Professional Documents
Culture Documents
What determines social trust? Exploiting evidence on the behaviour of migrants, Guiso, Sapienza and Zingales show that
the propensity of individuals to trust others is determined more by their original cultural formation than by the new
environment in which they relocate. They also find that differences in social capital across regions are largely explained
(at least in the Italian case) by historical factors.[7] I personally find this interpretation, though undoubtedly fascinating and
consistent with findings on other forms of social capital, rather unattractive and unconvincing when applied to finance.
Unattractive because by emphasising the role of educational and cultural determinants, it implies that trust levels –
whether high or low – are persistent and insensitive to policy over a short to medium-term horizon. I believe policy-
makers have a responsibility for fostering rectitude and confidence in the financial markets. Fortunately I also find it
unconvincing, because the “cultural root” hypothesis, with its high persistence implication, does not square with some
observed facts. It is evident that collective trust in certain institutions (e.g. banks, corporations or governments) can
quickly erode as a result of scandals or bad performance. A recent study on Austria, a country where trust in banks is
believed to be particularly high, suggests that this is explained by the financial stability record of the country.[8] Financial
crises can quickly weaken the trust in the financial sector, as revealed for example by the Chicago Booth/Kellogg School
Financial trust index for the United States,[9] which declined markedly after 2007; I do not think culture has much to do
with that. The dynamics is asymmetric; trust can be undone quickly, but builds up only gradually. The Edelman Trust
Barometer shows that the financial services industry is still today one of the least trusted ones.[10] Trust in banks is higher
than that in the financial industry as a whole, but since 2009, only a very small improvement has been observed. Finally,
it should be noted that the impact of changes in trust on behaviour is much more rapid and marked among financial
market participants than among households – witness the sudden liquidity and credit dry-ups that took place following
specific episodes, like the run on Northern Rock in 2007.
Everybody does it
We have always done it, so why change now
or similar. Many humans find such self-arguments convincing enough, but at the same time a deeper voice tells them that
there is something wrong; hence the need for opaqueness. The acts they embark on and the self-justifications given
must not be exposed. Any risk of exposure constitutes a very powerful disincentive to misbehave.
Leveraging on this psychological mechanisms, one could establish practices whereby employees engaged in certain
activities that critically impinge on trust are routinely made accountable to answer the following questions:
(1) Are you doing what you promised to do?
(2) Are you using your best knowledge and intention in doing it?
(3) Are you doing what public authorities, superiors, colleagues and business partners expect you to do, and if not why?
(4) Are you conforming to the mission and the values of your company, as they are publicly stated?
(5) Will your actions enhance public confidence in your company and in the financial sector?
Finally, and crucially:
(6) Would you behave similarly if your actions were publicly observed?
The fundamental importance of the last question was understood by Adam Smith, who believed that an “impartial
spectator” scrutinising individual behaviour was a necessary complement of the “invisible hand”. To quote:
“We suppose ourselves the spectators of our own behaviour, and endeavour to imagine what effect it would, in this light,
produce upon us. This is the only looking glass by which we can, in some measure, with the eyes of other people,
scrutinize the propriety of our own conduct.” (A. Smith, The Theory of Moral Sentiments, Section III.1.5.)
Putting all this into practice is evidently a challenge for supervisors, but once the logic is understood it does not seem
impossible. By looking across a range of indicators and fact patterns, helped by intrusive questioning, if supervisors make
the effort to connect the dots they should be able to see which banks are lax about culture and ethics. Shareholders,
board members and senior management play an evidently important role in setting the example, putting in place
adequate control mechanisms and enforcing them. Such processes need to be enshrined in explicit codes. Incentives of
managers and staff need to be consistently aligned. The ethical framework should influence the annual appraisals and
bonuses. Peer pressure and transparency help in this respect, especially when there is a risk of conflict of interests, for
instance between sales employees and clients. Making commissions and reward schemes transparent would be helpful.
An emphasis on ethics should also be placed on the recruitment process and career promotion mechanisms, as
prescribed by the FSB.[23]
Conclusions
Ethics are inextricably connected to the financial world as they form the basis for trust. Without trust the system is either
dysfunctional or unstable or both, as the recent experience has shown.
Regulatory and supervisory reform can contribute to strengthening trust, by placing the emphasis on robust risk
management systems, strong corporate governance frameworks and a sound risk culture. But in itself regulation is not
sufficient, if not complemented by a sound ethical framework. As “trust comes by foot, but leaves on horseback”, it may
take a while before we see results, but I am confident results can be achieved. Banking supervisors should be aware of
these issues and contribute to the process.
Thank you for your attention.
1. I am grateful to Jean-Edouard Colliard and Cécile Meys for excellent contributions and to Julie Dickson, Simone
Manganelli, Danièle Nouy and Stefan Walter for useful comments. The views expressed here do not involve the ECB or
the SSM Supervisory Board.
2. In fact, the term “credit” is reported to have been used for the first time in Venice in the 15th century.
3. Boatright, J. R., “Trust and Integrity in Banking”, Ethical Perspectives, Vol. 18(4), 2011.
4. Guiso, L., Sapienza, P. and Zingales, L., “Trusting the Stock Market”, Journal of Finance, Vol. 63(6), 2008 and Guiso,
L., Sapienza, P. and Zingales, L., “Cultural Biases in Economic Exchange”, Quarterly Journal of Economics, Vol. 124(3),
2009. See also the summary in Guiso, L., Sapienza, P. and Zingales, L., “Trust and finance”, NBER Reporter, No 2, 2011.
5. Social capital is defined by Putnam as “features of social life – networks, norms, trust – that enable participants of a
given community to act together to pursue shared objectives”. See Putnam, R., Making Democracy Work – Civic
Traditions in Modern Italy, Princeton University Press, 1993.
6. Pevzner, M., Xie, F. and Xin, X., “When Firms Talk, Do Investors Listen? The Role of Trust in Stock Market Reactions
to Corporate Earnings Announcements”, Journal of Financial Economics, 2013.
7. Guiso, L., Sapienza, P. and Zingales, L., “Long-Term Persistence”, working paper, University of Chicago, 2008.
8. M. Knell and H. Stix, “Trust in Banks? Evidence from normal times and from times of crises”; Oesterreichische
Nationalbank, mimeo, November 2009.
9. See http://www.financialtrustindex.org.
10. See http://www.edelman.com/insights/intellectual-property/2014-edelman-trust-barometer/about-trust/executive-
summary/
11. See e.g. Kirkpatrick, G., “The corporate governance lessons from the financial crisis”, Financial Market Trends, Vol.
2009/1, OECD, 2009.
12. I have described the first steps of this process in Angeloni, I., “Testing times for global financial governance”, Bruegel
Essays, 2008. A more recent overview is provided by Veron, N., “The G20 financial reform agenda after five years”, The
US-China-Europe reform agenda, Peterson Institute for International Economics, 2014; available at
http://www.iie.com/publications/papers//201405piie-cf40conference.pdf.
13. Available at http://www.financialstabilityboard.org/publications/140407.pdf. Background documentation is available at
http://www.financialstabilityboard.org/press/pr_131118.htm.
14. LIBOR alone affects more than USD 300 trillion of financial contracts, including swaps and futures, in addition to
trillions more in variable-rate mortgage and student loans; see
http://www.newyorkfed.org/research/staff_reports/sr667.pdf
15. Consisting in the falsification of the fixing of the conventional day-end exchange rate that serves as a reference for a
large volume of forex-linked contracts. The daily turnover of the global forex market is estimated by the BIS at USD 5.3
trillion.
16. An annotated list of recent financial scandals (but unfortunately a partial one, in spite of the fact that the paper was
published only 5 months ago!) is provided by Erhard, W. and Jensen, M., “Putting Integrity into Finance: A Purely Positive
Approach”, ECGI Finance Working Paper No 417, Appendix 1, 2014.
17. Payne, C., “Ethics or bust: beyond compliance and good marketing”, in Cosgrove-Sack, C. and Dembinski, P. (eds),
Trust and Ethics in Finance, Globethics.net, 2012.
18. Leonid Hurwicz comes to precisely this conclusion in his 2007 Nobel lecture through an admirable but totally different
argument: since compliance with the law requires enforcement, and enforcement is performed by other humans, a
system without ethics (which amounts to intrinsic, not extrinsic, enforcement) is unsustainable. See Hurwicz, L., “But who
will guard the guardians?”, Nobel Lecture, 8 December 2007.
19. See Defining and developing an effective code of conduct for organisations, International Federation of Accountants,
2007.
20. The ideas that follow draw heavily on Erhard and Jensen, op. cit., and Forstmoser, P., “Integrity in finance”, speech
given at the Swiss Banking Institute, 2006, including the references therein.
21. In the Theory of Moral Sentiments, Part III, Ch. 1, Adam Smith writes: “When I endeavour to examine my own
conduct, when I endeavour to pass sentence upon it, either to approve or condemn it, it is evident that, in all such cases,
I divide myself, as it were into two persons; and that I, the examiner and judge, represent a different character from that
other I, the person whose conduct is examined into and judged of. The first is the spectator, whose sentiments with
regard to my own conduct I endeavour to enter into, by placing myself in his situation, and by considering how it would
appear to me, when seen from that particular point of view. The second is the agent, the person who I properly call
myself, and of whose conduct, under the character of a spectator, I was endeavouring to form some opinion. The first is
the judge; the second the person judged of. But that the judge should, in every respect, be the same with the person
judged of, is as impossible that the cause should, in every respect, be the same with the effect.”
22. A similar notion – self-deception – appears to be a pervasive feature of a broad range of human and even animal
actions; see Trivers, R., The folly of fools; the logic of deceit and self-deception in human life, Basic Books, New York,
2011.
23. There has been discussion recently also about the possibility of asking bankers to take an oath that they will act
honestly and in the interests of their clients, with a view to promoting trust in the banking sector. The “banker’s oath” has
actually been adopted in the Netherlands and proposed also for the UK; see Llewellyn et al., “Virtuous Banking”,
ResPublica, 2014.
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