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78 Amicus Curiae 24 (2009)
Corporate Social Responsibility and Banks

handle is hein.journals/amcrae78 and id is 26 raw text is: Corporate social responsibility and banks by Charles Chatterjee and Anna Lefcovitch INTRODUCTION The current turmoil in capital markets has affected a large number of economies, as well as the financial lives of individuals. Whereas sympathy has been shown from some quarters to losses on the markets, others have voiced their outrage - primarily on the grounds that the collapse of capital markets could have been avoided or was occasioned by the greed of a limited few. Whatever may have been the case, the fact remains that the financial lifeline of societies has been adversely affected by factors to which the affected entities or individuals did not contribute. Bank failures usually take place due to bad risk-based investments. Risks are often perception-based; often a value judgment. The incidence of risks may be minimised or calculated in an optimistic fashion when driven by the perception of high profit-making, which has a blinding effect. In this process, the selfish interest of an entity or individual dominates and the best interest of the general public is relegated to a secondary position. Given the very long existence of a successful banking system in the UK, it would be fair to maintain that bank failures in the UK are a rather rare phenomenon. But, then, why did Northern Rock and Halifax or HBOS fail, or alternatively why was the government required to nationalise Northern Rock, albeit hopefully for a short period of time? The market failure was due to multifarious reasons, one of which may be described as a link factor with the US market, the operation of which is based on a different risk culture. The question remains whether the UK banks should have followed the US banks' lending policy, particularly in regard to sub-prime lending. Do capital markets have any social responsibility? Is it ethical for capital markets to be engaged in gambles at the cost of societal upheavals? The primary objective of this article is to discuss the issues raised in the preceding paragraphs. THE SCENARIO During the latter part of the 1990s and the early part of the twenty first century the major financial markets looked rosy, and ordinary people, particularly those with no knowledge of financial risks, took advantage of the privileges and facilities that the banks and other finance houses offered. Credit cards, bank loans and a variety of other credit sources became readily available. Finance houses offering such facilities made a fortune; the beneficiaries of loans and credits became overloaded with debts. In many cases the burden of debts proved to be unmanageable. The sub-prime mortgage technique, which originated in the US and the wave from which struck British shores, was also principally based on what is known as the self- certification of income system. Everybody would be lured by this attractive offer, especially when the property markets became buoyant and many people lacked the financial capacity to purchase property under the existing system, which was linked to their income. Thus, all such lending was allowed with the consequence that people would, in the course of time, find it difficult to meet their mortgage liabilities; the risks must have been foreseen by the lenders and yet lending was still allowed. During the late nineties, credit cards were made available to almost everyone, but in most cases the risks were not properly studied, and only credit checks were carried out. The purchasing power of people rose; consumerism spiralled, but in many cases cardholders could not meet their monthly payments. In England, many started paying off their monthly mortgage instalments with credit cards. The credit crunch was in a way a self-induced crunch occasioned by lenders. In the meantime, with house prices decreasing negative equity beckoned for many if the downward price spiral was not halted. Lenders faced the option of going for repossession, and possibly not recovering their money from proceeds of sale, or holding on until the property market improved. One problem with the second option is that if interest rates are raised there will be fewer demands for property and the market will be depressed. It must be emphasised that the economy is very property-based, and all these changes directly affect the ordinary man. Amicus Curiae Isue 78 Summer 2009

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