This paper argues that some of the major theories in current business ethics fail to provide an adequate account of moral responsibility for the creation of systemic financial risk. Using the trading of credit default swaps (CDS) during the 2008 financial crisis as a case study, I will formulate three challenges that these theories must address: the problem of risk imposition, the problem of unstructured collective harm and the problem of limited knowledge. These challenges will be used to work out key shortcomings of stakeholder approaches and Integrative Social Contracts Theory. I will argue that pluralist connection models used in political theory can help to overcome these shortcomings. Adopting an approach based on these models shows that financial institutions incur obligations in five main areas: managing their own risk profile; remedying some of the harms caused by financial crises; supporting the development of better epistemic methods; curbing the transmission and amplification of initial losses; and instigating structural reforms.
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Although this claim cannot be proven in the present paper, other causes of systemic risk display similar morally relevant pattern to the use of CDS (cf. Schinasi 2009, p. 344). A more detailed discussion of moral responsibility focusing on the specific problem of risky mortgages can be found in Linarelli (2017), part 1.
The author thanks an anonymous reviewer for pointing out the latent risk that CDS can create even when there is no ongoing financial crisis.
To be sure, the business operations of a limited number of financial firms do make a perceptible difference, even taken in isolation. Parfit’s torturer example should be read as illustrating a limiting case, rather than a perfect analogy for systemic risk creation. However, embracing a theory of moral responsibility which relies on the Individual Difference Principle and does not account for Parfit’s challenge would leave much of systemic financial risk unaccounted for.
On how CDS were designed to avoid both taxation as an insurance and as a wager cf. Kay (2015, p. 119).
Hsieh’s and Wettstein’s theories provide excellent starting points for addressing the problem of systemic risk. However, Hsieh’s theory would need to be reworked because it focuses on the reform of political institutions. For the reasons mentioned above, political reform alone does not suffice. Wettstein’s proposal is not readily applicable either. Its focus on human rights violations is too narrow. Systemic risk may entail human rights breaches; yet, much of the harm it produces does not fall under this category. For example, there is no human right not to be made to pay for twelve-figure bailouts or lose a particular job. Additionally, it is important to account for instances of reckless ignorance, e.g. failures to challenge unreasonable risk management practices critically. Bearing the social context in mind, finance professionals must be held accountable for what they know.
Cf. the title of Sect. 7, p. 250, of James (2017).
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The author would like to thank Joe Mazor, Lisa Herzog, Mike Otsuka, Jason Alexander, Bastian Lux, Nico Schröter and the reviewers for their helpful comments and suggestions.
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Moggia, J. Moral Responsibility for Systemic Financial Risk. J Bus Ethics 169, 461–473 (2021). https://doi.org/10.1007/s10551-019-04288-4
- Ethics in finance
- Risk ethics
- Ethics of responsibility
- Systemic harms
- Stakeholder theory
- Integrative Social Contracts Theory