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Ethics, capital and talent competition in banking

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  • Song, Fenghua
  • Thakor, Anjan
Abstract
We model optimal ethical standards, capital requirements and talent allocation in banking. Banks with varying safety-net protections, including depositories and shadow banks, innovate products and compete for talent. Managers dislike unethical behavior, but banks heed it only because detection imposes costs. We find: (i) higher capital induces higher ethical standards, but socially optimal capital requirements may tolerate some unethical behavior; (ii) managerial ethics fails to raise banks’ ethical standards; (iii) banks with lower ethical standards attract better talent and innovate more; and (iv) it is socially optimal to allocate better talent to shadow banks instead of depositories, and this allocation results in higher capital requirements and ethical standards for depositories. Consequently, with capital capacity constraints, the shadow banking sector is larger than the depository sector; talent competition induces a race to the bottom in ethical standards, and the regulator responds by setting capital requirements to magnify this size difference.

Suggested Citation

  • Song, Fenghua & Thakor, Anjan, 2022. "Ethics, capital and talent competition in banking," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:jfinin:v:52:y:2022:i:c:s104295732200016x
    DOI: 10.1016/j.jfi.2022.100963
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    1. Sergey A. Vasiliev & Irina A. Nikonova & Olga S. Miroshnichenko, 2022. "Banks, Financial Platforms and Big Data: Development Trends and Regulation Directions," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 5, pages 105-119, October.
    2. Song, Fenghua & Thakor, Anjan & Quinn, Robert, 2023. "Purpose, profit and social pressure," Journal of Financial Intermediation, Elsevier, vol. 55(C).

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    More about this item

    Keywords

    Ethics; Bank capital; Talent; Financial innovation;
    All these keywords.

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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