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

Duties of Banks Arising from the Nature of Their Tasks 27
focused interest on cheap credit at the expense of safeguarding deposits. It is unethical
not to stick to the institutional rules of lending, most notably the obligatory ratio
of equity to balance sheet total for lending, and moreover – via the sale of synthetic
CDOs – to breach the limit set by this ratio, even when this policy of easy money
is in the borrower’s interest, because the policy of lending by the banks infringes on
the protection interests of deposit customers. Nor can one replace the institutional
criteria of lending with personal trust in the person of a borrower.
People are given credit when it is believed that they will be in a position to pay
their debts. They are trusted to be capable, by virtue of their economic abilities, to
repay the loan they have been given. In the case of investment credit, this presupposes
a promising business plan and securities; in the case of a mortgage, a certain
proportion of own savings and the security of the property for which the mortgage
is lent. The own-savings ratio in mortgage lending can vary. In the Netherlands until
recently, mortgages of up to 120% of the market value of the property they were
secured against were available; in Germany the ratio is generally limited to 80%.
This difference does not imply that the Dutch banks trust Dutch customers more
than German banks trust German customers. The Dutch banks have more trust in
their own financial system than the German banks and the German legislator have
in Germany’s. There is greater institutional trust among the Dutch banks.
Institutional trust is mostly the opposite of personal trust. Institutions transform
uncertainty about the individual contractual partner, or mistrust of the individual
customer, with a set of procedures which permit them to know more about the other
party and therefore reduce uncertainty about the customer and the risk, and make it
unnecessary to resort to personal trust.
Very often the ethics of banking does not require new rules to be introduced, only
the implementation and enforcement of those that already exist. It requires ensuring
that the rules – which are often very simple – are taken seriously. One example is the
German financial crisis surrounding the Schneider real estate bankruptcy. This was
a case in which the banks made the mistake of not applying the most rudimentary
control regulations. They did not take a look in the land register to verify the register
of mortgages, nor did they make a site visit to the buildings on which they lent to
convince themselves personally that the size of the living and office accommodation
stated in the mortgage applications actually coincided with their true size. 11
The simple rule of verifying with one’s own eyes whether every property on the
plot coincides with the borrower’s description was disregarded – partly because of a
tendency that is peculiar to all repeat-business relationships: normally, once a sound
business relationship has been maintained with a partner over a long period of time,
a lender will not check every property with the same diligence as it would for a
first-time customer.
The evaluation of investment projects falls within the free decision-making scope
of the credit institution, and is therefore, like any other free decision, subject also
11 Cf. SPIEGEL magazine cover story: “Der Pleite-König. Millarden-Versagen der Banken” [The
bankruptcy king. Banks lose billions], Der Spiegel, No. 16, 18 April 1994, pp. 22–30.