Ethics in Banking

Ethics and the financial system. This association has been nagging at my mind for a long time. Is it possible? Is it realistically imaginable?

Tackling the subject of “ethics” is a difficult matter for anyone interested in Finance. What can possibly be “ethical” about money? When economists think about money, they think about big banks, mutual funds, speculation, arbitrage, profit-seeking, and sometimes even money laundering or criminal trafficking. Yet the concept of ethical finance does exist and is regulated by a wide variety of sources.

As mentioned in the second chapter, Banca Etica is the Italian intermediary with the greatest focus on ethics. It doesn’t just aim to make a profit, but to develop a sustainable economy. Let us begin with the bank’s historical background and then move on to its operations in an attempt to clarify its role in Italy and to compare it with the rest of the world.

The fight against money laundering is one of the most important aspects that involve banks and other financial intermediaries. Money laundering can be described as “a set of operations carried out to launder money of illegal origin in order to make the traces of its criminal origin disappear”. It often takes advantage of banking secrecy, which is one of the characteristics of tax havens, those places where people flee to evade taxes. Money laundering often leads to tax evasion. The two phenomena are closely linked. It follows that fighting money laundering translates into fighting the crime from which it originates, but in order to stop money laundering it is also necessary to contrast tax evasion. The analysis proposed in this chapter looks at both phenomena, highlighting the importance of the role played by the supervisory authorities, which rely on the cooperation of numerous players, first and foremost financial intermediaries.

Usury is a problem as old as the history of mankind. Remember the judgment to which the first bankers were subjected, as discussed at length in Chap. 2. In Europe different countries have a ceiling rate above which the loan is defined as a usurer. But there are no common rules. Currently, there is a EU proposal for a Consumer Credit Directive, which would liberalize the credit market, placing no limit both on the amount of loans and on the applicable interest rates. The Directive introduces the principle of home country control. It authorizes UK-based finance companies—where usury laws are less restrictive—to lend money across the continent. On the contrary, national controls on anti-usury rates (like in Italy, France, Germany and the Netherlands) would become non-compliant with Community legislation.

A brief mention should be made at this point of microcredit and Islamic finance, which, due to the principles they inspire, are well suited to the discussion of the ethical issue. The topic of Islamic finance in Italy is widely discussed in the works of Banca d’Italia (2010), D’Arienzo (2012), Biancone (2012, 2020), Salvi and Miglietta (2013), while at the international level we remember the studies of Ahmed (2011), Hayat and Malik (2014) and Nienhous (2011). Our aim here is to provide an overview of the topic, which is hard to cover in its entirety in a single chapter. The reason is simple: there are many types of contracts in Islamic finance. There is no homogeneity of thought on what is considered legal/illegal because Islamic finance rests on the laws of Allah, so on the different possible interpretations of the Koran. Consequently, we are going to try to offer an impression, focusing on the most important contracts which can be compared to some extent with Western finance. As Islamic finance also includes forms of microcredit, and since microcredit originated in Bangladesh—where Islam is the state religion—the chapter is divided into two parts. A first section deals with microcredit proper (origins, founder, use), while a second section focuses on Islamic finance in its main applications, which include finance for the poorest segment of the population.

This chapter aims to study the banking crises that have affected Italy in recent years, comparing them with what happened in other European countries. The first difficulties were recorded by Carife, Banca Marche, Carichieti and Banca Etruria in 2015, which were then followed by Veneto Banca, Banca Popolare di Vicenza, Monte dei Paschi di Siena and Carige in 2017. The last case is that of Banca Popolare di Bari, which ran into difficulty in 2019. The intermediaries differ in size and nature, but the difficulties encountered were caused by the same problems. The first aim is therefore to discuss the causes that led to the crises and then to see the solution adopted. To this end, bail-out, bail-in and bail-over will be discussed. Bail-out is the traditional public rescue, and this was followed by the introduction of the innovative bail-in, the private rescue (internal to the bank). The Italian legislator actually opted for a third solution: bail-over, i.e. a bail-out by the healthy banks. The latter can be discussed from many points of view and lends itself well to a reflection on the ethics of the legislative choice adopted.

The world of Finance seems to have turned into the kingdom of liars. Corporate hoodlums hide the truth from their investors, rogue traders conceal the size of their trading positions to internal and external control organs, fraudsters create Ponzi schemes by misdirecting investors.

Let us start again with the initial question: are ethics and finance a possible combination?