Finance and Ethics: Examining the Impact of Values on the Financial World

During the last decade, we can see different examples in which values and ethics have been ignored in the financial world.

The risky decisions and lack of values are principal causes of the crisis according to the Larrosiere Report. The lack of values due to wrong incentives of the governors led to a wrong price of the risk and an increase in leverage. There was also a complete lack of transparency.

The increase of the market of derivatives also increased the 'appetite for risk' and investors do not seem to worry about the danger of these decisions or be cheated about them.

The US Congress Report, which was created to examine the collapse of the financial system, concluded that there were big failures in supervision, corporate governance, and risk management. It also expresses that the combination of excessive borrowing, risky decisions, and lack of transparency resulted in a fatal outcome, and there was a systemic breakdown of accountability and ethics.

We can also mention that in the years 2013 and 2014, it was discovered that some large banks fudged their contributions and effectively manipulated the EURIBOR and LIBOR to maximize their short-term benefits. Among these banks, we can find Barclays or Deutsche Bank. This has triggered some changes on how this benchmark index is calculated. Related to this, we can also mention the forex scandal, a financial scandal in which banks colluded, at least for a decade, in the exchange rates for their own gain.

If we talk about Bail-out plans, we can find other ethical issues we should pay attention to. If companies know that if they are big enough the government will rescue them, their main aim will be to carry out 'run-for-size' strategies to be 'too big to fail' and they will take riskier decisions and moral hazard (in which the managers will carry out actions knowing that will result in a negative effect for someone else).

Offshore Financial Centers

Offshore Financial Centers are also important in the Finance and Ethics matters. In fact, they provide financial services to non-residents and have a financial industry superior to their population. To attract foreign capital, they provide light controls and deregulations, so these financial centers are black holes for global financial supervision and they do not collaborate with financial stability. It is also thought that they are havens for illicit wealth, derived from developing countries, tax-avoiding companies, or even from criminal organizations.

Insider Trading

Insider trading is the use of privileged information for personal use and benefit. Apart from being unethical, it is also a criminal action. Securities Commissions are in charge of supervising this, but it is difficult to prove when it happens.

Ponzi Schemes

Ponzi schemes are financial frauds in which the return paid to the investors does not come from any specific profit but from the investors' own money or from the money subsequent investors pay. To attract investors, they offer returns (in the form of interest rates) well above the average for similar investments. The early stages of these frauds normally seem like an everlasting flow of money. Normally, these frauds are detected by the authorities, but if not, there are 2 options:

• The promoter flees and robs the money
• The scheme collapses because it cannot find new investors or because previous investors ask to retire their money

Two recent cases of Ponzi schemes are the Madoff case in 2008, which went on for more than 15 years and more than 500,000 million were evaporated, and the Albania case, in which in the year 1997, 50% of GDP was invested in these frauds.

On the other hand, and after these examples where values and ethics were ignored, it's important to mention ethical banking. Even in countries where the disintermediation process has gone further, banks still have a major role. For example, they could restrict access to funding for socially damaging programs and facilitate easy and cheaper funding for socially and environmentally friendly activities. To promote this, in 2009, the Global Alliance for Banking on Values was created. Their common focus was to create a Triple Bottom Line for people, planet, and profit.