There is a big push to improve professional standards in banking. Some may say not before time. In the UK, a new Banking Standards Review Council is being set up to help improve the conduct and culture of banks. This is on top of all the new regulation that has been imposed on the industry, and the argument for it is that no amount of regulation can fix banking unless bankers themselves have a clear ethical code to follow.
The problem is to decide what is ethical and what is not. I have been at two discussions on the Banking Standards Review Council, whose champion is former Financial Times editor Sir Richard Lambert, and on both occasions this seemed to be a grey area. Of course we all know what is blatantly unethical – fixing Libor, for example, and duping clients into buying something that is clearly unsuited to their needs. And, we have a fair idea of what is totally ethical – taking deposits and granting mortgages to professional couples with secure jobs and a fat deposit.
The problem is everything in between. Is an interest-only mortgage, which depends on house price escalation and the subsequent sale of the property in question to repay it, unethical? Or is it good customer service in meeting the demands of a particular type of client.
Some banks have run into trouble for entering into interest rate swaps with small businesses. They were designed to protect the businesses against spikes in interest rates, but as rates fell the firms were paying over the odds and complained bitterly. The banks then had to compensate them for their losses. What if interest rates had moved up? Would the small businesses have been required to compensate the banks?
A Swedish banker once told me that his bank would never securitise a loan. His argument was that it was unethical to enter into a loan agreement with a customer and then sell the asset on to a third party. Last month, the Bank of England and the European Central Bank set out proposals to revitalise the asset-backed securities market. Should there have been a discussion first about ethics?
Clearly it will do no harm for bankers to be thinking about these things, and the lessons from the crisis, and the various scandals that followed, are that some banks had corrosive cultures where flouting the rules was not especially frowned upon. But there is also a danger that a 'highly ethical' banking culture is one in which customer choice is less and the banking playing field extremely narrow.
