Sustainable Finance Cristina Rovera Ethics in Banking Is It Possible? Sustainable Finance SeriesEditors Karen Wendt, CEO. Eccos Impact GmbH, President of SwissFinTechLadies, PresidentSustainable-Finance,Cham,Zug,Switzerland MargaretheRammerstorfer,ProfessorforEnergyFinanceandInvestments,Institute forFinance,BankingandInsuranceWUVienna,Vienna,Austria SustainableFinanceisaconciseandauthoritativereferenceserieslinkingresearch andpractice.Itprovidesreliableconceptsandresearchfindingsintheevergrowing fieldofsustainableinvestingandfinance,SDGeconomicsandLeadershipwiththe declared commitment to present the theories, methods, tools and investment approaches that can fulfil the United Nations Sustainable Development Goals and theParisAgreementCOP21/22alongsidewithde-riskingassetsandcreatingtriple purposesolutionsthat ensuretheparity ofprofit,people andplanet throughchoice architecturepassionandperformance.Theseriesaddressesmarketfailure,systemic risk and reinvents portfolio theory, portfolio engineering as well as behavioural finance, financial mediation, product innovation, shared values, community build- ing,businessstrategyandinnovation,exponentialtechandcreationofsocialcapital. Sustainable Finance and SDG Economics series helps to understand keynotes on international guidelines, guiding accounting and accountability principles, prototypingnewdevelopmentsintriplebottomlineinvesting,costbenefitanalysis, integratedfinancialfirstplusimpactfirstconceptsandimpactmeasurement.Going beyond adjacent fields (like accounting, marketing, strategy, risk management) it integratestheconceptofpsychology,innovation,exponentialtech,choicearchitec- ture,alternative economics,blueeconomysharedvalues,professionsofthefuture, leadership,human andcommunitydevelopment,team culture, impact,quantitative and qualitative measurement, Harvard Negotiation, mediation and complementary currency design using exponential tech and ledger technology. Books in the series contain latest findings from research, concepts for implementation, as well as best practicesandcasestudiesforthefinanceindustry. Cristina Rovera Ethics in Banking Is It Possible? CristinaRovera SchoolofManagementandEconomy UniversityofTurin Turin,Italy ISSN2522-8285 ISSN2522-8293 (electronic) SustainableFinance ISBN978-3-031-22147-7 ISBN978-3-031-22148-4 (eBook) https://doi.org/10.1007/978-3-031-22148-4 ©TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNatureSwitzerland AG2022 Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether thewholeorpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseof illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similarordissimilarmethodologynowknownorhereafterdeveloped. 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ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland To Rebecca, Carlo, Benedetta and Giulio I wish You the Best, in a better world Contents 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2 EthicsinFinance:Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 TheResearchAim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.3 TheHistoricalOrigins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.4 TheNeedforEthicsinFinance. . . . . . . . . . . . . . . . . . . . . . . . . 15 2.5 TheEthicalBank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.5.1 Aristotle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.5.2 ImmanuelKant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.5.3 JohnStuartMill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.6 WhatAbouttheItalianbanks?. . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.6.1 MAGs.. . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . . .. . 27 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3 TheESGWorld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.1 TheHistoryofBancaEtica. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.2 TheGoalsofBancaEtica. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 3.3 BancaEtica’sOperations. . . . . . . . . . . .. . . . . . . . . . . . . . . .. . 31 3.4 EticaSgr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.5 TheHistoryofESGFunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.6 ESGCriteria:WhereEthicalFundsInvest. . . . . . . . . . . . . . . . . 35 3.7 TheOperationofESGFunds. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.7.1 Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.7.2 Screening. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.7.3 EthicalAdvisors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3.7.4 EthicalIndex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.8 GlobalMarketValues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 vii viii Contents 3.9 TheItalianCase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.10 CriticismofESGFunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4 TheFightAgainstMoneyLaunderingandTaxEvasion. . . . . . . . . . 55 4.1 MoneyLaundering:HistoryandDevelopmentStages. . . . . . . . . 55 4.2 Anti-moneyLaunderingLegislation. . . . . . . . . . . . . . . . . . . . . . 56 4.3 ItalianAnti-moneyLaunderingLegislation. . . . . . . . . . . . . . . . . 57 4.3.1 PassiveCollaboration. . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4.3.2 ActiveCollaboration. . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.3.3 TheLimittotheCirculationofCash. . . . . . . . . . . . . . . . 64 4.3.4 NewRegulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 4.4 TaxEvasion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.4.1 TaxHavens:TheLuxLeaksandPanamaPapersCases. . . 68 4.4.2 Whistle-blowers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.5 TheFightAgainstTaxEvasion:TheTAXECommission. . . . .. 77 4.6 InternationalMarketValues. . . . . . . . . . . . . . . . .. . . . . . . . . . . 79 4.7 FiguresinItaly. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 5 TheFightAgainstUsury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 5.1 Usury:DefinitionandLegislation. . . . . . . . . . . . . . . . . . . . . . . 89 5.2 WhentoBeAfraidofUsury:TheCreditTrend. . . . . . . . . . . . . 90 5.3 TheThresholdRate. .. . . . .. . . . . .. . . . .. . . . .. . . . .. . . . .. 94 5.3.1 OER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 5.3.2 Objections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.4 Anti-usuryFunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.4.1 TheSolidarityFund. . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.4.2 ThePreventionFund. . . . . . . . . . . . . . . . . . . . . . . . . . . 102 5.5 TheItalianData. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 5.5.1 AccesstothePreventionFund. . . . . . . . . . . . . . . . . . . . 105 5.5.2 FundAllocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 5.5.3 TheMonitoringofContributionsDisbursed. . . . . . . . . . . 112 5.5.4 RegulatoryInnovations. . . . . . . . . . . . . . . . . . . . . . . . . 113 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 6 IslamicFinanceandMicrocredit. . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 6.1 Microcredit:HistoryandCharacteristics. . . . . . . . . . . . . . . . . . . 115 6.2 TheGrameenBank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 6.3 ReflectionsandCriticism. . . . .. . . . . . . .. . . . . . . .. . . . . . . .. 118 6.4 MicrocreditinItaly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 6.5 IslamicFinance:HistoryandBasicPrinciples. . . . . . . . . . . . . . . 120 6.6 TheIslamicBank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 6.6.1 Funding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 6.6.2 TheUseofFunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Contents ix 6.7 IslamicSecurities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 6.8 IslamicInsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 6.9 IslamicMicrocredit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 6.10 DataonIslamicFinance:IntheWorldandinItaly. . . . . . . . . . . 132 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 7 TheRescueofBanksinCrisis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 7.1 LiteratureontheBankingCrises. . . . . . . . . . . . . . . . . . . . . . . . 137 7.2 TheHistoryofBankingInstabilityinItaly. . . . . . . . . . . . . . . . . 138 7.2.1 MoreRecentHistory. . . . . . . . . . . . . . . . . . . . . . . . . . . 140 7.3 BalanceSheetFigures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 7.4 TheRescueInstruments:TheBail-OutandtheBail-In. . . . . . .. 157 7.4.1 TheNewSolution:TheBail-Over. . . . . . . . . . . . . . . . . . 159 7.5 BadBanks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 7.6 FinalConsiderations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 8 FinancialFrauds:IsItalyDifferent?. . . . . . . . . . . . . . . . . . . . . . . . . 167 PauldeSury References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 9 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Chapter 1 Introduction Ethicsandthefinancialsystem.Thisassociationhasbeennaggingatmymindfora longtime.Isitpossible?Isitrealisticallyimaginable? I remember travelling to Pakistan in 2012. On my own. My goal? To reach the base camp of K2, the Italians’ 8000-metre peak. On my way out of Islamabad by bus,enroutetoSkardu(fromwherewethensetoffforAskoli,thelastvillagebefore enteringtheCentralKarakorumNationalPark,accessiblebyjeep),IsawaBankof America sign. They had drawn two big red lines across it. They had sort of crucifiedit. Pakistan—as I’m sure you know—is the cradle of the Taleban. In Europa, AustraliaoranyUSstate,youwouldhavesimplythoughtthatabranchhadclosed. Possiblybecauseithadbeenphysicallymovedtwostreetsaway.ButnotinPakistan. In Pakistan, things are different. Unfortunately, there is such a thing as religious radicalism.YetinIslamabad—inadditiontothebeautifulFayṣalmosque—thereis alsoaCatholicchurchandthereare22parishesthroughoutnorthernPakistan.Yetit isnaturaltothinkthatitwasthecontrastbetweenWesternthinking—moreoriented towards the law of money—and the local culture, steeped in the Muslim religion, which rests on the Shari'ah, an ethical code of conduct, that caused the Bank of Americabranchtoclose. Thisisbywayofexample. Let’s go back to where we started. Can there be ethics in the financial system? Thefinancialsystemasweunderstandit,asalawaimedfirstandforemostatmaking a profit. The issue goes back centuries, having already been addressed by scholars and philosophers such as Aristotle or Kant, but also by some of the most famous economistsinhistorysuchasSmith,Mill,ParetoandKeynes,whoallreflectedon collectiveandindividualutility. As a student of traditional economics, since high school I have been taught the laws of risk and return, profit optimisation and maximisation of personal utility. WhileIamawarethatthetheoryofhomooeconomicus(whoknowseverythingand makesrationaldecisions)isasimplification,subsequentcontemporaryeventsmade me realise how important human psychology is in determining choices. Whatever ©TheAuthor(s),underexclusivelicensetoSpringerNatureSwitzerlandAG2022 1 C.Rovera,EthicsinBanking,SustainableFinance, https://doi.org/10.1007/978-3-031-22148-4_1