Journal of Business Ethics

, Volume 136, Issue 3, pp 471–480 | Cite as

Reassessing the Ethicality of Some Common Financial Practices

  • Philipp Bagus
  • Amadeus Gabriel
  • David Howden


Depositors have perceived banks as acting unethically during the most recent recession. One area of consternation is the ambiguity of the legal obligations entailed by the deposit contract when it is backed with only fractional reserves. In this article, we apply an existing analysis of the legitimacy and ethicality of banking practices to a wider range of financial transactions, including insurance policies, securities lending, perpetual bonds, and callable loans. Securities lending in particular creates rights violations analogous to those in fractional-reserve banking. Both callable loans and perpetual bonds have clear legal obligations which are not inherently problematic, though we herein clarify what these obligations are. Finally, we apply our ethical framework to demonstrate that insurance products are distinct from banking deposit contracts, and that perceived parallels between the two products underestimate these differences.


Insurance Banking Fractional reserves Callable loans Perpetual bonds Callable loans 


  1. Bagus, P., & Howden, D. (2009). The legitimacy of loan maturity mismatching: A risky, but not fraudulent, undertaking. The Journal of Business Ethics, 90(3), 399–406.CrossRefGoogle Scholar
  2. Bagus, P., & Howden, D. (2012a). Still unanswered quibbles with fractional reserve free banking. Review of Austrian Economics, 25(2), 159–171.CrossRefGoogle Scholar
  3. Bagus, P., & Howden, D. (2012b). The continuing continuum problem and future goods. The Journal of Business Ethics, 106(3), 295–300.CrossRefGoogle Scholar
  4. Bagus, P., & Howden, D. (2013). Some Ethical dilemmas of modern banking. Business Ethics: A European Review, 22(3), 235–245.CrossRefGoogle Scholar
  5. Bagus, P., Howden, D., & Gabriel, A. (2014). Oil and water do not mix, or: aliud est credere, aliud deponere. The Journal of Business Ethics, 90, 399–406.CrossRefGoogle Scholar
  6. Boatright, J. R. (2014). Ethics in finance. Oxford: Wiley Blackwell.Google Scholar
  7. Bodie, ZVI, Kane, A., & Marcus, A. J. ([1992] 2010). Essentials of investment (8th ed.). New York: McGraw-Hill.Google Scholar
  8. Brealey, R. A., & Meyers, S. C. (2003). Principles of corporate finance (7th ed.). New York: McGraw Hill.Google Scholar
  9. Checkland, S. G. (1975). Scottish banking: A history, 1695–1973. Glasgow: Collins.Google Scholar
  10. Cowton, C. J. (2002). Integrity, responsibility and affinity: Three aspects of ethics in banking. Business Ethics: A European Review, 11(4), 393–400.CrossRefGoogle Scholar
  11. Evans, A. J. (2014). In defense of ´demand deposits´: Contractual solutions to the Barnett and Block, Bagus and Howden debate. Journal of Business Ethics, 124(2), 351–364.CrossRefGoogle Scholar
  12. Green, C. F. (1989). Business ethics in banking. Journal of Business Ethics, 8(8), 631–634.CrossRefGoogle Scholar
  13. Hoppe, H.-H., Hülsmann, J. G., & Block, W. (1998). Against fiduciary media. The Quarterly Journal of Austrian Economics, 1(1), 19–50.CrossRefGoogle Scholar
  14. Howden, D. (2014). A pre-history of the federal reserve. In D. Howden & J. T. Salerno (Eds.), The fed at one hundred: A critical Review of the Federal Reserve System (pp. 9–21). London and New York: Springer.Google Scholar
  15. Huerta de Soto, J. ([2006] 2009). Money, bank credit and economic cycles. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  16. Köhler, M. (2013). Hume’s Dilemma—oder: Was ist Geld? Geldschöpfung der Banken als Vermögensrechtsverletzung. In G. Freund, U. Murmann, R. Bloy, & W. Perron (Eds.), Grundlagen und Dogmatik des gesamten Strafrechtssystems (pp. 878–923)., Festschrift für Wolfgang Frisch zum 70. Geburtstag Berlin: Duncker & Humblot.Google Scholar
  17. Koslowski, P. (2012). The ethics of banking: Conclusions from the financial crisis, (trans.) Deborah Shannon. New York: Springer.Google Scholar
  18. Mills, T. C., & Wood, G. (2011). Two-and-a-half centuries of British interest rates, monetary regimes and inflation. In G. Wood, T. Mills, & N. Crafts (Eds.), Monetary and banking history: Essays in honour of forrest Capie (pp. 158–177). New York: Routledge.Google Scholar
  19. Paulet, E. (2011). Banking ethics. Corporate Governance, 11(3), 293–300.CrossRefGoogle Scholar
  20. von Ludwig, M. (1971). The theory of money and credit (H. E. Batson, Trans.). Irvington-on-Hudson, NY: Foundation for Economic Education.Google Scholar
  21. von Ludwig, M. ([1949] 1998). Human Action: A Treatise on Economics. Auburn, AL: Ludwig von Mises Institute.Google Scholar
  22. White, L.. H. (2007). Huerta de Soto’s case against fractional reserves. Free Market News Network, 8th January 2007. Retrieved 21 May 2014, from

Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.Department of Applied Economics IUniversidad Rey Juan CarlosMadridSpain
  2. 2.Department of Finance and EconomicsGroupe Sup de Co La RochelleLa Rochelle, Cedex 1France
  3. 3.Department of Business and EconomicsSt. Louis University – Madrid CampusMadridSpain

Personalised recommendations