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

4 1 Ethical Economy, Economic Ethics, Business Ethics: Foundations of Finance Ethics
Since the stock exchange is usually viewed as a perfect market, which almost
completely realizes the conditions of perfect competition, within the framework of
the general equilibrium theory there appears to be no necessity for an ethics of the
capital market. In the capital market – according to the assumptions of general equilibrium
theory – more than in any other market, the general equilibrium is achieved
without any reference to ethics.
This book will demonstrate that this assumption is mistaken, and that the features
by which the capital market and stock exchange approximate to a perfect market do
not effectively exempt the stock exchange from the need for a specific finance ethics.
On the contrary, the credit and capital markets are far more in need of business
ethics than other markets, firstly because their business – finance – is abstract and
intangible in nature, and secondly because their goods – money and capital – are
substitutable (fungible), non-physical and hence equally intangible in character.
The purely economic theory of the economy starts out from the assumption that
markets in which actors are motivated by self-interest lead to optimality, even without
recourse to ethical motivation. It makes the further assumption that, out of selfinterest,
the actors will fulfill their obligations and will not breach contracts if more
advantageous alternatives come to light than those already contractually agreed.
Purely economic economics further assumes that asymmetries of information
make no significant difference or can be overcome by market participants. The problem
of the divergence of self-interest and corporate interest is not seen as a serious
one, since it can be overcome by means of incentives and the process of incentivization
with the promise of suitable rewards. The assumption is even made that
incentivization with the promise of sufficiently large economic rewards can lead to
hyper-motivation of actors. More than most, the financial institutions that are the
subject of this book made intensive use of monetary incentives like bonuses and
share options.
Yet another assumption of purely economic economics is that increasing enlargement
of the market will diminish, rather than magnify, all the problems mentioned.
In other words, on the one hand it will diminish false self-interest or the divergence
of the manager’s self-interest from corporate interests, but also the divergence
between corporate and customer interests through the greater competitive pressure
of the enlarged market. In reality, the opposite can also occur: the divergences
between self- and corporate or industry interest can potentially be exacerbated by
the growing size of the market.
Finally, purely economic theory assumes that the increasing commercialization
and shareholder-value orientation of banks, together with the dismantling of their
specific professionalization, their traditions and their norms as a profession, has not
reduced but actually increased the rationality of the banking sector, because archaic
traditions and profession-specific norms have been superseded by the competitive
pressures of globalized banking.
Ethical economy, a theory that recognizes ethics as one of the optimization conditions
of the market economy, takes up the opposing position on all the points
mentioned. It assumes that markets in which actors are motivated by self-interest
alone do not produce an optimum without recourse to ethical motivation. It makes