This paper applies a three-value analytical framework — legal, ethical, and social responsibility — to the assessment of banking fees in the United States. It traces the legal history of banking fee regulation from the National Bank Act of 1864 through landmark Supreme Court decisions and major congressional legislation. The ethical sections evaluate banking fees under utilitarian analysis, Kantian categorical imperatives, and Aristotelian virtue ethics, identifying which stakeholder groups benefit or are harmed. The social responsibility section contrasts Milton Friedman's profit-centered view with McWilliams and Siegel's broader societal conception, ultimately advocating a balanced, case-by-case approach. The paper concludes that the government, banking industry, and consumers each bear distinct but interdependent duties to maintain a financially healthy banking system.
The purpose of this paper is to analyze the "three value" framework — encompassing legal, ethical, and social responsibilities — as it relates to the assessment of banking fees in the United States. Banking fees are a phenomenon that, if left unregulated, may result in a significant accumulation of consumer debt in any given year. These fees can take the form of maintenance fees, overdraft fees, interest rates, and service charges on accounts and loans. The cumulative effect of banking fees is that the banking industry generates substantial revenue from them. This dynamic is significant because consumers must utilize banking services while banks must generate revenue to remain viable. Many argue that the assessment of fees by banks is unethical; however, the opposing view holds that fee assessment is not only moral but necessary. Outside of this debate, most observers agree that each segment of the banking industry holds some responsibility — whether legal, ethical, or social — for the system's successful functioning.
Historically, banking fees have existed for hundreds of years, but their assessment has been closely scrutinized. Prior to 1978, national banks were prohibited from charging interest rates exceeding state law limits (Steiner 2007). However, the 1978 Supreme Court decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. gave banks greater discretion regarding the fees they could charge. That decision ignited a trend toward deregulation, and legislation soon followed continuing this liberal approach (Steiner 2007). In 1996, the Supreme Court decided Smiley v. Citibank and ruled that a bank could charge fees to a credit card holder regardless of whether that person lived in the bank's home state (Steiner 2007). This decision resulted in an explosion of credit card interest rates and fees across the banking industry. Until President Obama signed the Credit Card Reform Act of 2009 into law, banking fees had generally been free from significant regulation. In the midst of the nation's foreclosure and mortgage crisis, serious questions arise: Was it the responsibility of the government to impose stricter regulations on the banking and mortgage industry? Was it the responsibility of lenders to use greater discretion in extending credit? Or was it the responsibility of consumers to exercise more financial restraint? Clearly, all three parties owed a duty to the system.
Prior to 1978, banking fees were subject to limited federal oversight. Nevertheless, the government has over the years demonstrated legal responsibility toward regulating the banking industry. Each of the three branches of the federal government — Congress, the Courts, and the President — has taken significant steps in shaping banking law, though the new laws have not always produced beneficial effects for the industry as a whole.
The Supreme Court decided Marquette National Bank of Minneapolis v. First of Omaha Service Corp. based on a historically significant piece of banking legislation: the National Bank Act of 1864. The goal of the National Bank Act was to encourage state banks to nationalize. The Court relied on Section 85 of the Act as the foundation for its ruling permitting banks to charge fees nationwide. The text of Section 85 reads: "Any association may take, receive, reserve, and charge on any loan or discount made or upon any notes, debts, or bills of exchange interest at the rate allowed by the laws of the state, district, or territory where the bank is located."
The Court interpreted the Act to grant the state in which the bank is located — rather than the state where the consumer resides — the authority to set permissible fee rates. This liberal interpretation was the beginning of the deregulatory banking fee movement that still affords banks broad discretion regarding what fees to charge today.
Another significant piece of legislation was the Banking Act of 1933, signed into law by President Roosevelt. Its goal was to restore public confidence in the banking system following the Great Depression, during which severe bank closures had resulted in millions of dollars lost by consumers and a nationwide shortage of currency (FDIC 2010). Although the Banking Act initially achieved its aims, within a few years the number of failed FDIC-member banks had increased once again (FDIC 2010).
The next major development occurred in 1968, when Congress chartered the Federal National Mortgage Association (Fannie Mae) to assist low-, moderate-, and middle-income families in purchasing homes (FDIC 2010). Fannie Mae's sister organization, Freddie Mac, was created by Congress in 1970 to provide capital for financing U.S. housing. Congress continued legislating in this space with the Home Mortgage Disclosure Act of 1975 (HMDA), which required banks and savings-and-loan institutions to lend money in low-income areas and to document their lending practices (FDIC 2010). The Community Reinvestment Act of 1977 pursued similar goals of ensuring financing for lower-income families, and also made it mandatory for the FDIC to monitor non-member state banks for compliance (FDIC 2010). This was a controversial move because it subjected state banks to federal oversight, limiting state discretion in lending practices. Finally, following the First of Omaha decision, Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980, which raised the ceiling on interest and fees that consumers could be charged — a change that had extremely negative effects on consumer debt and bankruptcy rates. The question that remains is whether the legal responsibility demonstrated by the government toward the banking industry has ultimately served the interests of consumers. Given the effects of 1980s deregulation still visible in the current economy, one is compelled to ask whether those legislative acts were themselves ethical.
Ethics as a branch of philosophy is defined as: (1) "a set of principles of right conduct," (2) "a theory or system of moral values," and (3) "the study of the general principles of morals and of specific moral choices" (American Heritage 1993). Ethics is concerned with the moral rightness and wrongness of particular conduct. Under the utilitarian model, an action that does not appear immoral at the outset may nonetheless be judged as wrong if its outcomes are harmful, and vice versa.
According to Cavico and Mujtaba, utilitarianism refers to a systematic theory of moral philosophy developed by the British philosopher Jeremy Bentham and further elaborated by John Stuart Mill (Cavico and Mujtaba 2005). Utilitarianism determines morality by focusing on the consequences of actions. Actions are not inherently good or bad; they are judged right or wrong solely by the consequences they produce (Cavico and Mujtaba 2005). Utilitarianism is systematic in its approach and accounts for all affected parties and the consequences they experience as a result of the actions in question. It measures and weighs the good against the bad to determine morality: if the good consequences outweigh the bad, the action is moral; if the bad consequences outweigh the good, the action is immoral (Cavico and Mujtaba 2005). Importantly, utilitarianism treats all people as equal — no single person's happiness, pleasure, or pain is accorded greater weight than another's.
A brief summary of how the utilitarian analysis of banking fees proceeds is as follows. The action to be evaluated is the imposition of banking fees by the banking industry. Stakeholders — those directly and indirectly affected by banking fees — are then identified. Those directly affected include society as a whole, the banking industry, bank employees at both the management and industry levels, bank consumers, and the federal government. Those indirectly affected include minors under the age of 18, non-consumers (those without credit), and businesses of all types.
For each stakeholder group, the good consequences (pleasures) and bad consequences (pains) of banking fees are identified and assigned numerical values. Positive values are assigned to good consequences and negative values to bad ones. If the sum of positive values exceeds the sum of negative values for a given group, the action is moral for that group; if the reverse is true, the action is immoral.
The following summarizes the consequence analysis and moral determination for each stakeholder group:
Society as a Whole (Directly Affected): Good consequence — banking fees produce more revenue for the broader economy (value: +5). Bad consequence — fees put society at risk of recession through default (value: -1). Result: Moral.
Banking Industry as a Whole (Directly Affected): Good consequence — more revenue is generated for the industry (value: +5). Bad consequence — risk of default reduces revenue and puts jobs at risk (value: -2). Result: Moral.
Employees of the Bank as a Whole (Directly Affected): Good consequence — more revenue benefits bank employees (value: +5). Bad consequence — risk of default reduces revenue (value: -1). Result: Moral.
Management-Level Bank Employees (Directly Affected): Good consequence — higher revenue equals higher salaries (value: +5). Bad consequences — default increases the risk of layoff (-2) and reduces work conditions such as fewer staff on duty (-2). Result: Moral.
Industry-Level Employees (Directly Affected): Good consequence — fees increase job security (value: +5). Bad consequences — default increases risk of layoff (-2) and reduces work conditions (-2). Result: Moral.
Bank Consumers as a Whole (Directly Affected): Good consequences — increased funding, services, and facilities (value: +5). Bad consequences — consumers are at risk of being defrauded, of default, homelessness, or damaged credit (value: -1 through the lens of broad societal risk, but the bad consequences dominate when consumer-specific harms are considered). Result: Immoral.
The Federal Government as a Whole (Directly Affected): Good consequence — fees increase the flow of currency (value: +5). Bad consequence — risk of default affects jobs and the housing market (value: -2). Result: Moral.
Minors Under the Age of 18 (Indirectly Affected): Good consequence — high payment ratios can lead to a healthier economy, increasing educational resources (value: +5). Bad consequences — high default rates adversely affect the economy, increase the risk of homelessness for the minor's family, and can reduce educational resources (values: -1 through -3 cumulatively dominate). Result: Immoral.
Non-Consumers (Indirectly Affected): Good consequence — a successful fee-paying system may lead to greater leniency in credit extension (value: +3). Bad consequence — default decreases the likelihood of obtaining credit (value: -4). Result: Immoral.
Businesses (Indirectly Affected): Good consequence — fees can result in more consumer spending and business activity (value: +5). Bad consequence — default leads to damaged credit and reduced consumer spending (value: -4). Result: Moral.
Of the ten groups analyzed under the utilitarian model, banking fees are found to be moral for seven groups — society as a whole, the banking industry, bank employees as a whole, management-level bank employees, industry-level employees, the federal government, and businesses — and immoral for three groups: bank consumers as a whole, minors under the age of 18, and non-consumers. The findings of morality generally relate to the revenue generation, job stability, and economic health that banking fees produce. The findings of immorality relate to the risks of fraud or excessive fees, default, and the adverse lingering effects on vulnerable groups who depend on or are excluded from the credit system.
"Categorical imperative applied to banking fee assessment"
"Virtue ethics and character as basis for fair fee conduct"
"Friedman vs. broader social responsibility in banking context"
McWilliams and Siegel define social responsibility more broadly as "actions that appear to further some social good, beyond the interests of the firm and that which is required by law" (McWilliams and Siegel 2001). Under this approach, a bank that charges interest rates at the maximum rate permitted by law is not operating under a principle of social responsibility. What would be required is for the bank to offer a rate below the legal maximum, for example. This broader conception of social responsibility shifts the focus outward — toward consumers and society in general — rather than centering it on the organization's own revenue.
The dilemma is obvious: which view would keep a bank financially viable while simultaneously demonstrating responsibility to society? Banking fees today are assessed frequently and tend to increase regularly. In light of the mortgage crisis and the Making Homes Affordable program's requirement that a homeowner's mortgage debt be limited to 31% or less of income, social responsibility under the McWilliams and Siegel approach would require banks to strive to offer homeowners terms below that 31% threshold. The Friedman approach, by contrast, would encourage the bank to use discretion in maximizing revenue. A balanced approach would fall somewhere in the middle, suggesting that banks review each case individually and offer incentives to the consumer accordingly. Such a middle-of-the-road approach to corporate social responsibility would require banks to be neither excessively company-centered nor excessively consumer-centered in their fee assessment. Either extreme can ultimately become counterproductive: fees that are too high increase the risk of consumer default, while fees set too low cause the bank to forgo opportunities to generate necessary revenue.
The major conclusions under the three-value framework as it relates to banking fees in the U.S. concern legal responsibility, moral responsibility, and social responsibility. It is the duty of all parties involved — the government, the banks, and the consumer — to ensure that the banking system remains financially healthy. What is required is a system of laws that regulate the industry and place fair limitations on what fees can be assessed and for what purpose.
The current government has taken strides in this area, but in light of the ongoing economic and housing crisis there is still much reform to be achieved. Once the appropriate laws are in place, it is the responsibility of the banking industry to adhere to them. By adopting a balanced approach to social responsibility, banks can sustain their financial stability without placing unreasonable demands on consumers. Finally, the consumer's role carries both a social and ethical duty: to meet her obligations in a timely fashion and not to enter into obligations she knows she is unable to fulfill. A balanced integration of legal, moral, and social responsibilities as they relate to banking fees will result in improvement to the current crisis the U.S. faces — it will not happen overnight, but with dedication to change, it will happen in time.
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