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Whatever the merits of ethical requirements as a regulatory response to the travails of banking, regulators have embraced the concept, and are increasingly positing that the global regime designed to improve the safety and soundness of banks will only succeed given more and better ethics. The problem is often characterized as one of oversight and culture, at which an ethical tone must be set at the top that will filter down to the bank employees.

What that tone should sound like is less clear, but a careful parsing of the speeches and actions of regulators so far is revealing. International financial regulation has embraced ethics in two ways. The first has been the way of chastisement, which reflects the new commitments of senior supervisors, who give speeches oriented on changing the culture of banking. Behind the chastisement is the idea that financial institutions have firm-wide cultures, in which self-interested behaviour is expected and other-focused behaviour is derided.

The second way that international financial regulation is making ethics part of its purview is one of ordinary supervision, which permits supervisors to assess the safety and soundness of an institution in part by evaluations of the quality of management. While in the past that might have required an assessment of the competence of the bankers at the top, in the wake of the financial crisis, it is more focused on command and control.

Both initiatives—the insistence on the implementation of commitments to ethics, and the harping on poor cultures and prior misdeeds—are related to an effort to make the job of overseeing banks easier for regulators. Their first efforts attempted to make sure that banks whose activities crossed borders were adequately supervised by their domestic regulators acting in concert wherever the banks did business.

The regulators have added capital adequacy rules and devised increasingly elaborate market requirements for banks.

The ethics of banking

Relying on management to adopt a commitment to ethics as a core value of the bank will, it is thought, reduce the amount of regulatory arbitrage, sharp practices, and deception—three practices that do not only make supervision difficult, but that might also contribute to the riskiness of banks. This sort of standards-based approach to banking supervision is thus a supplement to the more precise rules that banking supervisors have developed, especially recently. It is meant to persuade banks to treat their other regulatory obligations with respect. But in this way, the new international campaign for ethics is a very different form of regulation.

Multinational ethics regulation parallels that of the growth of other sorts of international financial regulation; it features increasing degrees of coordination and the use of regulatory networks to harmonize standards across borders. In particular, banking networks have begun to insist that all banks, regardless of domiciles, start to take ethics seriously.

The head of the FSB and current president the Bank of England, Mark Carney, has suggested that the relationship between the noble goal of moral conduct and the less lofty project of bank oversight is extremely close. Essential will be the rediscovery of core values, and ultimately this is a question of personal responsibility. More than mastering options pricing, company valuation, or accounting, living the right values will be the most important challenge.

These efforts have focused on encouraging the leadership of financial institutions, including boards of directors, to make ethics a centerpiece of the way they run their businesses. As such, the compendium of standards cover a vast array of components of financial regulation, ranging from narrow issues such as how to ensure that deposit insurance schemes remain solvent more general ones. It is with the broad components of financial regulation that ethics have come to be seen as an important part of the toolkit of the regulators you have joined up to the FSB's program.

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The FSB is not alone in tilting at the ethical windmill, although its managing director has made ethics out to be particularly important; other supranational organizations have acted similarly. The Basel Committee on Banking Supervision, a long-standing network of regulators who focus on bank stability, and one of the groups who are members of the FSB, in revised its Guidelines on Corporate Governance Principles for Banks, principally to stress the importance of the adoption of ethical norms by those banks, designed above all to reduce risk.

To this end, regulatory compliance resources at banks were particularly important. To be sure, the version did not ignore ethics. The committee also included in its revision of its Core Principles for Effective Banking Supervision a recommendation that banking supervisors evaluate the ethical standards adopted by the banks they supervise.

Ethics are increasingly discussed in the bank governance principles, but discrete, measurable requirements are still not part of the exposition. For their part, Organization for Economic Cooperation and Development OECD officials, though relative outsiders to the world of international banking supervisions, have joined it in its efforts.

So too has the subject been one of interests to the largest international financial organizations. Lagarde, the managing director of the IMF, has expressed views that are representative of this sort of senior leadership. This litany of calls for ethics among multinational institutions demonstrates not only the breadth of the phenomenon, but also its amorphousness. Banks have been chastised for being unethical, but the specification of what ethics requires has always remained, at the transnational level at least, underspecified.

National and European officials have scolded banks in the way that international regulations have done. But they have also entered the realm of applying ethics in ordinary supervision of banks. Thus, there has been castigation, along with a degree of regulation.

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That regulation in Holland and the UK has taken the form of oaths. Bankers are required, before they take their positions, to commit to a series of general propositions regarding client service, caution, transparency, and public mindedness. These values are analogized to those pointed to in speeches to bankers about how a new ethical dawn is needed elsewhere.

Banking ethics

In other jurisdictions, ordinary review of the internal controls in financial institutions has included a consideration of the ethical standards embraced by the board, which govern banks and have the power to push standards out to the institutions they lead. This section, like the prior one, identifies some of the leading European and country-level ethical banking initiatives; again, the themes of creating broad and perhaps even vague standards designed to improve regulatory compliance are sounded at the country level as well.

Ignazio Angeloni, a member of the Supervisory Board of the European Central Bank ECB , in argued that ethical behaviour by banks could lead to better compliance with the spirit of the laws. If anything, the interest in ethics in the UK is particularly long-standing. Regulators have written articles about the importance of this sort of behaviour.

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The USA has joined this multinational effort. In , William Dudley, the current president of the New York Fed and vice-chair of the Federal Open Markets Committee and a former investment banker himself, emphasized the view that regulated banks must act ethically if they hope to meet the requirements that their regulatory supervisors expect of them. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.

It is up to you to address this cultural and ethical challenge. Over the long haul, the economy needs a vibrant and trustworthy financial sector in order to thrive, just as the financial sector needs a vibrant economy to thrive as well …. A strong and ethical culture in the banking industry will make it more trustworthy, and therefore more effective in performing its mission. It will also help the industry be held in higher esteem and this will help attract the talent needed to sustain the industry. These regulatory efforts have also, unsurprisingly, generated efforts by banks themselves to address and improve their culture—or at least to report doing so to their regulators.

Sometimes banks promulgate codes of ethics because their regulators require that they do so, in other cases, the banks have developed the codes without specific sanctions, but it is undoubtable that large bank in any democratic economy has one, and has made it easily available on its website. This distinguishes financial institutions from other businesses, who do not market their ethics so prominently.

For example, Deutsche Bank has declared: After the financial crisis, it is essential for the banking industry to restore a firm bond of trust with the communities we serve. That applies to Deutsche Bank as well as the entire industry. We have set ourselves the goal of taking on a pioneering role in the change that is indispensable in the business sector: Cultural change was therefore an essential part of our [s]trategy… American banks have all adopted codes of ethics.

These codes may be required by regulation in some cases, or could be little more than a form of customer relations. But the ubiquity of them underscores the multinational nature of the new impetus towards ethical banking. Ethics are the next step in a successful — at least in promulgation, if not yet clearly in enforcement — international campaign to create credible global financial standards. They are extremely broad and cosmopolitan, however, and so are quite different from the international efforts that have preceded it, especially since , when banking regulators adopted precise rules on capital requirements for their charges.

Most of the hard and specific rules of banking regulation involve activity restrictions, capital charges, resolution and the planning for it, and compensation rules. These are the traditional provinces of financial supervision, and, accordingly, they have been the focus of international cooperation in the past. International financial regulation has never had the sort of activity restrictions that have characterized banking in, for example, the United States.

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However, in the post crisis, there have been efforts to hive off derivatives trading from the more basic commercial and consumer lending operations of even large and complicated institutions. International financial regulation has won regard for its successes on capital requirements for banks. They have been joined by other very specific multinational regulatory efforts in the way of the financial crisis, including the development of leverage requirements, liquidity coverage ratios, and net stable funding ratios that force banks to keep a higher proportion of their assets in less profitable, but very safe, endeavours.

Another traditional role of financial regulation has been to create a fast and specialized bankruptcy process that can take over a failing bank without disrupting the financial system and the businesses of its counterparties and clients. But coordinated windup powers are increasingly seen as multinationally required—the Basel Committee and the FSB have made them essential criteria for evaluating the quality of a bank supervisory regime.

Chaos ensued in the last financial crisis when Lehman Brothers, a multijurisdictional financial institution went bust, with an attendant race for courthouses and assets across the globe. They have agreed to subject their domestic banks to a series of stress tests and have also agreed that they should come up with the so-called living wills or plans for the orderly windup of institutions hit by a shock that their capital is unable to fully cushion. The progress made in the architecture of the international financial regulatory system has been parallelled by progress in its institutionalization, which is increasingly elaborated, procedurally regular, and subject to political input.

Networks such as the Basel Committee have embraced the sorts of notice and comment procedures that we have come to expect from domestic regulators. The FSB incorporates the insights of networks of domestic regulators, like Basel, with those of international organizations concerned with systemic stability, like the World Bank and the IMF, in an effort to take a broad view of the regulation of international finance. The FSB reports to the G or, occasionally, the G-7, purely political organizations that top the hierarchy and that might be likened to a Concert of Europe for the modern era, consisting of heads of state that meet annually, and finance ministers who meet twice a year to deal with the global economy.

It is all an impressive feat of bureaucratization; it is fair to say that banking is increasingly regulated through an international process, and occasionally directly by international bodies. None of the works of Basel and the other international soft law institutions appears to have led regulators to conclude that banks will no longer take advantage of information asymmetries, or, in large part, pursue risky strategies with the potential for short-term gains and leave worrying about the long term to others. For this reason, they are increasingly, and apparently, looking elsewhere.

Ethics represent something different from the institutionalized and elaborated post-crisis regulation. In this way, the vogue for ethics suggests a way that multinational regulation is being deepened, with hard rules and fallback standards. But the deepening is certainly hard to define meaningfully. There are reasons to be sceptical about the promise of banking regulation through ethics, at least if it were thought to be a primary mechanism of supervision. In this section, I begin by reviewing the case against an international effort to regulate by ethics.

I then consider some of the other implications of the phenomenon, namely, that it represents, in the best case, a complement to the hard rules designed to introduce broad standards to an international regime that has previously depended on specified and precise rules, like the Basel III capital adequacy ratio. Secondly, the idea that one code of banker ethics could apply to all financial industry professionals, no matter where they do business, exemplifies the cosmopolitan nature of the project.

Relatedly, the idea that all bankers and banking regulators might be able to look at the world in the same way truly suggests that financial regulation, and financial practice, is an epistemic community, where everyone sees the world in the same way, which is thought to be, at least by some, a precondition to collaboration across borders.

Thirdly, it is worth noting that the application of ethical constraints on bankers is a very mild enforcement mechanism, for a regime that has, in the past, relied on peer review as its sole enforcement mechanism. Some of the concerns about the effectiveness of regulation by ethics turn on the way that banking regulators across country have called for ethics to be implemented—as a code of broad standards, devised by the banks themselves, or at a minimum with their input.

A call for this sort of ethics presents the prospect of a surrender by regulators, a sense that regulation cannot make banks safer, but that perhaps hortatory lectures that really leave the job of oversight up to the banks themselves, and the way they define their ethical responsibilities, might work. Ethical regulation did not have to be either amorphous regulation or self-regulation. There are ways to pursue ethical banking with tangible consequences.

Claire Hill and Richard Painter have proposed one less diffuse approach, for example. Nor is liability the only way to freight ethical rules with real consequence. Christina Skinner has suggested that countries that adopt rules that facilitate the uncovering of misconduct ought to get a break on the capital that their banks must hold under Basel III. Moreover, personal consequences for violations of ethical rules could be imposed, ranging from a bar from working in the industry, to fines, to a necessarily disclosed black mark in the employment records of the banker, visible to future employers.

The general counsel of the New York Federal Reserve recently cited the ability of bad actors to move from firm to firm as one of the lingering industry obstacles to change. The fact that banking regulators have implemented none of these tangible reforms might suggest that international financial regulation, the epitome of pretty hard and quite successful soft law, is giving up on the prospect of passing increasingly elaborate rules where compliance is technical and mathematical, rather than rooted in principle. This negative interpretation might point to the many examples of international soft law initiatives that lack specificity.