Responsibilities, Ethics and the Financial Crisis

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The global financial crisis that began in 2007 is widely thought to be the result of at least the following: bank deregulation in the USA at the end of the Clinton administration; an explosion in consumer credit in the USA and other Western countries; innovations in the way that the risks of consumer lending, including mortgage lending, were spread --notably through a market in securitized debt; overconfidence in the strength of house prices; and conflicts of interest among institutional lenders and those responsible for analysing credit risks. The effects of the financial crisis include at least the following: large-scale publicly funded support for banks, including loans and puchases of bank assets; government guarantees of bank deposits, and, in some cases, bank losses, leading to near bankruptcies of states such as Ireland; huge public spending deficits in bank-supporting jurisdictions; drastic and sudden reductions in public spending in most of the welfare states in the developed world; and reductions in international aid to the poorest in the world. The financial crisis is particulaly important in the UK, where financial services constitute one of the largest economic sectors and one of the biggest sources of tax revenue. This project seeks to enlarge the public understanding of the crisis, and the understanding among officials, regulatory and consumer bodies of the ethical issues raised by the crisis, specifically, how responsibilities for what has gone wrong create obligations to some of those badly affected by the crisis. The project addresses the question of which insitutions are responsible; and the question whether individuals, including ordinary consumers and sub-prime borrowers, are also partly to blame. Starting from some of the specialist literature on the causes of the crisis, including the financial management literature, it considers which institutions have the primary responsibilities. Commercial banks are clearly prominent; but so are governments, credit rating agencies and regulatory bodies. Proposals for better-designed institutions are now in circulation both in the public policy and academic communities. The project will contribute with regulatory and taxation proposals from its finance experts. But it will also consider bank irresponsibility from the point of view of the defining purposes of banks and from the standpoint of the philosophical business ethics and the theory of corporate social resonsibility. The fact that some banks, especially in the UK, are government-owned, raises questions about the the answerability of banks to the public for policies that formerly were regarded as internal: e.g. at what level should salaries and bonuses be set? What should bankers be getting bonuses for? How far should they devote assets to the prevention of bank failure as opposed to extending credit? A particular focus of the project is the way that financial support for banks has reduced the amount of public spending directed at the most vulnerable. Although those affected include vulnerable people in the poorest countries, the research will emphasise the relatively poor in the UK and elsewhere who were the target market for sub-prime loans. The responsibility of banks for the worsened state of already disadvantaged people may generate obligations specifically targetted at the poor through future bank involvement in reducing financial exclusion. In particular, support for responsible lending to the relatively poor may be one of the most appropriate responses of the banks to those whose financial exclusion they first exploited and then aggravated. Here is where empirical research by the project on the relative strengths of different approaches to financial exclusion in the UK will inform proposals.