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

28 2 The Ethical Economy of the Credit Market
to the considerations of moral responsibility. Banks unavoidably have the power to
decide whether a project that depends on external capital is creditworthy or not, and
therefore whether it will be realized or not. In its decision-making process the bank
must apply the criteria of economic efficiency and justice both in exchange and in
price equity, although these can only be formalized to a very limited extent. Nor
can the impacts of such a decision ever be completely anticipated in experiment
or by scientific methods. The assessment of future outcomes of investments always
implies a high degree of freedom of judgment.
Banks must treat everyone who applies for credit fairly, i.e. they must treat equivalent
situations equally and non-equivalent situations unequally. They must follow
the principle of rule equality and the principle of objectivity and universality. The
interest rates for all customer loans must follow the market interest rate. Preferential
treatment in the evaluation of creditworthiness must be excluded, along with special
favors in the granting of credit to customers or unjustified discounts or premiums on
credit costs.
The same principle of equitable price and equitable interest rate also applies to
the bank’s relationships with current and deposit account holders. Here, too, the
market price and market interest rate must form the guideline for individual pricing
and the setting of interest rates. The ethics of banking requires that banks practice
neither preferential treatment of wealthier clients nor undue stringency or leniency
towards less wealthy customers.
The duty of impartiality 12 and objectivity is further underscored by the fact that
banks often command a natural monopoly in local contexts where the market is
not sufficiently large to bear numerous competing local branches of different banks.
These local monopolies of banks in small towns or villages are problematic from
the viewpoint of ensuring competition and consumer freedom of choice. There is
a certain justification for them, however, in that their personal knowledge of their
customers and the local community can enable them to manage personal credit more
efficiently than anonymous banks.
In their credit decisions, banks must strike a balance between sympathy and stringency.
On the one hand, they must be prepared to countenance certain risks in order
to facilitate innovations; on the other hand, they are duty bound to ensure that they
do not invest in economically unsound projects. Credit institutions are not lending
their own money but the deposits of their customers. It is in this dialectical union of
creative entrepreneurial imagination and a sense of reality, objectivity and thrift that
the duty and the virtue of efficient and fair banking practice reside.
Banks are often criticized for undue bias in their decisions on lending to industrial
companies towards the aspects of profitability and security. Criteria that transcend
economic efficiency in the narrower sense, such as assessment of the investment’s
12 Cf.F.N.BRADY.: “Impartiality and Particularity in Business Ethics”, in: P. KOSLOWSKI,
Y. SHIONOYA (eds.): The Good and the Economical. Ethical Choices in Economics and
Management, Berlin, Heidelberg, New York, Tokyo (Springer) 1993, pp. 175–194.