The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

102 7 Interdependences Between Financial Markets
about what other people will do. If an individual can be certain that others will obey
the rules, he or she will do the same. However, when there is no assurance that others
will obey the rules, the individual will also be tempted to break them.
This positive theory of ethical economy can be applied to the problem of insider
trading, and can analyze it as an empirical, non-normative problem of ethics-driven
social coordination. Voluntary ethical obedience to the rule on refraining from
insider trading will depend on expectations about the average conduct of other
finance brokers and investors. If the individual stockbroker assumes that most other
stockbrokers are practicing insider trading, he will have very few incentives to follow
the ethical rule not to engage in the practice. Professional ethics, generally
accepted and approved rules and customary codes of conduct in a profession will
give the individual some assurance that others also obey the rules.
Nevertheless, even professional ethics and professional rules and standards cannot
guarantee this absolutely. Professional ethics and professional associations are
in a position to improve the standard of rule compliance, but cannot guarantee it.
In situations where little control can be exercised in person and abstract contractual
relationships predominate, coordination by means of ethical rules can break down
and must then be supplemented with legal rules.
In the case of insider trading, this took place in the USA back in the 1930s.
In Germany, by contrast, stock-exchange participants believed until well into the
1990s that the insider trading problem could be solved by the professional ethics of
the stock exchange along with voluntary restraint on the part of its participants. Only
after a series of insider trading cases in Germany, and only under duress from the
European Community, the German Bundestag passed the Second Financial Market
Promotion Act, which included a ban on insider trading.
The reason for this delay can partly be attributed to the lesser role that the capital
market traditionally played in Germany. The American and the British stock
exchanges fulfill the central task of the capital market for the pension funds, which
operate on the stock exchange as probably the most important institutional investors.
Pension provision in Germany is organized in a completely different way. The state
organizes the social insurance system itself as a pay-as-you-go system and collects
the funding for old-age pensions through social insurance contributions that
are adjusted to the employee’s income, i.e. by means of mandatory but individually
adapted charges which are levied like a tax from members of the workforce and
the firms that employ them. This means that in Germany, the vast sums of money
earmarked for old-age pensions do not reach the capital market, in contrast to Great
Britain and the United States, for instance, where the pension funds are the main
investors on the stock exchange. The capital market is thus of the utmost importance,
not just for the private investor but also for the institutional investor acting as
a pension fund or on behalf of it. 10
10 RALF DAHRENDORF: “Europäisches Tagebuch (XII)” [European diary XII], Merkur, 48No.7
(1994), p. 639, rightly emphasizes the differences between Germany and Great Britain in the
institutional organization of pension provision.