Responsibilities, Ethics and the Financial Crisis

Lead Research Organisation: University of Birmingham
Department Name: School of Philosophy Theology & Religion

Abstract

The global financial crisis that began in 2007 is widely thought to be the result of at least the following: bank deregulation in the USA at the end of the Clinton administration; an explosion in consumer credit in the USA and other Western countries; innovations in the way that the risks of consumer lending, including mortgage lending, were spread --notably through a market in securitized debt; overconfidence in the strength of house prices; and conflicts of interest among institutional lenders and those responsible for analysing credit risks. The effects of the financial crisis include at least the following: large-scale publicly funded support for banks, including loans and puchases of bank assets; government guarantees of bank deposits, and, in some cases, bank losses, leading to near bankruptcies of states such as Ireland; huge public spending deficits in bank-supporting jurisdictions; drastic and sudden reductions in public spending in most of the welfare states in the developed world; and reductions in international aid to the poorest in the world. The financial crisis is particulaly important in the UK, where financial services constitute one of the largest economic sectors and one of the biggest sources of tax revenue. This project seeks to enlarge the public understanding of the crisis, and the understanding among officials, regulatory and consumer bodies of the ethical issues raised by the crisis, specifically, how responsibilities for what has gone wrong create obligations to some of those badly affected by the crisis. The project addresses the question of which insitutions are responsible; and the question whether individuals, including ordinary consumers and sub-prime borrowers, are also partly to blame. Starting from some of the specialist literature on the causes of the crisis, including the financial management literature, it considers which institutions have the primary responsibilities. Commercial banks are clearly prominent; but so are governments, credit rating agencies and regulatory bodies. Proposals for better-designed institutions are now in circulation both in the public policy and academic communities. The project will contribute with regulatory and taxation proposals from its finance experts. But it will also consider bank irresponsibility from the point of view of the defining purposes of banks and from the standpoint of the philosophical business ethics and the theory of corporate social resonsibility. The fact that some banks, especially in the UK, are government-owned, raises questions about the the answerability of banks to the public for policies that formerly were regarded as internal: e.g. at what level should salaries and bonuses be set? What should bankers be getting bonuses for? How far should they devote assets to the prevention of bank failure as opposed to extending credit? A particular focus of the project is the way that financial support for banks has reduced the amount of public spending directed at the most vulnerable. Although those affected include vulnerable people in the poorest countries, the research will emphasise the relatively poor in the UK and elsewhere who were the target market for sub-prime loans. The responsibility of banks for the worsened state of already disadvantaged people may generate obligations specifically targetted at the poor through future bank involvement in reducing financial exclusion. In particular, support for responsible lending to the relatively poor may be one of the most appropriate responses of the banks to those whose financial exclusion they first exploited and then aggravated. Here is where empirical research by the project on the relative strengths of different approaches to financial exclusion in the UK will inform proposals.

Planned Impact

Research on responsibilities and ethics in the financial crisis is highly relevant to a number of academic disciplines in the humanities and social sciences, as well as to the public policy community and the financial services sector in many developed countries, but especially the UK. Among the natural academic constituencies for work in this area are (a) philosophers working in applied ethics, in particular business ethics and the ethics of banking; (b) philosophers working on the attribution of institutional responsibility for states of affairs on a large scale (e.g. in global justice, including climate change, issues); (c) social policy academics,including philosophers interested in normative ethics with public policy implications; (d) academic writers on finance, and banking; (e) academic writers on banking regulation; (f) academics working on relative poverty in developed countries; (g) financial journalism corresponding to (e).
Among the non-academic groupings in the UK affected by the project are all of those connected with the 2010 Future of Banking Commission (sponsored by Which?), UKFI, the agency holding bank assets bought by the government at the height of the crisis; the Office of Fair Trading, the Financial Services Authority and the UK Banking Ombudsman --all involved in the regulation of banks inthe UK. Also likely to be interested in the findings of the research are UK and West European commercial and non-governmental providers of financial services to the relatively poor: these include, in the UK: Fair Finance, Street UK, and corporations involved in payday and doorstep lending, such as Provident Personal Credit. Other natural audiences for the results of the study in the UK are the retail banks, several government ministries, and the British Bankers Association. Within the NGO and voluntary sector, many groups associated with consumer credit and indebtedness will find the research relevant; for different reasons, groups associated with reducing public sector expenditure --such as the Taxpayers' Alliance-- will have an interest in the research from the point of view the justifiability of public support for banks. Many trades unions have campaigned against bank-rescue and bank-support policies from the point of view of their taking resources away from the welfare state. They, too, will find the work relevant. Outside the UK, and as mentioned in the 'Beneficiaries' section, the potential PI already has links with bankers in Iceland interested in discussing ethical issues in the wake of the collapse of the finanicial services industry there, and the resulting burden on the Icelandic public sector. There are bound to be many similarly minded bankers throughout Western Europe and in the USA, some of whom we hope to involve in the project through business school and commercial contact in the USA.The research will help to provide a framework for identifying and organizing the ethical issues raised by the Financial Crisis while recognizing the value that banks and other financial institutions have in developed economies and globally; the same framework will help to identify weaknesses in some of the proposals for reform already mooted e.g. by the Future of Banking Commission; the framework will be particularly designed to relate responsibilities for reckless lending and disproportionate profit-making and remuneration to opportunities for responsibly extending the reach of financial services to those normally ineligible for it. The framework can help systematize some moral conclusions about the financial crisis which do justice to the complexity and sophistication of the markets involved, and the fact that some of the financial products that were misused might serve legitimate purposes. The project will also connect the responsibilities of reckless and over-extended individual borrowers, with those of institutions len

Publications

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Chaudhry S (2015) Balancing the regulation and taxation of banking in International Review of Financial Analysis

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Mullineux A (2012) Taxing banks fairly in International Review of Financial Analysis

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Mullineux A (2014) Banking for the public good in International Review of Financial Analysis

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Rowlingson K (2016) Payday lending in the UK: the regul(aris)ation of a necessary evil? in Journal of social policy

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Sorell T (2018) Responsibility in the Financial Crisis in Midwest Studies In Philosophy

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Sorell T (2017) Designing in Ethics

Related Projects

Project Reference Relationship Related To Start End Award Value
AH/J001252/1 30/06/2012 31/12/2012 £687,174
AH/J001252/2 Transfer AH/J001252/1 01/01/2013 29/02/2016 £591,766
 
Description That pre-existing accounts of individual and collective responsibility need to be revised to accommodate the variety of responsibilities for the financial crisis. In particular, responsibilities for a shared bank culture, and responsibilities of individuals close to the top of a systemically important financially institution need a new approach. Systemically important banks are systemically important because of their hitherto unacknowledged location in a 'basic structure' confined in theory to public institutions and branches of government.

The Taxation work stream considered the relationship between revenue generating banking and financial services taxation and non-revenue generating regulations, such as capital and liquid asset requirements, which can be regarded as taxes on risk taking. The potential overlap between these two types of taxation should be eliminated to avoid double taxation. The use of special bank levies to assure that banks make a fair contribution to the costs of ameliorating the financial crisis is 'polluter pays' tax. It is felt that special levies are better directed towards establishing 'pooled' deposit guarantee and 'bank resolution' funds, as proposed for the Eurozone's Banking Union. VAT should be extended to financial services in order to remove distortions and the widespread application of a Financial Transactions Tax would be distortionary. A Financial Activities Tax on profits plus bonuses has merit, especially if VAT proves difficult to implement. More generally, the tax bias towards debt and against equity should be redressed in order to reduce the incentive to leverage.

The social policy stream on responsible lending and borrowing has, so far, produced some important findings comparing the Australian regulatory system with the British system, to learn lessons about how to reform the regulation of the high cost credit industry in Britain. It has shown that a variety of measures are needed together to improve people's access to responsible and affordable forms of credit. Caps on the cost of credit can be an important part of this alongside checks on affordability, restrictions on rollovers and default costs. Access to affordable forms of credit such as credit unions is also important. The demand for credit among people on low incomes also needs to consider the broader context of low incomes.
Exploitation Route Our account of responsibility in the financial sector will be of use to bodies such as the Banking Standards Review Council, in specifying and implementing appropriate standards. This body is being established following the Lambert Review on Banking Standards, which itself was set up in response to the findings of the Parliamentary Commission on Banking Standards.

Policy makers should consider the merits of extending VAT to financial services and eliminating the bias towards debt caused by the tax deductibility of interest, but not dividend payments, in order to remove distortions. Double taxation of banks via overlapping regulatory requirements and revenue generating taxation should be avoided. Transactions taxes should not be widely applied, but may have some merit in discouraging wasteful over-trading.

Our findings will inform policy and practice around responsible lending and borrowing in the UK and internationally. This has been the focus of much reform activity in recent years, including the introduction of price caps on payday lending. But there is still a problem of lack of access to affordable credit among people on low incomes. Our research will help inform future changes in policy and practice by focusing on: how mainstream lenders can change their practices in this field; how credit unions can be supported to meet increased demand; how reforms of high cost credit might be further improved; how people on low incomes can be helped to save rather than borrow; how welfare reform increases debt problems among those on low incomes; and how financial education and capability programmes can help some people make better decisions in relation to borrowing.
Sectors Financial Services, and Management Consultancy,Government, Democracy and Justice

URL http://fincris.net/
 
Description Findings from the philosophy stream of the project were submitted to the Lambert Review on Banking Standards, and subsequently discussed with Sir Richard by email, in which he particularly mentioned the value of our input with respect to training proposals for financial sector employees. In addition, Tom Sorell has contributed specific inputs on the financial crisis to the Government Chief Scientific Adviser's themed annual report on Risk and Innovation (2014). The responsible lending and borrowing work stream has submitted written evidence on two occasions to the Financial Conduct Authority (FCA) to help inform their decision on the cost of credit cap. It has also presented evidence on more than one occasion to the Archbishop of Canterbury's task group on credit unions, and to the Centre for the Study of Financial Innovation (CSFI). The taxation work stream has engaged with practitioners drawn from the IMF, the European Commission and the Institute of Chartered Accountants for England and Wales; firstly in convening a workshop on the subject of 'taxing banks fairly', and following this in collaboration on a book by the same title, published in October 2014.
First Year Of Impact 2013
Sector Financial Services, and Management Consultancy,Government, Democracy and Justice
Impact Types Societal,Economic

 
Description Yvonne Wang, Lecturer of Law in University of New South Wales 
Organisation University of New South Wales
Country Australia 
Sector Academic/University 
PI Contribution Andy Mullineux and Sajid Mukhtar Chaudhry have collaborated with Yvonne Wang, Lecturer in Law at the University of New South Wales, Sydney. She is researching bank levies in the US, the UK, Germany and France and aiming to write a report with suggestions for the Australian authorities on whether to introduce a bank levy in Australia or not. She has agreed to write a section on bank levies for our ?Bank Taxation and Regulation? paper.
Start Year 2013
 
Description CHASM briefing papers 
Form Of Engagement Activity A magazine, newsletter or online publication
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact through the project team's membership of the Centre on Household Assets and Savings Management (CHASM) based at the University of Birmingham, we have published a number of briefing papers to that centre's network, and on its website: http://www.birmingham.ac.uk/research/activity/social-policy/chasm/publications/briefing-papers.aspx. These include briefing papers on 'What is responsible lending and borrowing?'; 'Lending to people on low incomes: an overview'; 'Misconceptions of the financial crisis'; and 'The social purpose of banks'.
Year(s) Of Engagement Activity 2012
 
Description Industry and Parliament Trust event on How European Finance Legislation is Making Waves in the UK Economy 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Tom Sorell and James Dempsey both gave talks, which stimulated discussion amongst practitioners from the financial sector and UK and European policy makers who were present.

Participants told us that our talks had prompted them to think about the extent to which currently regulatory practice in the financial industry really addresses the issues of responsibility raised by popular commentaries of the financial crisis.
Year(s) Of Engagement Activity 2014
URL http://www.ipt.org.uk/turning-the-tide-how-european-finance-legislation-is-making-waves-in-the-uk-ec...
 
Description Interview with Simon Jackson (HM Treasury) 
Form Of Engagement Activity A magazine, newsletter or online publication
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Through contacts made at the 'Taxing Banks Fairly' workshop, we have conducted an interview with Simon Jackson from HM Treasury. The purpose of the interview was to discuss the position of HM Treasury on different kinds of bank taxation and how the Treasury proposes to implement such taxation in order to enhance financial stability and to reduce the systemic risk of financial institutions.
Year(s) Of Engagement Activity 2013
 
Description Interviews with members of the financial community 
Form Of Engagement Activity A magazine, newsletter or online publication
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Through the project's knowledge broker, Mark Hannam, we have conducted six interviews with senior members of the financial community. A condition of securing these interviews was that they be 'off the record' and we do not distribute the names of the people we have met. However, they have included a former CEO and Chair of a global investment company; a former Director of the Structured Finance team at a monoline insurer; a hedge fund manager; a Director of a Fixed Income business, specialising in securitised credit; the head of the Credit Valuation Adjustments desk at a major bank; and a former senior regulator now working in the private sector. The purpose of these interviews is to deepen the project's understanding of the crisis, understand ways in which 'insiders' think events are misrepresented, and engage practitioners on the ideas we are developing.
Year(s) Of Engagement Activity 2013
 
Description Second FinCris philosophers' workshop 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Participants in your research and patient groups
Results and Impact This workshop, which we organised and ran, has generated sufficient material (and further interest) for the development of two books in collaboration with participants.

On the basis of material developed in this workshop we have received requests to engage with third parties, for example the Industry and Parliament Trust event at which Tom Sorell and James Dempsey presented.
Year(s) Of Engagement Activity 2013
URL http://fincris.net/2nd-philosophers-workshop-report/