We must resist calls to start all over and obliterate our existing financial and monetary system. Instead we need to move the debate on to re-modelling the financial sector to be a force for good. A combination of recalibrations to existing regulatory frameworks and voluntary agreements among banks could start to deliver positive environmental and social change that in turn will shape the future of our society and our planet.
Hurricane Katrina, the tropical cyclone that bore down on the US Gulf Coast with devastating effect in August 2005, could be remembered for exposing and, quite possibly, deepening the cracks in the global banking system that would lead it close to collapsing a few years later. At the time, Katrina was the US' costliest "natural" disaster with damage to property alone exceeding $100bn and it exposed the flaws of the sub-prime mortgage market that subsequently infected the global economy.
The devastation caused this year by Hurricane Harvey and Irma continue to be a reminder of the effect that climate change can have on our global economy. The impact of uncontrollable climate change threatens to severely destabilise the whole of finance.
Christian Aid's Big Shift campaign offers a stark insight into the current lack of alignment between finance and what most would consider socially useful. While achieving globally agreed climate ambitions should clearly be in the long-term interests of both the finance sector and the economies it is supposed to serve, a staggering $1 trillion continued to be invested in fossil fuels in 2015, while only $300 billion was in renewables.
Unrealised potential
Since the 2008 financial crisis, I believe we have seen three phases of public debate. The first was all about dealing with the crisis and stopping the contagion. Then we moved on to how we could stop it happening again and new regulations have been implemented concerning the reserves bank’s need to hold and the accountability of individuals within banks. Regulators should now have the power to root out criminality, disproportionate greed and other unsafe banking practices found to have engrained themselves in a culture of deregulated banking.
We are now at the start of an exciting third stage where we can move the debate on from what went wrong, to whether our banking and financial system serves us in the right way and what role it could play. For all the malaise that surrounds it, the existing financial system remains our best chance to tackle the seemingly intractable issues facing the planet today. With the right political will, the finance sector is uniquely placed to lead the transition to the sustainable economy.
Triodos Bank has been at the forefront of a movement championing "sustainable finance" for more than 30 years. We are the UK’s largest social bank and we exist to show that finance can have a social purpose beyond fulfilling functional roles such as managing risk and facilitating customers' payments. Finance, and how it is directed, has a huge impact on the shape of our economy and society.
We have been described as a Challenger Bank in the past. Which is a bit odd for an organisation that has been around for 22 years in the UK! For us the term ‘challenger’ really relates to a new breed of start-up banks looking to provide competition. We should scrutinise what difference they are really offering. While we do need greater diversity in banking it is important to remember that alternative models already exist. What we really need to do is build the pressure to change banking at scale to promote a fairer and more sustainable society.
Towards sustainable banking
The EU, G20 and UN are among the international bodies giving serious thought to how we reshape the financial system to align it to the long-term interests of citizens. Blueprints for ambitious change are also coming out of the banking industry itself. The Global Alliance for Banking on Values (GABV) represents 43 financial institutions, including Triodos Bank, spanning all continents with more than 41 million customers and $127 billion in assets.
The GABV has published a white paper “New Pathways – Building Blocks for a Sustainable Finance Future for Europe”, expressing the collective will of these institutions to recalibrate the focus of finance so it leads the transition to a sustainable economy. Among the recommendations is for politicians, at a European level at least, to empower their regulators to require the amount of capital to be held in reserve to be linked to the social and environmental risks of their investments.
Nothing drives the behaviour of bankers as much as regulatory capital requirements. Capital surcharges could be applied to assets with higher environmental and social risks, or which do not comply with the UN's Sustainable Development Goals (SDGs). This would align banking to the reality that it is impossible to achieve financial stability via investments that are not sustainable.
There is nothing revolutionary about this. Risk weightings are a longstanding tool used to ensure banking doesn't become unsafe. Indeed, requiring banks to disclose their exposure to social and environmental risk wouldn't require any more work. Bankers already assess these risks because they understand the significance. They just haven't been required to do anything about them.
There are reasons to believe banks understand the tipping point they're on. Following calls from Bank of England governor Mark Carney, 11 major banks, holding more than $7 trillion, earlier this year agreed to start reporting on the risks posed by climate change on their assets. Meanwhile, 13 CEOs from the Dutch financial sector have declared their intention to actively work to achieve the goals of the Paris Agreement in a joint letter to the Dutch government.
In addition to recalibrating regulatory instruments to encourage genuine long-term stability, we must encourage diversity and collaboration among financial institutions. But perhaps the most exciting development could be the demand created by more and more people that are realising they have the power to consciously choose where to put their money. Our research has shown that over 60% of people want to know where their bank lends their money, but 75% are unaware of where it actually ends up.
With more transparency and choice in banking then individuals, institutions and businesses can all make this choice. These steps will help to unearth the underlying value of banks to society, as well as their potential to become important assets in tackling the issues faced by people and planet.
Bevis Watts is Managing Director of Triodos Bank UK
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Banking (the safe holding of ones money with transactional services) has become too impersonal. I believe this has lead to a loosening of social & community ties. I would be interested in studies undertaken on the benefits of local branches over the say the internet. Even substantial market towns no longer have a bank. Even our much used local village Post Office with professional staff has closed to be franchised into a pharmacy with a decline in services and expertise. Access to banking in its broadest community terms is made 'frictionless' but there are many benefits to postive friction, consideration and reflection.
This is an example of the conflation of Banking and Finance as if they were one and the same - they are not.
Agreed that the financial and monetary system does not need to be "obliterated" however the banking world is still in need of massive restructuring to reflect the needs of society.
Banking, for the main part, is the ability for everyone on the planet to make and receive payments and to store whatever currency they actually own. In many respects it should be viewed as a basic utility similar to the provision of water and electricity.
Clearly there is a great deal more to the issue but the article above, in the interests of transparency, should have pointed out the separation.
Thanks for this article and the link to the paper 'New Pathways'.
The nature of capital requirements may be unfamiliar to most people outside of a regulated deposit taking business environemnt but, of course, most people expect their deposits to be protected and, at some level, understand that government stands behind this security.
Therefore they should also support this type of regulatory direction of finance in the interests of social, environmental and therefore ultimately economic sustainability. Very interesting.
While the general framework of the article addresses important questions, the problems of UK banking reach down to a much more mundane, local, and -- for many people -- existential level.
The recent announcement of bank closures by RBS affects, to the astonishment of many, all banks in the Scottish Borders with no bank surviving except in Galashiels and Dumfries. These closures affect, it would seem, burghs such as Hawick (population circa 15,000), Annan (population circa 8000), Selkirk (nearly 6000),and Jedburgh (population 4000), alongside many smaller communities.
RBS justifies its policy by pointing to lesser footfall, a rise in on-line banking, and the popularity of mobile apps.
It is difficult to know how RBS reached this conclusion for the Borders. In many parts of the Borders there is no mobile phone coverage (or else very patchy), while Broadband speeds are woefully slow.
In effect, RBS is dismissing a large tract of Scotland as financially unimportant to its operations. The suggested alternative -- local post offices -- can only be regarded as a joke in poor taste. Most post offices as such have disappeared, to be relocated to supermarkets and discount stores.
In my own home town, Langholm, the post office is located in a Londis store whose staff (with a few exceptions) not only do not speak or understand English, but from whom in any event one would be reluctant to buy a cucumber, let alone transact confidential financial business, since there is no indication that they have received or will receive any special training. The store does not even accept credit cards!
From a metropolitan point of view such concerns must appear trifling and nugatory. But a great many people locally are not familiar with technological means of business transactions -- or do not even possess a computer.
Doubtless RBS hopes that such nuisances and backwoodsmen/-women will with any luck soon die (as indeed many assuredly will). They will leave behind, however, a swathe of population deeply disturbed by RBS's action (needless to say, not intimated to their staff in advance), which will be seen as another blow to small communities struggling to survive.
RBS earned the hatred of many of its customers over the behaviour of Sir Fred Goodwin and his like. It will earn yet more hatred and contempt by this move.
If, as the author suggests, the major banks need to rethink the way they do business, then alongside their global chicaneries they might well care to consider the reputational damage they are inflicting on themselves among ordinary folk in local communities, for whom the supposed blessings of technology remain a mirage