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Main Content
Finance and Morals
Why the EU's new financial management plan won't work unless it is accompanied by a cultural and moral change
Major crises in society are often followed by calls for measures to ensure that it will ‘never happen again’. In reality though, rules are not enough to prevent bad things from happening. Society is made up of individuals acting according to what their ethical standards dictate. These standards, or norms, do not come solely ‘from above’ in the form of EU or government directives and laws; they come from our peers and our families. To ensure that the financial crisis is not repeated, new rules are not sufficient; people working in the financial sector need to believe that what they’re doing is unacceptable to society.
During the boom years, banks were offering loans to people who didn’t want them, didn’t need them, and would find it difficult to repay them. Loan types advertised in banks included: car loans, home refurbishment loans, holiday loans and lifestyle loans. The ramifications of such unethical policies are felt throughout European economies today as businesses that rely on bank loans to invest in and grow their businesses are frequently refused credit.
The response of the EU to the financial crisis is a tightening of regulation. The European Commission set out, on October 20th, plans for a new ‘framework for crisis management in the financial sector’. Internal Market and Services Commissioner Michel Barnier explains that a “supervisory framework” is necessary “to try to avoid a financial crisis in the future”.
The proposals include a requirement for institutions to prepare for recovery when faced with serious difficulties, planning for stress or failure, a requirement for institutions to divest themselves of activities or business lines that pose an excessive risk to their financial soundness. In short, common sense ethical measures that one would expect from those institutions responsible for managing the finances of millions of citizens.
Fábio Barbosa, CEO of Grupo Santander Brasil, gave a talk on banking and morals in which he criticises our habit of always looking to the government for guidance. He stresses that it is not the government that changes society’s values; it’s us. His talk, entitled ‘Reforming Values: How what you do on a day-to-day basis is important’, draws on the example of big time drug dealers who help old people and fund crèches. These people, he argues, conduct business on a daily basis that is fundamentally bad, regardless of their good work in society.
Similarly, banks might have some positive programmes and some level of corporate social responsibility, but if their primary function is ethically wrong, the cons outweigh the pros. What is needed, then, is a fundamental shift in the way business is conducted.
It is no surprise that it is a Brazilian rather than a European banker that is speaking out about morality in the banking sector. In the years leading up to the crisis, interest rates were considerably higher in Brazil than in the EU, incentivising saving and disincentivising excessive borrowing. The outcome of European banking sector avarice is a state-funded bail-out amounting to a massive 13% of GDP. European economies will be struggling for years to come while the Brazilian economy enjoys modest growth.
So how can we ensure that a financial crisis on the scale that we are experiencing will not happen again? We should work on improving our corporate social responsibility, taking it beyond tokenism towards a central pillar of business. This change cannot come only from above; individuals must both demand more of their business partners, and uphold principled business practices themselves.
Barbosa believes that there is no ‘on’ and ‘off’ switch when it comes to ethical business: everything you do on a daily basis should be seen as contributing to a bigger vision. For Barbosa, education is the key to changing the values of our society, and this education starts at home. He believes the slogan ‘a better world for our children’ should instead be ‘better children for our world’.
This slogan could equally be applied to the current EU banking reform: what we need is not just better regulation for our bankers, but better bankers that serve the needs of society and refrain from excessive greed as a matter of ethics, rather than because it has been banned.