American Banking Industry - Research Paper Example

American Banking Industry Table of Contents Introduction 3 Review of Related Literatures 3 a) History of Banking Industry in America 4 b) The Role of the Banking Industry in the Social, Economic, and Political Setting of America 5 c) The Domestic and International Ethics, d) Ecological and Natural Resources 8 e) The Social Issues Faced by American Banking Industry, 10 f) The Corporate Stakeholders Response to the Issues Confronting the American Banking Industry 11 Rating of the Banking Industry’s Overall Social Responsiveness and Its Accomplishment Areas 14 Rating of Industry in Relation to the Core Values of Saint Leo University 15 Conclusion 16 References 17 Introduction The industry of banking which is among the oldest industry in the world serves a very functional role to each and every one among the Americans in both the individual and the institutional level. Nonetheless, despite whatever purpose it serves to the Americans, the banking industry is not free from any issue. As a point of fact, banks are often and highly criticized due to being so driven towards profit maximization. Given this, banks often neglect its responsibility to the people as well as the environment. That is to say, banks may be directly or indirectly participating to harming the human beings and the nature. In this regard, this paper primarily aims at investigating the American banking industry. Specifically, it aims at exploring the banking industry's history, role it serves to America, issues confronting it and its response to such issues. Through the research, this paper intends to assess the industry's overall responsiveness and its accomplishments area. Likewise, it plans to evaluate the said industry in relation to Saint Leo University core values. Review of Related Literatures This section aims at presenting an overview of the literatures related to the topic on American banking industry. This review aims at providing a cursory outlook at how the various data are sought to answer the questions and problems of this research project. The books and the articles reviewed in this part may not be a representative of the complete array of the information concerning American banking industry. The selection of the reviewed articles is solely based on the accessibility of materials. The expediency of this section is to help grasp an outlook on how to understand the topic understudy. In this regard, this review of related literatures is divided and categorized into the following segments which are: a) History of Banking Industry in America, b) The Role of the Banking Industry in the Social, Economic, and Political Setting of America, c) The Domestic and International Ethics, d) Ecological and Natural Resources, e) The Social Issues Faced by American Banking Industry, and f) The Corporate Stakeholders Response to the Issues Confronting the American Banking Industry. a) History of Banking Industry in America According to Goyal and Joshi (2011), 2000 BC marks the earliest record of banking activity. During this era, the merchants lent money to the traders as well as farmers in Assyria and Babylonia. In this regard, it can be said that in the entire world, the industry of banking is among the oldest (Goyal & Joshi, 2011). In United States of America, the earliest record of modern commercial banking industry had started in year 1782 in Philadelphia (Mishkin & Serletis, 2010). According to Mishkin and Serletis (2010), the Bank of North America had been a success which triggered other banks to operate in America. On the one hand, 1791 marked the charter of Bank of the United States. This bank had functioned as a private bank and at the same time, a central bank that had an obligation to the economy of the whole society. However, its charter expired in 1811 which had lead to the establishment of another bank in 1816. Such charter of the Second Bank of the United States came to end in 1836 as Andrew Jackson rejected its re – chartering. During the era of the first banks, it was the case that the bankers were extra watchful and so vigilant on to whom to lend the money. Likewise, the duration of lending really mattered for the bankers. Generally, short – term loans which were about a month to two months only were the ones approved. Meanwhile, the periods of 1832 to 1864 were the years of the existence of a lot of kinds of money. Because of this, the commerce was affected. A lot of banks did collapse due to the plague of counterfeiting. This particular event in the history had called for a standardized national currency in order to avoid the danger of counterfeiting. As a solution, National Bank Act of 1863 was passed and was revised in 1864 to set up a new system of national banks and at the same time, a government agency that would manage such new system. Fortunately, this new banking system was a success which had led to the creation of national currency (Mishkin & Serletis, 2010). However, the success of the new banking system was challenged during the years of 1930 to 1933, the period of Great Depression. In fact, it was a tragedy since there were some 9000 banks which had collapsed. The savings from the deposits had been slowly gone in which this incident had initiated panics to everyone in the country. In order to prevent such case to happen again in the future, the Federal Deposit Insurance Corporation (FDIC) was enacted in 1933. Likewise, there were other laws that were ratified to minimize the danger of such failure (Mishkin & Serletis, 2010). On the one hand, the period of 1970s up until now is the era of revolution in the banking industry. Due to the emergence of different technology, the banking industry has coped up with such innovations. Hence, the Americans way of banking has also changed. Now, Americans can obtain financial services through automatic teller machines (ATM), debit and credit cards, electronic banking, telephone banking and others. In fact, the rise of internet has also altered the banking processes (Mishkin & Serletis, 2010). b) The Role of the Banking Industry in the Social, Economic, and Political Setting of America Despite how the banking industry has evolved in so many ways throughout the years, the chief role it serves to the country has always remained the same. The central purpose it plays is to aid the economic life of each and every nation. Across the world, it can be noticed that how different banks operate is more or less the same like the process of how these banks obtain, utilize, as well as manage the capital resources in order to create profit out of these funds (Serrano, Oleson, Augros, Bazela and Benitez, 2010). The traditional role of banks is mainly to play its position in the financial system (Llewellyn, 1999). Specifically, the banking industry carries out a lot of functions. Ahumada and Fuentes (2004) stated that the central role of banks includes saving. In the same way, it helps the sharing out capitals to be used for investment (Ahumada & Fuentes, 2004). According to Llewellyn (1999), banks serve as a primary function of becoming intermediaries between the investors or the depositors as well as the borrowers in terms of finances. This makes the banking industry play a very significant role of allocating of funds. The macro – economic point of view suggests that the intermediary nature of banks causes such banks to be important in the circulation of fiscal policy (Ahumada & Fuentes, 2004). Ahumada and Fuentes (2004) did identify two significant channels in the transmission of fiscal policy. According to them, these channels are hinged on the particular role it plays in the banking sector (Ahumada & Fuentes, 2004). First is the traditional interest rate channel which functions only if there is an effect caused by the changes made by the central bank on the actual interest rates (Ahumada & Fuentes, 2004). The adjustments made by the central bank have consequences as well on the consumption and investment schemes (Ahumada & Fuentes, 2004). Nonetheless, it is important to note that this first channel will only function if the adjustments made in the monetary policy rate are passed on by the banks to their customers (Ahumada & Fuentes, 2004). On the one hand, the second channel is the credit channel which operates its role with the occurrence of some market imperfections (Ahumada & Fuentes, 2004). Such market imperfections are described by Ahumada and Fuentes (2004) as uneven or disproportionate information which brings on a reduction of the amount or extent of credit due to the restraining fiscal policy as imposed by the central bank. Likewise, the banking industry in this regard can be perceived as an institution that critically shares, manages as well as controls risk of the economic future flows (Ahumada & Fuentes, 2004; Llewellyn, 1999). Banks can be generally seen as asset transformers because its ways of accepting deposits and creating these assets in a different manner (Llewellyn, 1999). In this particular function, Ahumada and Fuentes (2004) said that the banks aid the changing the denomination, quality and also the maturity of these assets. On the one hand, Llewellyn (1999) also discussed the other nature of banking. As he suggested, the banking industry has also served a central role in payment system through acting as the most significant means within payment. This function of payment processing services is also agreed by Ahumada and Fuentes (2004). It is the case that this role of banking industry has even obtained importance even at the global scale (Ahumada & Fuentes, 2004). This is for the main reason of providing a much greater integrated financial services not only at the national level but also at the international level (Ahumada & Fuentes, 2004). For them, banks also functions a historical role of offering money changing services (Ahumada & Fuentes, 2004). Meanwhile, for Ahumada and Fuentes (2004), what is expected from a successful and efficient banking sector is that in the long run, it will aid an improved growth, development and welfare. Similarly, Ahumada and Fuentes (2004) proposed that a healthy and stable banking sector will eventually make even the business cycles. However, Llewellyn (1999) recognized the possible danger given the various roles being played by the banking industry. The solvent banks can happen to be bankrupt eventually assuming the potential harm of deposits and other increasing interests brought by the impacts of the banking systems and operations (Llewellyn, 1999). In this manner, within the realm of financial system, the banking industry has been traditionally considered special in its nature which needs an exhaustive and thorough control and management as compared to the other fiscal bodies of that sort (Llewellyn, 1999). c) The Domestic and International Ethics The financial institutions including the banking industry has a fundamental task of wealth creation through its ability to make the most out of its financial assets (Serrano, et al., 2010). In terms of banking and finance, however, it is important to understand what is meant by an ethical banking. However, it is often the case that the ‘neutrality rule’ is what usually applied by the lending committee or individual co – workers in times where there are no available guidelines on the ethical aspect of banking (de Clerk, 1999). However, given the financial value of money as well as its added values in terms of human, social and environmental, money can primarily influence individuals and their development (de Clerk, 1999). In this manner, de Clerk (1999) addressed the fact that there is no neutrality in terms of money, especially in the real world. It is unreliable to have an unbiased stance towards lending and so as investment (de Clerk, 1999).Meanwhile, Serrano et al. (2010) stated the bank’s management of money should be considered with such ethical consequences because of the fact that it is not their own money that they are dealing with but that of the investors. Hence, it cannot be denied that money can be used wrongly. According to Serrano et al. (2010), the argument that banks hold no moral responsibility over the others’ wrong – doing for the reason that it only function as an institution that finances and lends is not valid. It is the case that prior to the approval of lending of financial resources, banks have the power to authorize as well as support the borrowers’ realization of actions that comes along with their loan. (Serrano et al, 2010).Given this, likewise, banks have to be morally responsible in using the investors’ money. On the one hand, Serrano et al. (2010) discussed how banks engaged in operationally taking part in the wrong – doing of others. First is that the banks are involved in usurious practices. It is well – acknowledged that banks do take the full advantage of the investments. In this regard, it is logically acceptable for them to charge their clients interest rates based on their financing activities like loans. Nonetheless, it is the case that charging excessive interest rates, charging extremely profitable credits and having abusive commissions cause banks to be on the wrong side of having usurious practices. This is simply because they take full advantage of the situations of their customers while these clients are harmed from the said situation. Second is the unethical practice of speculative banking. The financial resources of the banks do not exclusively belong to them, in fact, these money belong to the individual as well as institutions that invest their money on the said bank. Given this, banks should be morally responsible on how they choose to manage these capitals. Hence, it is not ethically acceptable for the banks to be involved in a highly speculative and over dangerous investment practices. Third is the funding of arms, manufacturing as well as trade. There are a lot of banks that are enthusiastically involved in the funding the military industry to defend its population. However, it is important to note that the investing of money in arms and weapons is highly destructive because there are thousands of innocent civilians who can be victimized and get killed. Fourth is the immorally funding and supporting the totalitarian regimes. This is perceived to be an unethical practice because of the case that funding them may allow the money to be used by such totalitarian governments to empower their position in the government, to engage in corruption and to abuse human rights. Fifth is supporting the companies that have not much or no commitment at all to social responsibility. This practice of granting credit facilities is helping the companies to raise their capital to be used on socially irresponsible plans, especially in the case of companies in the third world nations where child labor is so much prevalent, the environment becomes so much polluted, and so on. Sixth is its ecological consequence that may be unethical. It is often the case that when lending money to the companies, what is often overlooked is the possible damage it can do to the environment. In this regard, financing of companies that would destruct the environment should not be an easy and trouble – free process. Hence, it is important to note that such environmental damage will further lead to harming the society as a whole. Seventh is when banks sponsor, donate and fund in contradiction to the advantage of family. Banks respect and value the institution of family and its family values. Given this, it is the case that banks must reject any initiative that can damage the family values in whatever manner it is. Last is the banking industry’s participation in social enterprise. Banks do have a very important role in the developing markets. However, banking industry must be much more concerned in getting active participation in developing the community in which the market operates rather than developing the said markets. These are only a few of how banks can avoid the morally unacceptable banking practices. d) Ecological and Natural Resources According to Ganzi and Huppman (no date), banks do not consider environmental conditions to be a significant concern to their business. Despite the fact that in this day and age, a lot of us do realize that the banking industry must also consider a lot of factors in their decision making processes like considering the ecological and natural resources, unfortunately, the banking industry is committed only in maximizing the profitability in every decision the banks make (Goyal & Joshi, 2011). Based on Jeucken’s (2001) study on environmental and annual reports of banks, he proposed that the role of banks must strongly be re – invented for the reason that half of the banks do have a self – protective, defensive and guilty position concerning the environmental problems. It is the case that majority of the banks do not realize what function they do to take part in sustainable development (Jeucken, 2001). On the one hand, in 2005, Sahu and Rejasekhar studied the relationship of bank credit and agricultural sector as well as the effects on agricultural financing due to the shutting down of rural banks. In their analysis of the data, Sahu and Rejasekhar (2005) found out that being oriented to profit maximization has caused the banks to disregard the provision of credit subsidy to the agricultural sector. Serrano et al. (2011) suggested that it is of importance for the banks to intently examine what the possible ecological damage can be made by their clients through their loans. Goyal and Joshi (2011) stated that it is a must for any bank to consider if the end – result of their decisions can harm the environment. Though banks do not directly cause the harm to the environment, the banks must also consider their position in the environmental consequences of such financing prior to approving any financing activity they will make (Serrano et al., 2011). To gain profit while situating the environment at its own expense is really one major ecological concern that banks must really consider (Goyal & Joshi, 2011). e) The Social Issues Faced by American Banking Industry The banking industry is not free from any issues, in particular, the social problems. As a matter of fact, given that this world we live in is a complex one, the impacts of the ethical and environmental issues are also linked with the social problems. According to SAS Institute Inc. (2010), banks are socially responsible to control and deal with the effects of their activities on the social world. This social management is two – fold. First, it is a must to lessen any negative effects that the banking activities are causing to the environment or if at all possible, to remove such negative consequences. Second, it is the case that the banks should also take positive actions that can aid the communities in which it operates. In helping the communities, banks can assist via fundraising activities, charitable giving, employment practices and the like. On the one hand, the banking industry is often socially criticized because their activities are not centered on social agendas like offering opportunities for the disadvantaged and investing in community (Benedikter, 2011). In the real world, banks are investing money to create profit out of it and not necessarily considering if such investments can benefit the society to a larger extent (Benedikter, 2011). In this regard, Benedikter (2011) differentiated what a social bank is from a mainstream bank. For him, a social bank has conscience which considers profit, people and planet all together in their principle whereas a mainstream bank, on the one hand, is just after the maximizing profit (Benedikter, 2011). This is basically how banks are criticized. They are disapproved of being so much thinking of profit without even considering the well – being of human and the condition of environment. The banking industries are confronted by a social issue of not considering social sustainability in their decision – making processes (Benedikter, 2011). After all, it is not just enough to consider investments and lending practices in terms of economic sustainability because in the long run, the human beings are the ones to suffer the consequences of such. In this regard, banks must be a social one which considers not only profit maximization but equally reflects on the impact of such decision on the people and the environment. Social banking must be promoted to criticize the practices of mainstream banking in order to satisfy the needs of economy while equally satisfying the needs of the society (Benedikter, 2011). It is not enough for banks to lend money to whomever but decide objectively for what purpose is the money will be used and what will be its effect in the long run, basically, it is about weighing the pros and cons (Benedikter, 2011). f) The Corporate Stakeholders Response to the Issues Confronting the American Banking Industry There are various ethical, environmental and social issues that confront the banking industry at present. As a matter of fact, the customers of banks have increased their awareness regarding the issues which challenge the banking industry. Given this, it is deemed indispensible for every bank to achieve sustainability, not only financially, but must be sustainable in terms of its social, ecological and ethical aspects (Goyal & Joshi, 2011). Meanwhile, it is the case that these banks also do recognize that they have to address such concerns. In this regard, what they consider to be the solution to such issues plaguing them is convert their mainstream banking practices to a more social one. Unlike the mainstream banks, a social bank is a bank that has conscience (Benedikter, 2011). Apart from considering how to maximize profit alone, banks must now consider in their decision making processes the greater benefit of the people as well as the planet (Benedikter, 2011). According to Goyal and Joshi (2011), the entire banking industry has responsibility, not only on the economy of the society, but must also be accountable in all aspects of society as a whole. In this regard, it is a must for the banks to always consider its social responsibility before having profit maximization at the top of everything. Hence, it is suggested by Goyal and Joshi (2011) that what must be regarded as the most significant measure to tell whether the lending practice is good or bad is the banks’ obligation for the entire society. That is to say, its social responsibility is of equal weight to its economic concern. To sum up, this is basically the corporate stakeholders’ response to the issues that challenge the banking industry. Banks must transform to a “cooperative banking” or “banking for social cohesion” (Goyal & Joshi, 2011). After all, it is long noted that the bank’s responsibility is not just serving for the economic needs of society but also extends to the whole community as a whole, including the government (Green, 1989). Likewise, according to SAS Institute Inc. (2010), the corporate stakeholders do acknowledge that it is a must for the banks to meet and conform to the sustainability policy that governs the banking industry. Hence, an effective corporate governance is required in the banking industry as well as the risk management (SAS Institute Inc,, 2010). As a response of some banks, an environmental and social risk management department is established to help the decision making processes of these banks (SAS Institute Inc,, 2010). Rating of the Banking Industry’s Overall Social Responsiveness and Its Accomplishment Areas The function that the banking industry serves to its people is undeniable. It aids individuals and institutions especially on economic needs. Banks can serve a purpose of saving money. At the same time, banks can serve a purpose of granting people’s financial needs like loans. In the critical evaluation of the banking industry in America, I can say that it has been doing well in adopting the technological innovations that take place today. Through coping up with the technological advancement, banking practices have been so easy for each and every one. For me, I can say that this is really one great accomplishment by the said industry. Such effortless and very convenient innovation by the banking industry is really of a great help among people. It is really of convenience because it saves resources like time. This aspect of the banking industry has only showed how open they are to accommodate the needs for convenience of the society. In addition to that, there are other elements against which the society can measure the social responsiveness of the banking institution. It is also of great significance to consider the direct as well as indirect consequences of the participation of banks in the developments in the society. It is the case that banks are generally after one thing which is on how they can create the greatest amount of revenue in whatever decisions they make. Having so driven by such profit maximization perspective, it is often the case that banks neglect that they are as well equally responsible to the environment and individuals. Given this, what are often overlooked are the impacts of their so much appetite for profit. The effects are manifold and intensify in the long run. For example, the environmental effects are the damages that the approval of loans creates. Banks have participation in the destruction of the ecosystem in which in the long run, it is also the human beings who will suffer. On the one hand, the people are also affected by the decision making processes they make. It is often the case that the money being lend by institutions are for setting up new businesses that kill the means of support of the disadvantaged individuals. In this regard, I give low ratings on the banking industry’s overall social responsiveness. This is because there are so many things that banks can be improved to be committed much more to the society and environment. The banks of today are more of a mainstream kind. What we need today are the kinds of social banks. Rating of Industry in Relation to the Core Values of Saint Leo University The Saint Leo University has core values of responsible stewardship, excellence and integrity. If based on the university’s core values, still, I give the banking industry a low rate. This is for the reason that the banking industry is so much centered on profit maximization even at the expense of the environment and the people. The first core value, responsible stewardship, appreciates greatly the resources that God has given us. Likewise, it demands for people to be resourceful and optimize the usage of such resources. On the sad note, being so driven with profit enables the banking industry to neglect its environmental responsibilities. As an effect of approving the financial demands of its clients that will be used for other purposes while damaging the environment, the banking industry, thus, partakes in the destruction of the resources that must be valued. On the one hand, the second core value, excellence, also contradicts some aspects of the banking industry. This is because not all of the stakeholders of the banks are morally responsible leaders. Like what is said previously, the banks do forget its moral obligations to the society and environment. Its last core value, integrity, also challenges the practices of banking industry for the reason that because of being so centered on profit, banks do disregard its promise of being equally responsible to the environment and the people. Conclusion In analyzing the American banking industry, it is undeniable how banks have been so functional to the lives of the people. However, on the sad note, there are some banking practices that are questionable in terms of its ethical, social and environmental aspects. That is because the banking industry partakes directly or for the large part, indirectly, to causing harm to people and the environment. Given this, there is a strong need for the banks to be ethically, socially and environmentally responsible too while working on their profit maximization principle. While in relation to the core values of Saint Leo University, it is the case that banks must strongly change their ways in order to care for the natural resources that our Creator has offered us, to be morally responsible, and also to be responsible to the people and environment. References Ahumada, L.A. & Fuentes, J.R. (2004). Banking industry and monetary policy. Central Bank of Chile Benedikter, R. (2011). Social banking and social finance. Springer. de Clerk, F. (1999). Ethical banking. Retrieved from http://www.social-banking.org/fileadmin/isb/Artikel_und_Studien/de_Clerck_Ethical_Banking.pdf Ganzi, J. & Huppman, R. (no date). Credit risk management: How the banking industry is integrating environmental & social issues: Is being green financially responsible? Retrieved from http://merage.uci.edu/~aigner/epa2006/papers/ganzi.pdf Green, C.F. (1989). Business ethics in banking. Journal of Business Ethics 8(8): 631-634. Goyal, K.A. & Joshi, V. (2011). A study of social and ethical issues in banking industry. International Journal of Economic Resources 2(5): 49 – 57. Jeucken, M. (2002). Banking and sustainability-slow starters are gaining pace. Ethical Corporation Magazine 11 p. 44–48 Llewellyn, D. (1999). The new economics of banking. Amsterdam: Société Universitaire Européenne de Recherches Financières Mishkin, F.S. & Serletis, A. (2010). The economics of money, banking and financial markets (4th Eds). Pearson Education Canada. SAS Institute Inc. (2010). Sustainable banking. SAS Institute Inc. Retrieved from http://www.sas.com/resources/whitepaper/wp_24356.pdf Serrano, R.S., Oleson, C., Augros, M., Bazela, M. and Benitez, M. (2010). Ethical issues facing banking industry. Fidelis International Institute. Retrieved from www.fidelisinstitute.org/.../ethical.issues.pdf  Sahu, G.B. & Rajasekhar, D. (2005). Banking sector reform and credit flow to Indian agriculture. Economic and Political Weekly 40(53): 5550-5559. Read More