Responsibilities, Ethics and the Financial Crisis

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.

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