Banking Industry Meltdown - Research Paper Example

BANKING INDUSTRY MELTDOWN BANKING INDUSTRY MELTDOWN: THE ETHICAL AND FINANCIAL RISKS OF DERIVATIVES Introduction The banking industry is such a powerful one that has both direct and indirect influences on the global economy. This is because banks have always become avenues by which various countries of the world have enrolled various macroeconomic and microeconomic policies to shape the economic fortunes of the countries (Hoggson, 2012). Such important role that the banking sector plays calls for the need for there to be circumspect in the way banking businesses are conducted around the world. One important thing is that as the world continues to become a global village due to globalization and the influence of technology, actions taken by one banking industry in a different country affects others equally the same way. It is not surprising that in the 2008-2009 financial year, there was an economic meltdown that could not just be blamed on one country’s banking sector or the other but on the collective global banking industry. Core to the cause of the global economic meltdown in the banking sector has been found to be the issue of ethical and financial risks of derivatives taken by most players in the industry. This paper looks into the core ethical issues that led to the meltdown and what could have been done to prevent the situation that was experienced. There is will then be a conclusion that makes recommendations as to how leaders in the industry can avoid any future occurrences. Moral philosophy applicable to an understanding of the banking industry meltdown The banking sector operates with two major forms of ethical considerations, which are business ethics and moral ethics. Reading through the case of “Banking Industry Meltdown”, much blame can be put on poor application of moral ethics by leaders within the sector. Specifically, ethical egoism can be pointed to as the major causing ethical factor. This is because in egoism moral philosophy, the basis of morality is identified to be self-interest (Waller, 2012). This means that people take action that eventually results in their self-interest and gains rather than on the gains of others. Egoism can however be applied in a number of ways, both in the positive and negative sense. In the case, it would be noted that the banks applied egoism to an extent that was nothing less of greed and selfishness. As much as it is a fact that banks are profit making industries that must engage in forms of investments with their customers that bring profit to the banks, it must also be understood that the banks have moral, civil and social corporate responsibilities that they have to honor to their customers. Because the inputs that customers make to the banking sector is very influential in determining profitability for the banks, the banks should have first placed the interest of customers first but we read of the banks creating a subprime market by giving out loans to people who did not have qualifying credit ratings all in the name of the self-interest that the banks would have in the most immediate term. Impacts of “White collar” and “Blue collar” Crimes White collar crimes are generally referred to those types of crimes committed in the corporate sector and involving financially motivated nonviolent actions (Leap, 2013). Blue collar crimes on the other hand refer to those types of crimes committed by people supposedly to be within the lower social class. Because these people often do not have the financial influences and connections, their crimes are considered to involve violence (Dyer, 2012). In the public opinion perspective, people who commit blue-collar crimes, as compared to those committing white-collar crimes are easily exposed, condemned and often punished. Because of this, the public see blue-collar crimes as more substantive and abusive as against white-collar crimes. The case study however gives a clear indication that this assumption cannot be ethically right, even if it may be deemed as legally right. This is because the refusal of the banking sector to be mindful of basic ethical considerations and the rightful application of moral philosophies resulted in such a grievous level of untold hardship not just on particular individuals but on the global economic climate as a whole. Normally, blue-collar crimes are committed against specific people and the direct effects are suffered by the individuals who are affected. In the kind of white collar crime that we read about the in case study however, it is very clear that white-collar crimes come with even larger consequences when compared to blue-collar crimes. Role that corporate culture played in banking industry scenario Corporate culture has been explained to be a concept that “governs the ways a companys owners and employees think, feel and act” (Small Business Encyclopedia, 2014). This means that corporate culture is an embodiment of the way any company will act or react to issues that affects the conduct of business. This is because it cannot be possible to operate a company or an organization in a way that is different from its corporate culture if it is the corporate culture that reflects how all stakeholders within the company think, feel and act. With this said, it can be said that corporate culture played a major role in the banking scenario that is discussed in the case study. A typical example that can be assigned to justify this position is the corporate culture of “win-win” that exists among most banks that come together to form the banking sector. From the case study, the “win-win” culture of the banking industry was exposed as the industry thought of the need to make profits as the only alternative to its business existence. Because of this, corporate cultures were focused on rewarding people who would take risks to ensure that their banks made profits rather than those who created value for stakeholders (Benson, 2012). Should the banking sector have focused on their corporate culture on the need to creating value for stakeholders therefore, what was experienced would not have happened. How leaders within the banking industry could have used their influence to avert the industry meltdown Since the industry meltdown was caused by intrinsic factors and conditions that were identified right within the banking sector, it is expected that any influences that could have been used by leaders within the industry would have focused directly on activities within the banking sector. What this implies is that leaders within the banking industry could have used their influence to enforce the proper application of principles, particularly corporate governance principles. This is because within corporate governance principles, operators within the banking sector are expected to focus on the interest of stakeholders, whether they are shareholders or non-shareholders (Rezaee, 2012). Should this have been done, the bankers would not have put their own interests first or have refused to create value for the stakeholders, who are the rightful owners of the banks. Based on this, it will be postulated that the only way that leaders within the banking industry could have used their influence to avert the industry meltdown was to have ensured the enforcement of corporate governance principles among the banks. It is held that it would have been very easy for the leaders to use their influence to achieve this given the fact that they carry authority to both enact and enforce rules and laws within the sector. Conclusion From the discussion and analysis of the case study, it can be concluded that the banking sector became its own enemy in the industry meltdown that was experienced in 2008-2009 economic year. This was done particularly through the wrongful application of banking principles and moral philosophies. Emphasizing on the ethical egoism, the banking industry refused to rightly identify the place of value creation for their own growth and development agenda. Because of this, they used various selfish means to make profits, including acts that can be considered as white-collar crimes. Meanwhile, these white-collar crimes have effects that do not affect only one person or a group of individual but the economy at large, given the important role that the banking sector plays in total economic development. Leaders within the sector had the opportunity to use their influence to enforce the practice and application of the corporate governance principles to prevent what happened but this was never done. Into the future, it is expected that the banking sector will identify the place of stakeholders as the real owners of the banks and focus on the interest of these stakeholders rather than on self-interest. References Benson D. (2012). Business Ethics: Ethical Decision Making & Cases, 8th Edition. New York: Cengage Learning. Dyer, J. (2012). The Perpetual Prisoner Machine: How America Profits From Crime. Boulder: Westview. Hoggson, N. F. (2012) Banking Through the Ages, New York, Dodd, Mead & Company. Leap, T. L. (2013). Dishonest Dollars: The Dynamics of White-Collar Crime. 5th Edtion. Ithaca: Cornell University Press Rezaee, Z. (2012). Financial Statement Fraud. John Wiley & Sons. Small Business Encyclopedia (2014). Corporate Culture. Retrieved June 1, 2014 from http://www.entrepreneur.com/encyclopedia/corporate-culture Waller, B. N. (2012). "Egoism." In Consider Ethics: Theory, Readings, and Contemporary Issues. Revised Edition. New York: Pearson Longman Read More