Ovidius University Annals, Economic Sciences Series
Volume X, 2010
Ethical Banks: An Alternative in the Financial Crisis
Mascu Simona
Universitatea „Ovidius”ConstanŃa
mascu_simona@yahoo.com
Abstract
The goal of this paper is to discuss the
SECTION TWO issues of ethics, moral hazard and behavior in
banking regulation of the global financial
system.
The paper is focused on the specific
ECONOMICS AND BUSINESS characteristics of ethical banks, compared with
those of traditional ones, and provides a
ADMINISTRATION picture of the extent of this phenomenon.
Through this paper I also intend to argue
that the recent crisis has not just been a
banking crisis, but also a crisis of
professionalism and banking ethics. The credit
crisis calls into question the functionality and
good performance of traditional banks. The
full incorporation of ethical values and
SUBSECTION principles by traditional financial
intermediaries might be a form to solve their
misleading financial situation.
Finance and Accounting Keywords: ethical banking, sustainability,
financial crisis, moral hazard
JEL clasification: D82, D83, G01, G21
1. Introduction
For many of us, the expression “ethical
banking” is an oxymoron. Also, the name
“ethical bank” is controversial, because what is
“ethical” or not is subjective.
“Ethical banking” is a term difficult to
define. A very restrictive way to describe it
would be as an “umbrella concept” of
investing based on a combination of financial,
social, environmental and sustainability
criteria.
The activity of ethical banks is focused on
social and human values, which emphasize the
solidarity and responsibility for society and
environment. In this context, it is imperative to
talk about sustainable banking activity. This
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means that banks involve in financing
businesses
and projects characterized by social, cultural
and environmental value-added, as an
expression of capitals entrusted by depositors
and creditors, which aim to encourage the
development of responsible, durable projects.
It appears that in the US, the epicenter of the
financial crisis, sustainability was the last thing
on the agenda of some of the largest financial
institutions in the world.
Banks and financial systems have to be
flexible when integrating social changing
values. This process has to be public, open,
and supervised by external social auditors in
order to maintain and strengthen trust, which is
an essential value.
2. Ethical banks versus traditional
financial intermediaries
Ethics and banking are not words that
naturally flow together. It is known that the
primary aim of a bank is to make a profit.
Financial intermediation is not charities. Banks
have to make sufficient profits to satisfy their
shareholders. So it might be curious that
banks are founded for social and ethical
purposes. It might sound confusing hearing a
banker saying that “money should be a tool for
social good” or that “investment should be for
the good of the community and the
environment”.
However, banks don`t operate isolated
because their activities have social and
ecological consequences. The ecological
impact of financial activity is difficult to see,
but there is a possible indirect impact through
the financing of certain economic activities.
This philosophy can be defined with the term
of Sustainable and Responsible Investment
(SRI): “This is a concept that continues to
evolve. Nevertheless, the constant within this
area is that sustainable and responsible
investors are concerned with long-term
 Ovidius University Annals, Economic Sciences Series Ovidius University Annals, Economic Sciences Series
Volume X, 2010 Volume X, 2010

investment; and environmental, social and ranking of ethical banks term the amount of Table2. Sales and profits at The Co- business over the past 15 years on ethical
governance (ESG) issues are important criteria funds with ethical destination places on first operative Group grounds.
to determining long-term investment place Great Britain, followed by Netherlands, Financial 2009 Growth vs Following are examples regarding the Co-
performance. ” [1] Sweden, Switzerland and France. Therefore, highlights 2008 operative bank` social goals in 2009:
In table 1 are presented the most some countries have an unexploited potential • £11.3m invested in communities in 2009;
representative distinctive features of ethical for the social value added. • £6.7m raised for charity this year;
and classical banks. In the list below are mentioned a couple of Group sales £13.7 + 31% • Voted Responsible Retailer of the Year –
Table1. Ethical banks versus classical banks ethical banks worldwide: bn for the third year running;
Traditional banks Ethical banks • South shore Bank (USA); - Trading £11.6 + 37% • CFS voted Best Financial Provider by
• Shore Bank Pacific (USA); Group sales bn Which? Magazine;
The activity is Operate with a • Self Help Credit Union (USA); - CFS sales £2.1b + 6% • Revival of The Co-operative Bank’s
subordinated to the clear set of ethical • Charity Bank (UK); n unique customer-mandated Ethical Policy;
reaching values, • Co-operative Bank (UK); Underlying £473 + 20% • 250,000 young people benefited from
of several known, accepted • Smile (bank) (UK); Group operating m Group community projects covering
quantitative and respected at • Triodos Bank (Netherlands); profit before renewable energy and recycling;
objectives, mainly all the significant items • £5m pledged to support the co-operative
• Banca Etica Populare Universal;
the market share hierarchical levels enterprise hub;
• Ethic Bank (Italy); - Underlying £338 + 22%
and profitability. • CFS Toxic Fuels campaign raising
• Grameen Bank (Bangladesh); Trading Group m awareness of the impact of tar sands
The focus is on Pursue the • Bank Rayita (Indonesia); Profit
maximizing the obtaining of both extraction;
• Citizens Bank (Canada); - Underlying £177 + 21% • The Plan Bee campaign raising awareness
financial financial and • Banco Solidario (Bolivia); CFS Profit m
gains. social of honeybee decline, funding research, and
• Banque Alternative Suisse Profit before £402 + 85% encouraging people to help bees and plant
gains.
(Switzerland); payments to and m bee-friendly wildflowers;
The investment The investment • Ethikbank (Germany); on behalf of • 15% reduction in packaging target met a
strategy and risk decision belongs,
• GLS (Germany); members year ahead of schedule;[4]
profile are firstly, to
• Credit Cooperatif (France); (equivalent to the Another bank which have an ethical policy
established by customers by
• Cultura Savings Bank (Norway); pre-tax profits of is Triodos, but it doesn`t offer personal current
bank’s choosing
• Caisse Solidaire du Nord-Pas de Calais a plc) accounts. Its services include business and
management the ethical project
(France); [2] charity accounts, and personal savings. They
to be financed Members’ £4.5b + 15%
Figure1. Ethical banks' logos declare every loan they make, a uniquely
with their funds n transparent measure. Triodos set out to use
funds. Dividend paid £55m + 16% money for good, and will only finance
Don’t provide Publish on a to customer businesses that “add cultural value and benefit
information regular basis a list members people and the environment”. They are best
concerning the with all the Net £1.6b +£949m known for investing in wind power in the
destination of investment borrowings n 1980s, long before it was a fashionable cause.
attracted and projects that Source: Co-operative bank The Ecology Building Society has seen a
borrowed funds. received The Co-operative Bank has seen a 38% vast increase in savings deposits since the
financing. jump in new current accounts as consumers crunch, building on a 10% increase in 2009.
Grants financing Finance those deserted the bigger banks in droves in the Britannia Building Society, currently merging
without taking into companies whose wake of the financial crisis. It gained 140,000 with the Co-op Group to form a “super-
account the ethical projects perform new customers, taking the total to 1.2 million, mutual”, noted that 140,000 new savings
behavior of the a positive and doubled its share of the current account accounts had been opened.
applicant, or the influence on market to 4%.
impact of his society and There is one high street bank in the UK with
“We're already seeing a flight to trust," said 3. The financial crisis due to ethical
actions on environment an ethical policy, and that’s the Co-operative.
Peter Marks, the chief executive. "People are crisis
society and The bank has its roots in the co-operative
weary of big business, especially in the
environment movement that started in the 19th century as a The present financial crisis is much more
financial services sector. They want to feel
Ethical banks reveal that their financial way of creating a fairer model of capitalism than a financial one. It is a crisis of ethics and
confident about where they're putting their
intermediation activity gathers customers through shared ownership. The bank remains it was facilitated by the moral hazard. Banks
hard-earned savings.”[3]
aware of the importance of social committed to those ideals, and members all assured that they were well capitalized. This
The Co-operative is said to have turned
responsibility and solidarity. In Europe, the receive a share of the profits. was enough to convince regulatory authorities
down £1 billion ($2.2 billion) worth of

1681 1682

and the policy makers that the bank’s
behaviour posed no risk to the economy.
In this crisis the world of finance is
experiencing what the farmaceutical world has
known for a while , that product can causes
‘serious and rare` adverse events that are hard
to detect. Pascal Lamy, the Director-General of
WTA declared:
“ Finance is one of the last „ black holes” . A
sick bovine or a hazardous lighter cannot cross
borders; a toxic product still can”. The fact is
that the current financial crisis has its roots in
financial inovation.[5]
Today's financial crisis has its roots in
corporate iresponsibility around the subprime
mortgage market in the US. If
“responsible lending' wich presumes providing
credit, based on background checks and
professional judgement, to people who can
accommodate regular repayments without
getting into financial difficulty had been
observed (or if tighter regulatory oversight had
been imposed), we might not all be in this
position right now.
The crisis in ethics was facilitated by a
regulatory culture that does not adequately
control hazards, moral hazard is said to lead to
excessive risk taking. A number of central
bankers, including Mervin King of the Bank of
England, Paul Volcker, and Alan Greenspan,
support that banks are "too big to fail”. In the
recent financial and economic crisis the
number and nature of rescues in sophisticated
financial markets and systems has dramatically
increased the salience of the issue (too big to
fail). Regulators placed their faith in market
data and ignored the potential risks of bank
behavior. Now, many discovered that banks
may be "too big to let fail".
Although much has been said about the
inevitability of banking crisis, such attitudes
tend to reflect willingness to tolerate risk
ignoring its consequences.
The financial draws attention to the fragility
of markets and the importance of trust and
organization for their stabilization. Now the
idea of deregulation and free market is under
observance. Financial markets are no longer
seen only as a way to promote choice and
efficiency, but they also need to be ordered,
tamed and civilized.
The actual financial crisis has become a
pervasive collapse of trust. Banks no longer
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Ovidius University Annals, Economic Sciences Series
Volume X, 2010
trust other lenders. Investors no longer trust
banks. Lenders no longer trust borrowers.
Many banks appear to be failing in their duty
to society as well as to shareholders.
The Financial Trust Index captures the
amount of trust that americans have in the
institutions in which they can invest their
money. [6]
Graph1. Percentage of people trusting
various
types of banks
Source: Financial trust index
It is evident the way consumers have been
flocking to ethical banks since the financial
crisis began.
The present crisis is fundamentally one of
trust and integrity, and therefore ethical in its
foundation, its solution cannot be a mere
institutional reorganization or some additional
regulatory measures. It needs an ethical
response at all levels: the individual, the
corporation and the government and regulatory
entities.
4. Concluding remarks
Nowadays, profitability and solidarity are
two notions which have to be brought together
although longtime perceived as being
contradictory.
Is time to intensify concerns in the banking
system, in terms of awareness of the credit
institutions to support ethical and sympathetic
investments.
Banks should adopt alternative strategies, to
increase customers’ confidence and to
configure a banking activity based on social
responsibility providing investment for social
and ethical purposes. It also aimed to provide a
place for people savings where the customer
could be sure that their money would not be
used for projects they didn't approve of. The
lending criteria of an ethical bank is that what
the borrower plans to do with the money must
be socially, environmentally or culturally
useful.
The ideology of purpose that will dominate
the future is one that finds acceptance and
participation by society at large, unleashes
human potential, draws individuals and
organizations towards ethical behavior, and
makes it possible for every human being to
make a difference. Only the purpose of
'serving the real needs of humanity' is likely to
meet these requirements." [7]
We need to get back to collaborating the
old-fashioned way. That is, people making
decisions based on business judgment,
experience, prudence, clarity of
communications and thinking about how, not
just how much.
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Ovidius University Annals, Economic Sciences Series
Volume X, 2010
The other way of regarding our present
dilemma is to see it as moral retribution for the
excesses of past years.
It is time to set our moral compass so that
our decisions are not governed by mere
personal gain. The wider community is
important and without it we cannot live a full
and happy life.
5. References
[1] M. Christensen, R. Edme, “Foreword from
Eurosif ”, European SRI study, 2008.
[2] AllExperts, “Ethical banking”, Encyclopedia,
2008.
[3] J. Kallewe, “Co-op profits surge as customers’
desert UK's bigger banks”, Guardian, 2010.
[4] The Cooperative Group, “Record sales and
profits at The Co-operative Group”, Preliminary
Results for The Co-operative Group for the 51
weeks ended 2nd January, 2010.
[5] D. Demortain, “Credit rating agencies and the
faulty marketing authorization of toxic products”,
Risk&Regulation, 2008.
[6] Financial Trust Index,
www.financialtrustindex.org.
[7] M. L. Wiersma, “Purpose beyond Profit”,
EBBF, 2008, pp.26
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