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

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The Outsourcing of Asset Management 179 the task of the international discourse on law and legal theory to question this dogmatism and to complement or replace it, as the case may be, with new and better rules and justifications. This process has already been set in train by the financial crisis. Alternative business models to the American model are increasingly being discussed. 51 “Wealth in the Hands of Others”: The Outsourcing of Asset Management and the Growth of Financial Intermediation as Causes of the Financial Crisis The outsourcing of asset management and the increase of financial intermediation play their part in the higher proportion of speculative forms of investment, and hence in the hyper-speculation that preceded the financial market crisis. Two trends combined to produce higher expected returns on investment, which in turn were only achievable with riskier and more speculative forms of investment. The first trend concerned the increased demand for capital that arose from the opening of the global market. The opening of the global market, and above all the opening of South-East Asian, Indian and Chinese markets as well as the markets of Eastern Europe, of necessity, usher in a shift in the relationship of capital and labor income in highly developed economies. Capital has become scarcer – despite the phenomenon of greater inheritance of capital wealth which, for Germany in particular, represented an important historical turnaround after the substantial losses of wealth during and after the Second World War. On a global scale, however, capital scarcity has intensified despite lower interest rates. This scarcity was confirmed by the high dividends and price rises on the stock market before the financial crisis. Globalization, as has already been shown, is not only the cause but also the consequence of the expansion of the capital market, induced in turn by the demand for capital in countries characterized by a high supply of labor and high demand for capital investment from the developed economies. In the global market, there has been a shift in the relationship between capital income and labor income. Capital has become scarcer than labor, a development that has repercussions on the globalized allocation of capital and capital investment. The relative increase in capital income in relation to earnings before the crisis was intensified by a phenomenon that is equally a consequence of heightened globalization: heightened capital mobility. Since the factor of labor is necessarily more tightly integrated into a community and more location-specific, whereas the factor 51 Cf. PETER CAPPELLI: “The Future of the U.S. Business Model and the Rise of Competition”, The Academy of Management Perspectives, 23(2009) pp. 5–10; RICHARD WHITLEY: “U.S. Capitalism: A Tarnished Model?”, ibid., pp. 11–22; MAURO F. GUILLÉN, ESTEBAN GARCÍA- CANAL: “The American Model of the Multinational Firm and the ‘New’ Multinationals From Emerging Economies”, Ibid., pp. 23–35.
180 10 Disturbance of the Invisible Hand of capital can roam freely around the globe, income streams from capital are less location-specific than earnings from employment. Overall, income from capital rose more markedly than wages from labor. As a result, the expected returns on capital investments were also heightened. In the course of this process, there was increased demand for professional investment advice and greater outsourcing of investment management, with the consequence that the outsourcing of investment management led to the selection of more speculative and higher-risk portfolios than owner-investors would choose if managing the investment themselves. More speculative and higher-risk portfolios have to be selected when investment management is outsourced, in order to achieve average returns on capital for the investor’s portfolio after deduction of the fees for the investment advice. Heightened demands on the performance of investment advisors included demands for a high degree of professionalization. Investors were prepared to outsource investment management to others, in the hope that the outsourcing and financial intermediation would achieve a return in excess of what an individual taking autonomous investment decisions can achieve, despite the fees for the intermediation. The financial intermediation fees, for their part, forced the financial intermediaries to select more assumedly profitable, more risk-laden, and more speculative forms of investment. Although the growth in financial intermediation may have increased the professionalization of asset management up to a point, it also raised the degree of risk and speculation in asset management. Furthermore, it has to be asked whether the financial intermediary did not tend to exhibit a greater appetite for risk than the investor on his own account, because ultimately the investor rather than the intermediary bears the investment risk. A higher degree of financial intermediation will therefore, ceteris paribus, lead to a higher appetite for risk and speculation. The listed factors of increased financial intermediation, which was also encouraged by the advertising of financial intermediation by the banks, contributed to hyper-speculation in the financial markets. It did not reduce it, as one might expect based on the higher degree of professionalization. The returns that bank customers expected of their bank in its capacity as financial adviser were also inflated because the banks were coming under competitive pressure from other, newer financial institutions which were not banks – such as online brokerage and pure financial consultancy firms – and were forced to promise higher returns and to achieve them by means of more speculative forms of investment. Moreover, the banks were forced by the pressure of competition to use a higher degree of leverage in the financing of their lending, because in their lending business too, they were placed under pressure by new financing providers, some of whom benefited from lower credit-financing costs because of their lower or nonexistent minimum capitalization and minimum reserve requirements. The banks had to respond to a new competition between financing firms which could penetrate the banks’ business segments thanks to deregulation, and competed so vigorously that banks were compelled to promise and to generate higher returns. Deregulation and rising competition along with the investors’ desire to outsource
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THE ETHICS OF BANKING
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The Ethics of Banking Conclusions f
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Preface The crisis in the financial
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Introduction: Is the Finance Indust
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Introduction: Is the Finance Indust
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Contents Part I Foundations of Busi
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Contents xiii 6 The Ethical Economy
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Contents xv After the American Fina
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Part I Foundations of Business and
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Chapter 1 Ethical Economy, Economic
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The Justification of Ethical Duties
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The Justification of Ethical Duties
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Business Ethics and the Fiduciary D
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Part II The Ethical Economy and Fin
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Chapter 2 The Ethical Economy of th
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Purpose and Task of the Credit Mark
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Duties of Banks Arising from the Na
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The Globalization of the Capital Ma
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Values and Valuations in the Capita
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Which Values Should Determine the A
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On the Ethics of Financial Consulti
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Tasks of the Capital Market and Dut
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Tasks of the Capital Market and Dut
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Speculation and Finance Ethics 45 S
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The Functions of Speculation in the
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The Functions of Speculation in the
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Chapter 4 Insider Knowledge and Ins
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Insider Trading as Pseudo-Speculati
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Statutory Provisions Against Inside
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The Abuse of Insider Knowledge as a
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The Abuse of Insider Knowledge as a
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Ethical Duties of the Investor 67 a
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Ethical Duties of the Investor 69 a
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The Finance Ethics of Hostile and F
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Mergers and Acquisitions 75 On the
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Corporate Governance by Consensus a
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Futures and Options 85 They are str
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Variants of Derivatives 87 signific
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Variants of Derivatives 89 the law
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Variants of Derivatives 91 CDO synt
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Hedging and Speculation 93 insuranc
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Hedging and Speculation 95 average
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Chapter 7 Interdependences Between
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The Information and Influence Asymm
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Intangibility of Financial Products
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Intangibility of Financial Products
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Chapter 8 The “Banking Secret”,
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The Swiss “Banking Secret” 107
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Banking Secrecy, the Right to Priva
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Banking Secrecy, the Right to Priva
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Part III Financial Wagers, Hyper-Sp
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Chapter 9 Financial Wagers, Hyper-S
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Wager or Gambling: What Is Speculat
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Page 206 and 207: The Way Out of Financial Crises 189
Page 214 and 215: References ALBERT,H.:Marktsoziologi
Page 216 and 217: References 199 CASPARI, K.-B.: “D
Page 218 and 219: References 201 HALDANE, A,A.TURNER
Page 220 and 221: References 203 KOSLOWSKI, P.: Ethik
Page 222 and 223: References 205 MESSNER,J.:Das Natur
Page 224 and 225: References 207 SCHMID, N.: “Insid
Page 226 and 227: References 209 WEBER, M.:Die Börse
Page 228 and 229: Name Index Note: Page numbers in it
Page 230 and 231: Name Index 213 N Naughton, M. J., 1
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