Ethics in banking – from Gordon Gekko to George Bailey (It’s a wonderful life)

I had written a recent piece on how culture and ethics has become one of the central topics of discussion in central banking.

Danièle Nouy, Chair of the Supervisory Board of the ECB in this speech looks at two characters from the two Hollywood movies. One is Gordon Gekko of Wall Street who epitomized greed and was fine with any conduct in finance as long as it brought more returns/income. Another is George Bailey of It’s a Wonderful Life who used his own money to pay depositors and save his bank.

So in terms of movies, it is less “It’s a Wonderful Life” and more “Wall Street”. In “Wall Street” a reasonably good man, Bud Fox, succumbs to the unethical ways of his boss, Gordon Gekko. He immerses himself in a culture where “greed is good” and any means is justified to make money and satisfy the greed. So Bud starts to exploit insider information and only later regrets his actions and tries to correct them.

As in this film, in real life bankers might also be tempted to go further than they should in order to make money.

But how far is too far? How far should bankers go? Well, first of all, there is the law. The law draws very clear lines that constitute hard limits for everyone. But is it really that simple? It might be legally acceptable to sell risky bonds to the pensioner from around the corner. And it might be legally acceptable to pay out large bonuses even though the bank is making huge losses. But would this be ethically acceptable?

We have all learned during the crisis that such behaviour is not just unethical. It is also highly risky. Before the crisis, many banks had created and sold unethical products. In the end, however, their greed made them lose a lot of money during the crisis. And this greed still has repercussions today, well after the crisis. Just consider the size of the fines banks have had to pay for past misbehaviour, and the loss of trust they have had to deal with.

So, the law is just the last line of defence. Ethical behaviour is more than just complying with the letter of the law. When bankers take decisions, they must be aware that there is more to consider than just the legal and financial aspects.

And they must acknowledge that it is not just about them. Their actions can affect many other people. Unethical behaviour might hurt the customers of a bank – think of mis-selling. It might hurt the shareholders – think of excessive risk-taking and the subsequent failure of the bank. It might hurt investors in the markets – think of LIBOR rigging. And it might hurt taxpayers – think of bailouts. Banks have a lot of stakeholders, and if the stakeholders suffer, the banks themselves will suffer.

But how can we ensure that bankers look beyond the letter of the law? How can we ensure that they take into account the wider consequences of their actions?

She looks at several issues facing banking and finance in terms of culture, ethics, governance and so on.

Who should one emulate? She says Gekko’s time is up and bankers must be more like Bailey:

We have to approach the topic of ethics from many angles. But the ultimate goal is clear: a shift in culture. Bankers are part of society, and they cannot sustain a culture that puts society at risk. The Gordon Gekkos have outlived themselves; the time has come to turn back to the George Baileys – honest bankers who reliably serve their customers and society as a whole. And if that sounds boring to you, well, dare to be dull!

 

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