Ethics in the financial sector is one of the topics that has been most discussed in recent years after the lack of morals in the performance of financial intermediaries. As a result, the opinion is growing that the causes of potential losses and the generation of economic and financial crisis are the result of the failures of the moral virtues of financial institutions such as banks, hedge funds, supervisory and regulatory bodies, governments, rating agencies and central banks. Therefore, it seeks to emphasize the relevance of the ethical issue in decision-making, since everything is based on the choice of one or another option that can improve or affect social welfare.Financial ethics has the meaning of promoting professional and responsible conduct through a corporate culture that translates into a widespread and effective practice of the moral values assumed by the company. Similarly, ethics can have various functional approaches such as professional development as an entity, corporate governance through Corporate Social Responsibility and a new system such as Ethical Banking.
Introduction
Given the development conditions in which the current economy is submerged, it is necessary to have a mechanism that facilitates access to sources of financing that can contribute to the growth of productive sectors such as industrial, commerce, education, manufacturing, mining, agriculture., among others. It is in this way that intermediation between savers and debtors plays an important role, so that the Financial System is nothing more than the inevitable consequence of the need for mechanisms that allow satisfying a source of financing. However, given the attractive and generous profits that can be achieved through intermediation, the operating institutions of the Financial System were mitigating the importance of ethical standards and social responsibility. And as a result of the above;that the sole decision criterion should be the maximization of utility and in turn the creation of the vision of a system of savage capitalism. The latter coupled with many criticisms of the financial sector itself for the excessive abuse of power, generation of economic crises and the lack of regulation. That is why the importance of reinforcing and creating ethical standards or actions focused on social responsibility and sustainable development arises. As we can see, more and more initiatives focused on these objectives are emerging, but there is still the challenge of implementation in all participants in the financial sector. This work therefore aims to show the relevance of ethics in financial institutions,In order to do this, the exploration of ethics in the financial sector and the definition of ethics in the financial system will be addressed first, to later give way to the scope of ethics. Likewise, we will end with a brief conclusion on the topic addressed.
Ethics in the Financial Sector
Currently, ethics within the Financial System is one of the topics most addressed in recent years, this as a consequence of the numerous economic crises, fraud, monetary policy errors, risk assessment, public and private debt, etc. of which they attribute their origin, among others, to unethical behavior in the members of the financial system. This means that through their participation the financial entities become empowered and therefore have greater responsibility for the contribution to the general welfare. If we understand the social function of financial institutions according to Argadoña (2010), it is to provide intermediation services that facilitate the flow of savings to investment, contributing to the well-being of families and companies, facilitating the management of their wealth with acceptable levels of liquidity,return and risk.
A clearly appreciated proof of the failure in the ethical behavior of financial institutions, their managers and employees is financial crises. “Every day more and more people are aware that the global economic and financial crisis has to do with common values and ethical norms and that the failures of the moral virtues are at the center of the failure of the markets and of the institutions (as quoted BBVA, 2016) ”. An example of the above is the financial crisis suffered by the United States and therefore some related countries between 2007 and 2010. Known as the “crisis of high-risk mortgages (subprime), it was the straw that broke the camel's back in a financial sector that since the last decade of the 20th century it had moved further and further away from the real economy thanks to financial engineering,putting ground between borrowers and lenders. As a result, the injection of 1.2 billion euros of public capital was essential to rescue the financial systems of the US, Germany, the United Kingdom, France, the Netherlands and Spain, among other countries ". This crisis is related to the lack of ethics due to the participation of commercial banks, since in 2003 interest rates in the United States reached 1% encouraging customers to purchase mortgages that they could not afford relying on the increase unstoppable housing prices, leading to a housing bubble. Given that housing prices rose unstoppably, banks began to grant mortgages to families that did not meet the established requirements, that is, to customers with low creditworthiness.
The situation that arose due to the subrprime mortgage crisis was a joint result of the actions of banks taking very high risks, that of companies for acquiring a lot of debt and that of regulators due to their lack of action, however they will be the taxpayers who will pay the price through public debt of the State.
Another example that shows the lack of ethics in the actions of financial institutions can be found in investment banks, through the manipulation and fraud of interest rate benchmarks, such as LIBOR, among investment banking executives, with the aim of improving returns on their trading positions. The self-regulation that bankers had to calculate the rate was a factor that gave a sense of objectivity to depart from government authority. However, due to the manipulation of LIBOR, at the convenience of the banks, confidence in the system itself was disappointed and even more importantly in the development of various countries through interests in sovereign debt, mortgages and other financial instruments.
It can be observed that unethical practices have in common behaviors of greed, deception, recklessness, arrogance, conflicts of interest, fraud, perverse incentives and others. Argadoña (2009) expresses that all or at least many of us are greedy and have been so for centuries. For this, control mechanisms such as laws, regulations and judges were designed and implemented to avoid falling into a situation where greed, fraud or corruption occurs. However, in recent years, incentives and situations supported by greed have also been generated, such as the following:
- Creation of conditions that have allowed the benefits to be much greater, through speculation and leverage. Society has also generated situations of induced greed, encouraged and rewarding those who are successful in their greedy behaviors and making it more difficult to behave in such a way Some of the regulation and control mechanisms have failed.
These incentives led to financial entities such as banks, hedge funds, supervisory and regulatory bodies, governments, rating agencies and central banks failing in their ethical conduct.
Within the Financial System, everyone has social responsibility, the first level can be attributed to the set that encompasses the system itself, which creates shared responsibility for all entities, each one in its scope. As well as the regulators and supervisors in their functions. At the second level we have each type of entity such as commercial banking where emphasis is placed on the restrictions imposed by law and regulation. At the last level there is external social responsibility where there is a margin for each entity to specify which services it is going to provide and which people.
What is financial ethics?
The term ethics originates from the Greek ethos whose meaning is "custom", which is why ethics has been defined as "the doctrine of customs that are aimed at achieving a just end" Ethics in the investment industry focus on decisions that address moral issues of right and wrong.. Given that the perception of ethics is defined according to the time, societies, individuals and situations that arise, and these variables are constantly changing, it is somewhat difficult to establish its exact definition, but it can be known in based on a question that is: How to act in the best way for the good of one or more people?
Financial ethics has the meaning of promoting a professional and responsible conduct through a corporate culture that translates into an extended and effective practice of the moral values assumed by the company.
The role of financial ethics
We can bet that ethics could have prevented bankruptcy of some institutions by avoiding behavior of conflicts of interest, remuneration systems focused on profit and not on social welfare itself, regulatory arbitrage operations to reduce controls leading to deception and fraud. Similarly, another function of ethics is that of contributing to the creation of a different climate in the financial sector and in preventing crises by generating and sustaining trust. It can be said that trust has been lost due to the lack of transparency in structured financial products, as well as the unethical behavior of the entities and people who sell them.
When it comes to financial ethics, three approaches can be distinguished:
Ethics as effective fulfillment of a professional function
It refers mainly to the promotion and ease that the conduct of the entity and its managers and employees are adapted, not only to legal obligations, but also to the effective fulfillment of its social function and the satisfaction of the expectations of professional behavior derived from the moral standards that are socially and conventionally expected of her.
Ethics as corporate social responsibility
Ethics is not only internally focused on the corporate governance of financial institutions, in the same way a financial ethics can be oriented to the recognition that it has of corporate social responsibility that encompasses the environmental and social issues that it has with its shareholders, clients, government, suppliers, etc. In summary, Corporate Social Responsibility within organizations, practices are focused on a series of values, attitudes and behaviors that define the actions of companies and affect corporate actors (workers or collaborators). At the same time, external practices are linked to the entire production chain (suppliers, consumers and clients) and cover matters such as respect for the environment,the effects caused by the actions of the companies in the surrounding communities and with regard to the commitments with the State.
Ethics as an alternative to the financial system model
That is no longer focused on the behavior of the entities but on their ends. It is intended to replace you by ends, means and results rather than improving your behavior. This can be translated into what is known as ethical banking. Ethical Banking is “a financial entity in which the most comprehensive form of SRI is specified, since its entire business is invested with criteria of economic profitability and with social and environmental criteria under total transparency. Examples:
Grameen Bank, Triodos Bank, Banca Popolare Etica, FIARE ” 9. In the same way, it is known as the one that lends money exclusively for the ethical or social purpose, being chosen not only for the generation of profits but also for social concerns.
conclusion
Many have been the cases in which once again the lack of ethical behavior, control and regulation on the part of the Financial Institutions is shown. Results that translate into potential losses for all members within the economy in which they operate, is for this reason the importance of emphasizing the value of ethics within the Financial System which serves as a mechanism that can avoid the behaviors of greed, deception, recklessness, arrogance, conflicts of interest, fraud, perverse incentives and others within the financial sector. To a great extent, financial ethics also serves to generate trust, create a healthy financial environment, avoid company bankruptcy,promote an alternative finance system such as ethical banking and adopt a corporate governance focused on social responsibility.
References:
ARGANDOÑA, A. (2009): “Can corporate social responsibility help to understand the financial crisis?”, IESE Business School, University of Navarra, March 2009, Research Document DI-790.
ARGANDOÑA, A. (2010): “The ethical dimension of the financial crisis”, IESE Business School, July 2010, Research Document DI-872.
BBVA. (2016). Ethics in the financial system: a compliance system. Retrieved from https://www.bbva.com/es/wp-content/uploads/2016/04/LA-ETICA-ENEL-SISTEMA-FINANCIERO.pdf on October 9, 2017.
Fernández, B., Serafín, A., Cuesta, MDL, & Pardo, E. (2014). The Financial Sector: contextualization and importance in the Spanish and European economy.
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It is a rate that affects financial operations of all kinds globally and which is established by 16 banks that operate in the London market coordinated by the British association of banks. As it is a global measure, its value is necessary for calculating the market value of a large number of derivatives
Lazkano, N. (2015)
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BBVA (2016)
BBVA (2016)
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