Banking: an Ethical Dilemma? Essay.
In this report, I plan to discuss the question Banking: An Ethical Dilemma? Within this is I will discuss ethical dilemmas in association with banking. I will firstly start by giving definitions of what is meant by the terms: Banking, Ethics, and Dilemma. From here, I will go on to identify what banks are and what the roles and importance are for the economy. Next, I will go on to explain banking operations and with this identification, I plan to then discuss the ethical dilemmas and show my opinion on the question ‘Banking: An Ethical Dilemma?’ I will then discuss any other issues unrelated to ethical dilemmas within the banking sector and with this; I plan to use references and facts to support my argument on the subject.
Finally, I will identify my finding regarding the dilemma and try to conclude on whether banking is ethical.
Firstly, ‘Banking’ can be defined as one of the key drivers of the economy.
Banking provides a safe place to save excess cash, known as deposits. It also supplies liquidity to the economy by loaning this money out to help businesses grow and to allow consumers to purchase homes, cars and consumer products. Banks primarily make money by charging higher interest rates on their loans than they pay for deposits. (http://useconomy.about.com/od/glossary/g/Banking.htm) ‘Ethics’ comes in many forms but can primarily be defined as the code or rules of moral principles that are set standards of good or bad, or right or wrong decisions, in personal conduct and therefore is a guide to the behaviour that is morally acceptable from a person or within a group or an organisation. Ethics effect moral decision made by people, and its main concern is what is good and though to be best for society. Siddiqui (2010) With this definition of ethics, ethical behaviour is very much as it seems. The behaviour is used surrounding ethics. It is behaviour, which is seen to be accepted as good or bad, or right or wrong, within organisation rules and obligations and government laws.
It is about being responsibly and acting in an honest and fair way taking into consideration whether the actions taken are affecting people in a way that would not be seen as ethical. ‘Business Ethics’ is the same aspects and contains the same issues of ethics and ethical behaviour but is put into a business context. This is deal with on a daily bases throughout every organisation in the world. Within this subject, business ethics is not just based on the organisation or employees but also to any customer that they may have. Many organisations have had their reputation tarnished with bad publicity due to the business ethics. This can be down to employment or how the organisation is ran, this can include poor working conditions, exploiting people or even down to low wages. Organisations that do not follow in business ethics can result in breaking the law that can lead to them being sued; the problem with this is that multi-million businesses can often afford to take a hit but never the less that is no excuse to disregard their ethical behaviour.
Finally, the term ‘Dilemma’ can be defined as: a situation that requires a choice between options that are or seem equally unfavourable or mutually exclusive. (http://www.thefreedictionary.com/dilemma) Banks are seen in many forms, they primarily come in the following forms, which are Retail, Central, Investment, and Building Societies. The main purpose of a bank is to provide a safe place where people have confidence to deposit money. It is seen that banks are produced and ran by honest people. As well as storage of money, there are many other purposes to bank, but they are separated into individual banks and depends are on what form of bank they represent. Retail banks are otherwise known has commercial/high street banks, which customers use every day for goods and service links with their everyday tasks. They main roles are to provide a service to corporate, personal, and private banking to customers. This can include bank accounts for money storage, loans, credit cards, mortgages, and saving as well as many more. Examples of these banks would be; HSBC, Lloyds TSB & NatWest.
Central banks are the main bank within a national, and have many roles, which are vital in the economy. Central banks such as The Bank of England unlike retails banks are need to keep the economy financial stable. The Bank of England’s roles are to; set interest rates, create money supply, lender of last resort, they are the bankers bank and the place of settlement and they have to regulate these to provide paramount service for the economy. Investment banks are otherwise known as merchant banks. The main purposes of these banks are raising capital for customers, businesses or for the government. This can be achieved by providing services for mergers and acquisitions as well as propriety trading, foreign exchange. Unlike retail banks, investment banks do not take deposits, these banks run from taking equity.
Building Societies are financial institutions, which mainly provide saving accounts and mortgages. Unlike other banks, building societies are mutual which means that their customer are members and can therefore receive information and attending meeting regarding the progress or alterations in operations and have a right to vote on the actions taken. Building societies are run by shareholders and have directors whose decision it is on the strategies taken. Banks have great importance within the economy, and without them, we would see a different world from the one we see today. “Although banks create no new wealth but their borrowing, lending and related activities facilitate the process of production, distribution, exchange, and consumption of wealth. In this way they become very effective partners in the process of economic development.” (http://www.blurtit.com/q197532.html) What do banks do?
This is a question, which many people may be confused by. People deposit their money into a bank for feeling that it will be kept safe for them to collect at any time, when in reality when someone’s deposits money is to their account, the banks promptly lend the money out to another customer and in result creates a cycle. In fact, when a customer makes a deposit at a bank only an initial 8% is kept in banking funds, 90% of the deposit and lent out to another customer creating more profit for the bank. As well as accepting deposits banks also repay against written order, create account, lend money, render account, reasonable notice closer, maintain secrecy (Tourniers exception), interest and fees, set off, return cheques and pay against monies held. Although these are the main roles this is not an indication of the products and service which are provided by individual banks and may differ between them.
Therefore, when looking into banking, where can we draw the line to say whether a bank is being ethical or not? I think the first factor, which needs to be pointed out, is that banks are businesses and therefore are out to make a profit, but how far will they go in succeeding this main objective and with this jeopardise their ethical values? So as previously stated the main purpose of the bank is to make a profit and to do this they have to provide service and sell products as such. The bank is required to make a profit to provide to the shareholders, and with this will increase the business and allow the business to grow and progress. Banks as businesses are not charities and therefore need to make a profit without making a profit banks would fail without input into finance and would therefore have to relate on government funding, which in turn would change banks from private businesses into national banks. With doing this then the government would have to get the funding from somewhere to provide to the bank so this would most likely required an increase in taxes which would then cost people more money in do this.
The problem with this is that without the private funding from customers then it would be possible for banks to fail which would create havoc with the economy. This would put more of the public’s money at risk, and could affect the circulation of money and without circulation the money, as we know it will lose value and will basically die out. If it were put into place that banks were made national this, this would mean that they would have to be more cautious and would take no risks in the services, which they provide. This would mean that people would not get the high interest returns on their account and saving which they believe that they should be entitled to but do not want any of the risk which is associated with this. For a bank to make a profit, they are required to use customer’s deposits and lend the money out to other investments. The percentage of the deposit, which is loaned out, can be seen to be risky and if customers were to find out this then they may be less inclined to deposit their monies. Is it unethical that a) Customers are not informed of this? Alternatively b) the percentage that is loaned out?
This could be altered by giving the customer more information. Is 8% of a deposit a reasonable amount to keep or should it be higher. I think that if banks start reducing the percentage, which in turn would allow them to make more profit that this would be unethical and it is creating more risk to customer’s money and without guarantee that there is going to be 100% return rate. I think that if banks did lower the percentage, and did increase the money that could lend then this would influence banker’s decision on the ethical values if it were allowing them to make more profit for the bank and in turn increase any bonuses, which they would receive because of the extra profit. With this extra money, going back into circulation then this would create an increase in interest growth. Although this may be seen to be unethical, I think the main problem is the education of the public on this subject. Banker bonus is always high-level news in media, as people hear about these vast bonuses and cannot understand where these amounts are coming from.
It is my perception that why people hear about theses bonus that they believe that it is their money that is being used to fund the bonus that that everyone within the bank or the average banker is going to receive these bonuses when in reality it is actually very few who do. I believe that banker should be allow bonuses as without the work that they put into the banks then this would result is a fall within the economy, so in result I do not believe that these bonuses to be unethical. The Financial Services Authority otherwise known as the FSA is the regulatory of the UK’s financial services industry. This was set up by the government with the purpose to regulate the activities of financial services markets, exchanges, and businesses. All financial service must follow the standards, which have been put in place by the FSA; this has consequences if not followed. This can be used to show that a bank is being ethical as the FSA would be able to notice any unethical activities within a bank and would then take action to correct this. The make act of unethical behaviour is using customers money to achieve personal ambition.
This is using the money in a scene of greed and in result to boost ego. A good example of this would be Fred Goodwin. Fred Goodwin was the former chief executive of the Royal Bank of Scotland (RBS). His personal ambition was to build RBS to become one of the world largest banks. With the authority in his post, he created a bank that was more focused on selling the products and service than the fundamental service of banking and with the temptation to create more profit was building then this was just the beginning of the unethical behaviour. As a result of this RBS grew and quickly became one of the largest banks but within this growth it was not long before questions were raised regarding the ethical values of the banks. Following investigation, which was launched after whistle blowing if, was seen how unethical Fred Goodwin had been in running operations within the bank and promptly resigned from his post after RBS lost approximately £25 Billion, which would be able to fund the NHS for two years. To date this is the biggest ever commercial lose in history.
This is a key example of when the temptation of personal gain overrides ethical value. So is it ethical for a bank to fail? Banks are formed on trust, if it is seen that a bank has failed and has lost its money and funding would create mass panic. This was seen in previous years with Northern Rock. When as many banks in the past, Northern Rock went to the central Bank of England to ask for lender of last resort, but made public awareness and suddenly people started to panic that they money was not safe and wanted to withdraw the funds from the account. This soon resulted in the banks running out of money as the 8% per cent of deposits that was kept in storage soon ran out. Banks are now introducing ethic policies, this would allow the customer to gain a greater knowledge and insight into the bank on how they run ethical, and from here, and customers can evaluate them and from here make a decision on which bank to choose.
The first bank to introduce they ethical policy was the co-operative bank back in 1992. From these policies, it allows a more transparent view into the bank and how it is ran. This can show information such as where customers deposits are loaded onto for example this money could be loaned onto a business that has poor environmental records, which you may feel strongly about and would rather not create funding for them. Is it possible for any bank to act ethically, as a principle they may all try to portray a positive image of the ethical values but with the key goal to make profit, how far is too far for ethicality before they can be criticised. There are banks with exception in which they actions may be seen to be unethical but in retrospect the are somewhat ethical. Rationalisation for unethical behaviour comes in four common forms; these are seen to be used to justify misconduct and other ethical dilemmas. They are:
* Convincing yourself that the behaviour is not really illegal. *
Convincing yourself that the behaviour is in everyone’s best interests. * Convincing yourself that nobody will ever find out what you’ve done. * Convincing yourself that the organisation will “protect” you. Schermerhon (2005)
Ethical investment is another problem, which is often brought to the public eye. It has been said that investment bank should invest into smaller companies instead of mass-market organisation to create more business with the economy. As much as this can be seen to be ethical, the problem with this is that there is higher risk investing in smaller companies as there are not necessarily going to be successful and as a result create more risk of no return on initial investment. This could then result in the bank having to act more unethically to compensate for their actions.
Overall, within this assignment I have given definitions of banking, ethics, and what is a dilemma. From here, I went on to explain what is a bank, and the different types of banks and what they roles where and how they differed from each other. I then discussed banking operation and when onto discuss the ethical dilemmas within banking sector. After doing research I believe that in banking, it is very difficult to constantly stay ethical and it is so easy to fall for temptation to act unethically in either time of need or for personal gain.
This can be done with minimal effort and sometimes without even notice. Ethics is incorporated in everyday life and is going to be constantly changing therefore I believe what is seen to be ethical could at some point be seen as unethical depending on the state of law. I have discovered that within all organisations there are constant uses of ethical behaviour both good and bad. Therefore, I believe that each organisation at some point will encounter a combination of the alternative ethical views. From analysing the ethical actions, I have concluded that even though some decisions and behaviours are seen to be unethical this does not necessarily mean that they are illegal. It is dependant of organisational procedures and government laws.
* About.com (2010) Banking. [online] Available at http://useconomy.about.com/od/glossary/g/Banking.htm [Accessed 1st April 2011] * Siddiqui, K. (2010) Lecture Hand-outs 6 – 8.
* The Free Dictionary (2010) Dilemma. [online] Available at http://www.thefreedictionary.com/dilemma [Accessed 17th March 2011] * Blurtit (2010) What is the importance of the banks. [online] Available at http://www.blurtit.com/q197532.html [Accessed 18th March 2011] * Schermerhon, J.R. (2005) Management 8th ed. New York. John Wiley and Sons Inc. * Boatright, J.R (2008) Ethics in Finance. 2nd ed. Oxford. Blackwell Publishing. * Boartright. J.R (2000) Ethics and the conduct of business. 3rd ed. New Jersey. Prentice Hall, Inc. * Parkin, M., Powell, M., & Matthews, K. (2005) Economics 6th ed. London. Pearson Education Limited. * Co-operative (2011) Why we have ethical polices [online] Available at http://www.goodwithmoney.co.uk/why-do-we-need-ethical-policies/ [Accessed 6th April 2011} * Bank of England (2011) About the Bank [online] Available at http://www.bankofengland.co.uk/about/index.htm [Accessed 23rd March 2011]