Responsibilities, Ethics and the Financial Crisis

Lead Research Organisation: University of Warwick
Department Name: Politics and International Studies

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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Appleyard L (2016) The variegated financialization of sub-prime credit markets in Competition & Change

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

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Chaudhry S (2014) Taxing Banks Fairly

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Dempsey J (2013) Corporations and Non-Agential Moral Responsibility in Journal of Applied Philosophy

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Dempsey J (2015) Moral Responsibility, Shared Values, and Corporate Culture in Business Ethics Quarterly

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

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,Policy & public services

 
Description Contribution on the financial crisis to Government Chief Scientific Adviser's themed annual report on Risk and Innovation (2014).
Geographic Reach National 
Policy Influence Type Gave evidence to a government review
 
Description Contribution to Sir Richard Lambert's Banking Standards Review
Geographic Reach National 
Policy Influence Type Gave evidence to a government review
URL http://www.bankingstandardsreview.org.uk/assets/docs/responses/james-dempsey.pdf
 
Description Response to Financial Conduct Authority consultation on capping the cost of payday lending
Geographic Reach National 
Policy Influence Type Participation in a national consultation
Impact Our response to the FCA's consultation has contributed to the policy of a cap on the cost of payday lending which the FCA estimates will result in 70,000 fewer people becoming indebted to high cost credit.
URL http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/2014/response-to-t...
 
Description AHRC Follow-on Funding
Amount £58,140 (GBP)
Funding ID AH/P006019/1 
Organisation Arts & Humanities Research Council (AHRC) 
Sector Public
Country United Kingdom
Start 01/2017 
End 09/2017
 
Description Archbishop's Task Group on Responsible Credit and Saving grants scheme
Amount £2,528 (GBP)
Organisation Church of England 
Department Archbishop's Task Group
Sector Charity/Non Profit
Country United Kingdom
Start 10/2014 
End 12/2014
 
Description Funding application with Dalvinder Singh, Professor of Law 
Organisation University of Warwick
Country United Kingdom 
Sector Academic/University 
PI Contribution We have contributed our philosophical analysis of the financial crisis, and the outputs of the FinCris project, as inputs into the creation of a follow on grant application.
Collaborator Contribution Dalvinder Singh has contributed his extensive knowledge of international financial regulation to our work on the follow on grant application.
Impact This collaboration between philosophy and law has resulted in a multi-disciplinary proposal for a follow on project to FinCris, which is currently under consideration by the AHRC.
Start Year 2012
 
Description Final Conference (Brussels) 
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 On (i) the challenges of ascribing responsibility for events such as the financial crisis,; (ii) responsible lending and borrowing for people on low and middle incomes in the UK; and (iii) using taxation as a measure for changing behaviour in the financial sector. Participants included Peter Grasmann (European Commission), Arthur Kerrigan (Former EU official, now with KPMG in Ireland), Andrew Mullineux (University of Birmingham)
Year(s) Of Engagement Activity 2016
URL http://www.birmingham.ac.uk/schools/social-policy/departments/social-policy-social-work/news-and-eve...
 
Description Financial Reform After the Crisis: Promoting Stability, Ethics and Financial Inclusion (New York) 
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 This workshop was conducted at the Institute for Public Knowledge, New York. It included panels on 'Banking Sector Reform After the Crisis'; ' Balancing the Regulation and Taxation of Banking'; 'SubPrime Borrowers'; 'Responsibility, taxation and financial exclusion after the financial crisis'; and 'Reflections from the US Perspective'. Speakers included Tom Sorell (University of Warwick); Dalton Conley (NYU); Gillian Tett (US Managing Editor, Financial Times); Michael Keen (IMF); Andy Mullineux (Birmingham University); Karen Rowlingson (Birmingham); Paige Marta Skiba (Vanderbilt Law School); Neil Bhutta, Senior Economist at the Federal Reserve Board; Tom Donaldson (Wharton); James Dempsey (Warwick); Seymour Spilerman (Columbia).
Year(s) Of Engagement Activity 2015
 
Description Giving expert advice to IPPR on approaches to boosting financial inclusion 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/parliamentarians
Results and Impact Lindsey Appleyard was asked by the IPPR to give expert advice on financial inclusion issues to inform their work in this field

IPPR will be producing a report on financial inclusion in 2014/early 2015
Year(s) Of Engagement Activity 2014
 
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 Monetary policy workshop, University of Montreal 
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 The workshop has influenced policy proposals in Europe and North America about quantitative easing

An email group of lawyers, economists, and philosophers has been discussing normative issues in monetary policy. Some of the participants (e.g. Lawrence Kotchlikoff ) internationally influential as well as influential in the US.
Year(s) Of Engagement Activity 2014
 
Description Participated in roundtable discussion at Conservative party conference fringe meeting on credit unions 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/parliamentarians
Results and Impact Lindse Appleyard attended this event, on behalf of the project team. It was a roundtable discussion on 'Reforming Credit Unions and Expanding Community Finance' at the Conservative party conference on 30th September 2014 in Birmingham. The event was hosted by the Centre for Social Justice and chaired by Chris Pond (former DWP minister) and Lord Freud (Minister for Welfare Reform). There was a lively discussion on: The importance of safe, affordable credit via credit unions and community development finance institutions (CDFIs); Financial capability and how this could be delivered at key stages of the life course; The role of banks in providing financial products and services to all e.g. basic bank account; Universal credit and the shifting need for financial products and services alongside this transition; The need for capital to support CU and CDFI's in providing loans to those underserved by the market


At the event, Lindsey had discussion with representatives of the Barrow Cadbury Trust which led to them visiting the University of Birmingham for a further event and discussion of possible future funding
Year(s) Of Engagement Activity 2014
 
Description Participation in roundtable discussion at Conservative party conference on local banking 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/parliamentarians
Results and Impact This event was organised by DEMOS and provoked lively discussion of issues around: If and how local banks could work in practice and the challenges in doing so; Whether the UK needs a Business bank ; Financial exclusion of SMEs and the blurring for personal finance which is often used for business purposes; Market demand; The changing bank branch landscape and if there is a need for high street branches

Duncan O'Leary, from Demos, chaired the event which was also attended by: Zaki Cooper- Standard Chartered Bank; Robin Fieth- The Building Societies Association; Sam Hinton-Smith- Santander, UK; Helen McCarthy- Consumer Finance Association; and Guy Opperman MP


Lindsey Appleyard, who attended on behalf of the project, has subsequently been asked to contribute as an expert to Demos's research on local banking
Year(s) Of Engagement Activity 2014
 
Description Presentation to Centre for Responsible credit annual conference, 11th March 2014 in Birmingham 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact This was a major annual conference to discuss 'Britain's personal debt crisis: what are the problems and possible solutions?'. Karen Rowlingson took part in the plenary session along with representatives from debt charities, union organisations and the British Bankers Association. Jodi Gardner presented a paper on 'Responsible lending in Australia: what can the UK learn?' Representatives from the Financial Conduct Authority, Money Advice Service, Turn2Us, Stepchange debt charity, Credit Uions and so on, attended and took away a number of our briefing papers from the project.




After the talk, Christine Allison, from the Archbishop's Task Group on Responsible Credit and Saving approached us to ask if we would be willing to carry out some further analysis of our data to feed into their work in this field.
Year(s) Of Engagement Activity 2014
URL http://www.cesi.org.uk/CfRCPresentations
 
Description Presentations given at CSFI/Archbishop's Task Group on responsible credit and saving roundtable 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact This roundtable focused on the potential impact of a cap on the cost of payday lending. It was hosted by the Centre for the Study of Financial Innovation and the Archbishop of Canterbury's Task Group on Responsible Credit and Savings. It was held in London on June 25th 2014. The discussion was focused on the Financial Conduct Authority's plans to introduce a price cap. Four members of the FCA attended alongside representatives from the credit industry and consumer groups. Jodi Gardner discussed lessons from Australia from the project and Karen Rowlingson discussed broader issues relating to the UK context. There was a lively discussion.

Participants took away numerous copies of our policy briefings and at the end, a representative from the FCA asked Karen and Jodi to send in their analysis so that the FCA could draw on this when completing their plans for a price cap.
Year(s) Of Engagement Activity 2014
URL http://www.csfi.org/files/short_term_credit_caps_invite_-_for_site.pdf
 
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/