Ethical Bankers.

AuthorGordon, Gwendolyn
  1. INTRODUCTION II. THE DEMAND FOR, AND SUPPLY OF, ETHICAL BANKING NORMS A. The Need for Ethics? 1. Observed Need 2. Functional Need B. The Emerging Supply of Ethics Requirements C. A Culture of Ethics III. ETHICAL BANKING AS A BID FOR DISCIPLINE A. The Traditions of Banking Supervision B. Ethical Banking as a Bid for Professional Responsibility IV. TWO POSSIBLE IMPLICATIONS OF THE ETHICAL BANKING VOGUE A. Happy Bankers? B. A Failed Paradigm? V. ORGANICALLY-ARISING ETHICAL BANKING CULTURE? A. Attention to the Granular Detail of Bankers' Moral Narratives May Give Rise to More Effective Regulatory Initiatives B. Possibilities for Dynamism VI. CONCLUSION I. INTRODUCTION

    A charge regularly leveled against the banking industry has been made against the character of those who work in it. Richard Posner has argued that banking is "unusually corrupt," largely because of "a business model [that] attracts people who have a taste for risk and attach a very high utility to money," which makes them likely to engage in "financial sharp practices." (1) Stories of ethical lapses by bankers appear regularly on the front page of prominent news outlets, (2) as well as in the speeches of presidential candidates, legislators, and religious leaders. (3)

    Increasingly, the charge is also being leveled by regulators. Janet Yellen, chair of the Federal Reserve Board (Fed), has said: "[W]e expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have not done so, sometimes brazenly." (4) Those regulators, moreover, are beginning to pair their criticisms with action. The Federal Reserve Bank of New York (New York Fed) recently held a high-level, two-day meeting with executives at large banks at which it pushed them to establish a "culture of compliance" with an ethical "tone at the top." (5) The head of that bank, and the Vice-Chair of the Federal Reserve Board, has warned that "[t]he evidence is pervasive that deep-seated cultural and ethical problems have plagued the financial services industry in recent years"; he has sought to make ethics one of the priorities of his administration. (6) The G-7 group of wealthy nations, of which the United States is a member, announced in 2015 an effort to develop a common set of ethical standards that would apply to all bankers, regardless of the country in which they do business. (7)

    By the highly informal standards of banking regulation, this counts as a coordinated regulatory campaign. (8) Bank regulators do not often pass rules or codes; rather, they oversee their industry with relatively opaque, hands-on supervision wrought through on-site examinations and do much of their regulating by scrutinizing the balance sheets of banks. (9)

    Calls for good conduct look very different. Standards-based, rather than rules-based, ethics in banking is a term rarely defined with precision. To make matters even more indefinite, calls for ethical bankers are couched, with overwhelming frequency, in the language of cultural change. "As regulators, we are as concerned with the health of an organization's risk culture, which includes ethical standards, as we are with its underwriting standards," the Comptroller of the Currency, the head of the other regulator of national banks, has said. (10) But "culture" is a concept as flexible as "ethics." (11)

    An inquiry into what regulators mean when they call for a culture of ethics in banking is accordingly critical for understanding how the government hopes to control the financial industry. It is also a leading example of a modern penchant to try to use ethics as a regulatory tool. (12)

    In our view, ethics and culture are emphasized as an acknowledgement that regulatory oversight cannot exist if the regulated industry is "working to rule" (13) or is taking the perspective of the Holmesian bad man about the law. (14) Banking ethics are also meant to manage customer relationships, as well as address serious public relations problems that have bedeviled both the banking industry and its supervisors.

    That amounts to a wide array of goals, but this Article argues that the idea of regulating through ethics codes has coherence, if not an entirely clear promise. Ethical banking regulation can best be understood as an effort to bring to banking a set of commitments that would, above all, mimic the root values adopted by professional responsibility codes. Doctors, lawyers, and accountants all police their professions with codes of ethics.

    Indeed, the professions are separated from other jobs through their insistence on maintaining a set of disciplinary ethics among other rules related to professional qualifications. In the words of the New York Court of Appeals, "a profession is not a business," partly because it requires "a code of ethics imposing standards qualitatively and extensively beyond those that prevail or are tolerated in the marketplace." (15) As the sociologist Harold Wilensky has said, "any occupation wishing to exercise professional authority must," among other things, "convince the public that its services are uniquely trustworthy." (16)

    Ethics codes and professional training requirements are meant to achieve this trust. They do so by limiting the ability of the professional to act in her pure self-interest at all times. (17) Instead, that professional must in some circumstances put her client's interest ahead of her own, and must in others serve as a government agent--as in the case of lawyers acting as officers of the court, doctors acting as servants of the public health, and accountants acting as the guarantors of truthful disclosure and the gatekeepers of compliance with the securities laws. (18)

    Banker ethics, so often vaguely referred to by regulators or underspecified when spelled out, might be understood as the project of suffusing banking with these core professional values of public service and client commitment.

    Applying these core values to banking, however, is no easy proposition. Bankers have never enjoyed the guild-like status of the professional disciplines; traditionally, much of what they do is more related to business management than it is to lawyering or accountancy. (19)

    Banks, after all, do not only provide services and advice to their clients. They also sell them a product: money, in various bundles, at a price. (20) As salesmen as well as advisors, bankers make uneasy candidates for the sort of ethics rules of the professions. It is pointless to insist on a uniform ethic of client service when bankers sometimes occupy roles as trusted advisors, but at other times act as middlemen who operate between buyers and sellers of products--especially when bankers, like anyone else, are governed by the strictures against fraud and in favor of good faith. (21)

    While there are those, such as Rakesh Khurana and Nitin Nohria, who argue that business managers should adopt the mores of a profession, the differences between the professions and business management--ranging from barriers to entry, public trust, and fiduciary obligations to the client--are significant. (22)

    Moreover, a public service requirement might make sense in exchange for professional monopoly rights granted by state accreditation, which lawyers and accountants enjoy. But there is no banking monopoly; the modern banking industry has never been more fragmented. (23) Shadow banks that are not regulated like banks, but provide financing like banks, have taken market share from conventional institutions. (24) These shadow banks include money market funds that finance the day-to-day operations of large firms with their appetite for commercial paper, venture capital funds that finance and develop new businesses, business development corporations that invest in small and midsize firms, and hedge funds that can take on any of these functions, along with others. (25) These institutions do what banks do, but no one expects hedge funds or money market operations to take on the mantle of public service. (26)

    Finally, a change in culture is not simple, nor does it necessarily move along the paths which one might hope to direct it. (27) Measures thus far proposed by regulators (28)--whether general exhortations or top-down edicts--will not necessarily produce real change. Neither would the successful establishment of a culture of ethics within banking likely cure all of banking's ills.

    At best, ethical banking, while being no substitute for demanding rule-based regulation, may be a complement to it. The fact that it has become a priority for regulation is both a testament to the achievements made since the financial crisis and a sign that regulators are perplexed by the problem of cementing that progress. The move has been from the specific to the general, away from regulatory requirements and toward getting bankers to take the attitude that such requirements are meant to be embraced.

    In this, the regulators are adopting the "foggy" approach to the imposition of deliberative standards that scholars such as Seana Shiffrin have praised. (29) They have eschewed the sorts of specific requirements for ethics that Claire Hill and Richard Painter have urged on American regulators. (30)

    Moreover, they represent a particular mood in American regulation. Regulation through ethics is regulation at its softest, and today soft forms of regulation such as guidance, best practices, and memorandums of understanding with other regulators are growth areas in administrative law. (31) Regulating banks through culture and ethics is accordingly not just important for understanding how banking supervision is now meant to work, but serves as an example of this sort of so-called new governance. (32)

    In our view, informal regulation can work, particularly in the context of the coordination of international oversight over a global industry like the financial services industry. (33) But we are skeptical of these calls for a...

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