Ethical Finance As A Systemic Challenge: Risk, Culture, And Structure

Cornell Journal of Law and Public Policy, Vol. 27, No. 3, p. 797, 2018 In recent years, there has been no shortage of scandals involving fraudulent, predatory, and otherwise ethically unacceptable behavior on the part of large U.S. and non-U.S. financial institutions. Reverse redlining and targeting of racial minorities and other vulnerable segments of the population for subprime mortgages, collusive price-fixing in the world’s most important interbank lending and trading markets, and fraudulent creation of client accounts by bank employees pressured to generate fees for the bank are only some of the recent examples of such blatantly unethical behavior. Much of this behavior was also directly implicated in the generation of unsustainable levels of risk in the financial system, which led to the global financial crisis of 2008-2009. Not surprisingly, industry regulators and scholars of financial markets have been increasingly vocal in their criticisms of the financial industry’s systematic failure to maintain high ethical standards of business conduct. Much of the regulators’ and academics’ attention in this area is focused on individual financial institutions’ apparent inability to foster a strong internal culture of pursuing market objectives through ethical and socially responsible means. Accordingly, the potential remedy for this problem is often seen as a matter of improving the firms’ culture of risk-taking, so that they develop a genuine commitment to seek private gains without creating systemically destabilizing risks or otherwise endangering the well-being of their clients, creditors, and the rest of the society. In effect, this recent “ethics turn” in financial regulation recasts firms’ “risk culture” as a crucial determinant of success, or failure, of the post-crisis search for systemic financial stability. This Article analyzes the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies its key conceptual and normative limitations. It argues that the principal flaw in that debate is that it tends to ignore the critical role of systemic, structural factors in shaping individual firms’ internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current academic and policy discourse on institutional culture, the Article discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market--on a macro- rather than micro-level--would profoundly, and far more effectively, alter individuals’ and firms’ normative choices and attitudes. The key to making finance ethically sound, therefore, is to make it structurally sound – and to do so on a systemic level.