of bank control is the limit of banks to home markets. It is done to prevent penetration from international markets. However, this form of control is not effective as banks are not free to invest in other regions. These regions could have scarce liquidity. Therefore, in this case, investment in other countries would be a flow of healthy capital. It is not an effective action in the banking industry that is struggling to recover after the financial crisis. The freedom of banks to invest in foreign markets has provided them a chance to stabilize due to the flow of healthy capital. Control weakens the banking system further. Government control in this case is safe, but it does not give the opportunity for investors to venture into new markets and take risks (Bryfonski, 2010).
Total control of the banking industry is not quite effective. The government should not struggle to overtake private commercial banks and undertake banking operations itself. The main essence of private banking in the global market is to undertake investments. The meaning of investment is a venture that involves risks. Banks are enterprises that can venture into any investment freely because they have available capital to invest at the right time. The only reason why partners decide to start a bank is to get into investment activities at any time in any region. There are no investments without risks. Banks are themselves a risky investment. Most citizens feel that investment banks attempt to find enough capital and the right risk models for the global market. Banks give the public a chance to invest in the global market. The government is supposed to act as a welfare agent for its citizens. In banking, the government aims at ensuring that it protects the public from exploitation by banks. Therefore, it means that the government cannot encourage risky investments. If a client were to lose his/her money in an investment, the government as a welfare agent and the bank should cover the risks. It simply implies that the government cannot protect the public and advise them to risk their funds at the same time.
Instead of fully control banks, the government should engage in a healthy bank regulation. It means that governments have to set a universal ethical code of conduct to guide all banks.
Afterwards, governments should observe banks more closely to ensure that they adhere to the code of conduct. After all, the public is involved in risky investments in banking of own free will. The role of the government is to ensure that banks are not responsible for causing another financial crisis (Bryfonski, 2010). The government should employ the best economic analysts to give advice to commercial banks and the whistleblowers of illegal and unethical conduct at the same time. Thus, the government must act only as a regulatory body to maintain control on standards in banks. It will prevent the notion too big to fall that exists in the banking industry. This notion holds that the financial sector, especially commercial banks, has too much control over the international economy. As a result, it cannot fail without adverse effects on the economy. Therefore, the government always supports commercial banks on the brink of their collapse. The government acts as a bailout for these banks to avoid bankruptcy. Analysts believe that it would prevent the failure of the system. The government should have different regulatory measures to control the banking industry in order to prevent a repeat of the financial crisis, as well as the protection of public exploitation by bankers.
The first method of control that has failed in the past is the minimum requirement. It is a method of regulation when the government requires commercial banks to maintain a minimum capital ratio. It is done to ensure that banks do not over-borrow or lend more money than they can maintain. At the beginning of the global economic recession, commercial banks held little money in their reserves. Somehow, banks in the US found a leeway to determine the one responsible for their supervision and regulation. The main aim of the minimum requirements is to promote the objectives of the regulatory body. In this case, the federal government should control the minimum requirement in order to control the exposure of certain sectors of commercial banks to risks. It acts as a protective measure. It ensures that commercial banks can maintain their capital ratios even in times of economic downfall. In this case, the government should not intervene to bail out collapsing banks. This method of regulation has failed for commercial banks in the country. For this reason, the government had to control some of the smaller banks, which had not maintained their capital requirements during the financial crisis (Wehinger, 2013). Large banks were controlling most after giving loans to the smaller ones. The government had to get money from the public reserve to bail out the banks. In regulation, the government should make sure that it will not happen in the future. They should engage in better regulatory and supervisory methods to ensure that every bank maintains its capital ratio requirements.
The government also acts as a supervisory body. This method of regulation has failed in the past. The government issues a bank license to commercial banks so that they could carry out banking operations. The government also goes ahead and supervises the activities of a bank. When applying for a bank license, applicants present their ethical guidelines. Moreover, there are other requirements that banks should fulfill before procuring the license. The government as a regulatory body ensures that the requirements are met in different ways. They include giving directions on the right action, obtaining undertakings from commercial banks, revoking the banking license, and imposing penalties. The government has failed to supervise commercial banks effectively. It has led to non-compliance with the requirements. Banks have also found a leeway in going against the supervisory body. It has resulted in activities against their ethical code of conduct. The government ends up assisting banks with problems that could be easily avoided. Thus, the government should not seek how to control banks but rather supervise their operations effectively. This way, banks will adhere to their requirements, thus operating effectively (Reynolds & Newell, 2011).
The Federal Reserve Bank requires that each bank reports and discloses its annual financial information. This information and other details should also be available from the bank any time the Federal Reserve Bank requires it. Before the financial crisis of 2008, the government did not audit commercial banks. It trusted that their financial information was correct. It gave banks a chance to doctor their books of accounting. Later, the Federal Reserve Bank found out that banks were in different financial positions that they actually reported. It was a great risk for depositors and creditors who assessed wrong information in determining the level of risks when making investment decisions (Groarke, 1998). It means that banks could have a chance to go against a key ethical requirement, market discipline. Market discipline ensures that there is control over prices as well as lending rates in the market. Without market discipline, market prices are distorted. The market also lacks financial health. Besides, the government cannot use information on market prices to indicate the real financial health of commercial banks.
In the process of regulation, regulatory bodies have made amends to secure commercial banks. The persistence of major financial scandals clearly shows that commercial bank regulation has a long way to go. The government has to develop new approaches aimed at bringing back trust in the banking industry. Commercial banks should also apply general logic in their operations. Most commercial banks do not adhere to their ethical code as far as compensation and pay are concerned. The government has made interventions in the industry to improve the economic situation that favor commercial banks. However, compensation and pay for bankers does not help make banking a better industry. Most people feel that bankers are unfairly rewarded rather than punished. The banking industry does not impose the right penalties for those in the industry (Reynolds & Newell, 2011).
The perfect example is a manager receiving huge bonuses in good times as well as bad times. Managers can reap maximum rewards in times of credit crunches that is unfair for the financial sector. It shows that the banking industry is ready to absorb any economic gains easily. However, they run back to the government in times of economic downfall to bail them out. The government has bailed out banks from the financial crisis. Among these banks, there are managers and directors who reaped millions from the crisis. In this case, governments should leave banks to collapse rather than bail them out. The reason is that investors in banks have given their management the chance to take advantage of their investments. Commercial banks should also regulate their operations to avoid running back to the government after their collapse (Groarke, 1998).
The fact that regulators have focused on making banks more efficient and transparent shows that the financial sector can improve. However, the government has paid little attention to the improvement of the sector for maximum benefits to the society in general. Banking has failed to fulfill its social function. The government has only focused on the financial part of banking with financial models and investment advices. Nevertheless, ethical banking involves the society and the bank’s environment. Banks should base their evaluation on real outcomes in the society. These include safety, access, performance, fairness, trust, and accountability. It will ensure financial health as well as social welfare. Every commercial bank will struggle to understand the market not only in terms of the economy but also as a society. Policymakers and regulators should realize that failure in the market at the level of institutions affects the society as a whole. The question is not whether the government controls banks fully or not. Rather, it is what the government is doing to improve the market at the institutional level, which will translate down to ordinary financial users (Reynolds & Newell, 2011).
The notion that banks are too big financial sectors to fall is particularly selective. Only three decades ago, the global economy did not depend on banking. Banking played a minor role in it. Financial institutions were not in the list of major industries in different economies. However, it has changed drastically with changes in investments. Today, every economy in the world fully depends on the health of its banking sector. Overreliance on the financial markets poses the question of whether banks should be listed as basic utilities, such as electricity or water. The response to this question is in the trust that people are ready to give to financial markets. It is vital for the systems, which depend on trust, to work. The public heavily relies on banks to take care of financial savings. Their importance cannot be overestimated. Therefore, it is the role of the government to come up with regulatory measures to ensure that the banking sector is healthy. It does not imply that the government has to take over banking entirely. Rather, it means that the government should give banks freedom to invest and, at the same time, regulate their operations to avoid collapse (Groarke, 1998). Regulators should support collapsing banks only when banks really require it. It means that the carelessness of managers and investors is not a reason for bailing out. The government must also provide investment advice to the public.
Economic experts have recently come up with principles to guarantee that the government can protect the public from commercial banks. It will ensure that commercial banks run as independent entities and fully assist the society. These principles will also improve disclosure, transparency, as well as responsibility, as far as ethical conduct is concerned with providing financial services. Moreover, they will make certain that the public is not a victim of misconduct of bankers. The principles aim to restore trust that is not achievable unless investors and customers feel secure about the banking sector. It is now the role of the government and banking authorities to adopt and follow the principles. This way, the global economy will stay ahead in matters of development to prevent any other crisis. The point that the government should completely absorb commercial banks will not assist in providing financial health. It will discourage risky investment and healthy competition in the market.