ISB Paper Series - Institute for Social Banking

 ISB Paper Series Selected Research Papers on Social Banking and Social Finance No. 5 Values in the banking industry By Katharina Beck Originally published in „Sozialimpulse“ (German), March issue 2010. Institute for Social Banking | ISB Paper Series, No. 5, May 2010 | www.social‐banking.org About Katharina Beck Katharina Beck is a graduate in Regional Sciences of Latin Amercia and now working as Man‐
aging Director at the Institute for Social Banking (www.social‐banking.org). She is responsible for, amongst other things, Communication, the International Summer School and other seminars. In 2008, she was president of oikos International (www.oikos‐international.org). Beck is a LEAD Fellow (www.lead‐europe.org), writes online at www.kathas‐welt.de about sustainable lifestyles and lives in Cologne, Germany. She is personally driven by the wish to enable every human being to live a life in dignity. See‐
ing climate change as one of the most urgent problems for humanity, she tries to find ways for shifting how the economy is working nowadays. Finance and personal values play a major role in this. Therefore, Katharina focuses on increasing awareness about banking and finance and also about how the “western lifestyles” can be changed towards “sustainability” – understanding this word as ability to live now and in the future. Contact Her contact details are E‐mail: katharina.beck@social‐banking.org Telephone number: +49‐176‐23175779. Bochum, Germany, May 2010.
Institute for Social Banking | ISB Paper Series, No. 5, May 2010 | www.social‐banking.org Abstract Values in the banking industry by Katharina Beck What are the current values in the banking industry and what can and should – in the future – be the values in the banking industry? These questions are discussed through interviews with bankers and via reflections on the nature of money and banking. The present essay starts with approaching the “commodity” of banks: money. The basic characteristics of banks are presented. From the nature of money and banking, the author deducts the following core values of the banking industry: transparency, trust, responsibility, fair and constructive dialogue, participation and respect. To achieve a banking sector that respects these values, the author claims for citizens to ac‐
tively shape the society they live in. Institute for Social Banking | ISB Paper Series, No. 5, May 2010 | www.social‐banking.org Beck, Katharina, Values in the banking industry Values in the banking industry 06 March, 2010, written by Katharina Beck, in: “Sozialimpulse”, March 2010 “Ethical Banking“, “Social Banking“, “Values‐
oriented Banking“ – these three concepts have gained widespread media coverage during the past few months. German newspapers are reporting increasingly frequently on value‐oriented banks as being the "winners of the financial crisis"1. However, against the background of the financial crisis and the huge bonus payments, many people do not associate banks and their managers with ethical values. Are values, ethics and social matters seriously at odds with a profit‐maximising banking system that allows bankers to feed their "insatiable greed"2 at the cost of the public? Is it cynical to speak of values in the banking industry? ”Social Banking sounds almost ironic to me, due to the negative connotation of the word bank", says somebody interested in the topic, for example, when hearing about the existence of the Institute for Social Banking for the first time. Nevertheless, there are banks that do care about values. For example, since last year eleven financial‐services providers from all over the world set up the ”Global Alliance for Banking on Values“3. They stress there exists a banking industry based on “values”, which they jointly advocate. Among the members of this alliance are the GLS Bank or 1
Dohmen, C., „Ethikbanken jubeln über Kundenansturm“, Süddeutsche Zeitung, 09.02.2010, available online: www.sueddeutsche.de/finanzen/482/502713/text
/ (2010/03/01). 2
Vgl. Klar, H., Judzikowski, S., Stoll, U., „Ungebremste Gier“, frontal 21, 23.06.2009, available online: http://frontal21.zdf.de/ZDFde/inhalt/16/0,1872,75
97264,00.html (2010/03/01). 3
Website of the Global Alliance for Banking on Values: www.gabv.org (2010/03/01). the Triodos Bank4, which offer their services in Germany. Some founders of the alliance and other providers of financial services in Europe are also members of the ”Institute for Social Banking“, an educational institute that in the field of training and research has been focusing on values, social welfare and ethics in the financial system since 2006. The institute’s objective is to get "more and more people to rethink their view on the finance, banking and insurance industries in an ethical and socio‐ecological way."5 The institute fittingly held its third International Summer School on Social Banking to take place in Florence in July 2010, under the motto of „”Banking on values“. What are the values that count in the banking system anyway? The professional experience I gained at the Institute for Social Banking and the targeted discussions with representatives from the financial sector6 gave me an insight into the issue. 4
For a detailed overview over ethically‐orientated banks in Germany see "Öko‐Test", March issue (No. 03) 2010, p. 102‐113. 5
Website of the Institute for Social Banking: www.social‐banking.org/das‐institut/ (03.03.2010). 6
I would like to thank Andrea Valdinoci (fiancial consultant, GLS Treuhand), André Presse (Economic consultant at GLS Bank, is completing his habilitation in Karlsruhe at the Institute for Economic Research and Policy (Institut für Wirtschaftspolitik und Wirtschaftsforschung), Georg Schürmann (Manager of the German branch of Triodos Bank), Rainhard Quante (Divisional leader of the Executive Board, Sparkasse Blomberg) und Julian Kühn, Mirjam Fochler and Sven Remer, for being an inspiration (all Institute for Social Banking). 1 Beck, Katharina, Values in the banking industry Money: the "commodity" of the banks appears to be neutral When asked about "values in the banking industry", André Presse, currently qualifying as a professor at the Institute for Economic Policy and Economic Research in Karlsruhe, answers spontaneously that values sound "ideal" to him and therefore "have not lost anything in the banking industry" as banking sounded so "objective". This is probably what many people feel about the issue, not just because they have gained the impression that the entire banking sector has been unethical over the last one and half years. Banks are the quasi‐
administrators of our money and in order to better understand our relation to the banking industry, it is important to take a closer look at this medium. In an intuitive and subjective sense, money appears to be ethically neutral and unbiased: ”Pecunia non olet“ – money does not stink. This is an old social principle that alludes to the neutral and objective nature of money. Money is made of paper, metal or today even mostly virtual and consists of numbers. Thus, the feeling may arise that, beyond the numerical values, money does not contain any further values. A further consideration is that there is a cultural aversion to dealing with money: According to a study by comdirect7 of 2009, 72% of the Germans agree to the statement “You don’t talk about money“. Only 4% of the respondents stated that they would speak openly about their income with their acquaintances. Our individual money is thus not a natural part of our discourse about values of society as a whole and as we have grown up with this, we do not incorporate money into our everyday thoughts either. 7
For more information about the German´s attitude towards money, see the German article: Janson, S., „Geld – in Deutschland ein Tabuthema?“, 27.05.2009, available online: www.berufebilder.de/existenzgruender/alles‐was‐
geld‐ist/geldanlage/geld‐in‐deutschland‐ein‐
tabuthema#text (2010/03/03). The subject of money and also the discussion about the activities of the banks, which deal with money, is secret and does not take place in public, even though it shapes our interpersonal relationships every single day we buy, lend or donate something. Another factor related to the anonymisation of the banking industry is the unique globality of the financial sector. As a result of its virtual approaches, unlike any other sector, it is able to use the possibilities of simultaneous trading anywhere on the globe. Money has become abstract. You can find this abstraction as well in our personal struggle for maximum profits, which is another influencial factor in our relation to the banking industry. We see the high percentages, and, just as described in the stimulus‐response model, we end up wanting more and more money. They tell us that "our money is working for us"8. However, we do not question how this is supposed to work. Money has become an end in itself instead of being related to real values. In this game, the bank has ended up being nothing but “the value‐neutral” framework for the money, which "works for us". With these cultural and systemic causes in mind, it is quite understandable that we talk even less about the inherent values of the banking sector than about the banking industry itself. Prior to the financial crisis, this was apparently due to our cultural (non‐
)relation to money, which ”is simply there”. Moreover, although people are infuriated over the greedy and unscrupulous bank managers since the banking sector has shifted to becoming the centre of attention, on the other hand, it is however being intuitively accepted for reasons already explained, that there are no other values in banking besides profit maximisation. 8
For more details on this schizophrenic assumption, I recommend the simple but concise video ”Money Clip“, available online: www.bewusst‐investieren.de (2010/03/04). 2 Beck, Katharina, Values in the banking industry Confidence is a bank´s most important asset. Thus, in its very foundation, the banking system is neither objective, factual or neutral: It is based a priori on a feeling or a value, namely trust. Every time we buy something, we rely on somebody else offering a service or transferring the possession of a product to us in exchange for a piece of paper, metal or a number on a screen. The vendor for her part trusts that the symbol of value (the bank note, the coin or the virtual amount of money) will enable her to buy other goods or services.9 Even in an etymological sense, the meaning of money is clear: The term credit, which describes one of the most original banking services, derives from the Latin word "credere", which means "to believe". Just through money alone, the medium that banks deal with, is enough to make it impossible to perceive the banking industry as a neutral service as it is always dependent on the confidence and trust of its investors (creditors) and must show the trust to the borrowers (debtors).10 Contrary to the general feeling of a "lack of values" (in the sense of neutrality) in the banking industry, the basic asset of a bank is trust, which can neither be objective nor neutral. As a result of this solely perceived "objectivity" of the banking industry, the monetary economy had benefited from a high confidence rating for some time. Each person had his/her own main local bank and went to his/her own trusted adviser. What seemed to be a matter of course to most, began to falter because of the financial crisis. By speculating, the banks turned the 9
The function as a medium of exchange is used as a definition of money by economists. See also the lecture of Dr. Elisabeth Allgöwer on 21st of October 2009 at the University of Cologne: „Geld Kapital und Zinsen im Spiegel der Wirtschaftsgeschichte“. 10
The social aspects of the monetary interaction can also be observed in the terms “creditor“ and “debtor“. medium of exchange ‐ money ‐ into a commodity itself and thus gambled away the money of their depositors. Even the local bank around the corner sold a lot of "bad products", for example, of the bank Lehman‐Brothers to "bona fide" customers. Moreover, many purchased these products “in good faith” at their local bank. Today, a lot of these customers have lost their savings. If we take a closer look at the statements of banks and their board members, it is no major discovery to realise that the entire banking system is based on the confidence of their shareholders, customers and other stakeholders. According to Mr. Reinhard Quante, Head of the Office of the Executive Board of the Sparkasse Blomberg, trust is the top priority in the banking industry. Stephen Green, member of the Board of the HSBC Group, emphasises that restoring confidence should be the main objective for his industry11 – not only with regard to the customers, but also between the banks. Intransparent bank products and anonymized gambling over the past ten years have also shattered confidence on the financial markets. The fact that those involved professionally in the business and should therefore know the most as to what goes on behind the scenes no longer trust one other, shows just how deep the crisis of the banking industry is. Trust arises from transparency and knowledge What has gone wrong? Most customers are simply unable to know what their bank is doing exactly with their money. According to the principle "You don’t talk about money", it is not made public to whom the bank lends the money deposited by their customers or where it is being invested. In 11
See also: Green, S., „Positive Werte im Bankwesen“, Speech by Stephen Green, at the event „Banken im Umbruch“, Frankfurt, 8th of September 2009, available online: www.hsbc.com (2010/03/03). 3 Beck, Katharina, Values in the banking industry general, I can really trust an institution when I understand what it is doing with my money. The indicated cultural and systemic causes can be considered as responsible for the fact that this information has not been demanded by the customers prior to the crisis. There is a problem of transparency – not only since the emergence of the complex "financial products" such as the structured bonds that even some traders do not understand. To win back confidence in the banking sector, transparency and the provision of information are more important than ever and cannot be replaced by state guarantees of customers’ savings in the long term. Institutes such as the GLS Bank or the Triodos Bank, which make the loans granted public, show that a transparent banking industry is possible. It is this kind of open business policy that has guaranteed the values‐oriented banks a large increase in customers since the outbreak of the financial crisis.12 In what can we have confidence? What does the bank do with my money? It is essential to keep these basic characteristics of banking and financing in mind. In view of the fact that the banking industry is based on the extremely subjective and personal value of trust, it is necessary to take a look at the other values in the banking sector. Where upon do customers of a bank rely anyway? Well, first of all they trust the bank to manage the money in a responsible manner, by ensuring that their money is safe and, at best, making the amount grow. In particular the commercial banks that conduct classic banking and investment banking at the same time, have deeply undermined the trust of their customers. However, within the context of the financial crisis, how the bank deals with the money has moved into the spotlight. Georg 12
See also: Dohmen, C., „Ethikbanken...“, op.cit. Schürmann, who has been working for the Deutsche Bank for 20 years and is now manager of the new branch of the Triodos Bank in Germany, puts the loss of confidence in the banking sector primarily down to the "domination of the quarterly profit" and the strong concentration on the "Shareholder Value“ of the commercial banks: "Traditional institutes define themselves through quarterly profits, which says a lot about their values, as they focus on profit maximisation. Customer orientation is subordinated to the shareholder orientation." It is obvious that banks have to work reasonably in a microeconomic way. Nevertheless, the question remains if such a one‐sided and short‐term strategy is micro‐economically wise in the long term. Does this really yield shareholders growing profits in the long term? If this short‐term "shareholder orientation" leads to shattered confidence in the banking sector, banks having to be rescued by billions from the state and shareholders’ accounts being subject to considerable loss in value, it is not just ethically questionable, but also harmful to the protection of the customer’s money and thus has a detrimental effect on the whole business model of the banking sector. Responsibility or the bank as the heart of the economy The strongest link between the value‐
oriented banks of the Global Alliance and the Institute for Social Banking is their view of the banking system that puts the people and the common good at the centre of their overall concept. They stress that the actual real function of the banking industry is to serve as a provider of financial services to the so‐called real economy13 (that includes 13
The chairman of the Board of the GLS Bank states, for example: " The financial market has to become the provider of financial services for the real economy again. Source: Jorberg, T., „Geld hat Menschen zu dienen – nicht umgekehrt“, Frankfurter Rundschau, 2008/07/11, available online: www.gls.de/die‐gls‐
4 Beck, Katharina, Values in the banking industry all economic activities beyond the financial sector). They reject wild14 speculations with the insets of their creditors. Banks, in their function as a source of capital and funding of the economy, can be seen in a figurative sense as the heart of the economy and are therefore a sort of centralized relay‐station in our economic cycle. As they are intermediaries between the surplus of money and the need for money and are engaged in a constant dialogue with the different stakeholders, banks are pre‐destinated to detect trends, requirements and special needs of the society. Their role, however, is not restricted to registering specific events, but also to exerting active influence on these: By having a choice when it comes to the granting of a loan, deciding which initiative or project will be granted funds and which one will not, they actively shape our society.15 Consequently, banks have a lot of power. Just like from the traditional value "Property entails responsibility", there is a certain responsibility of the banking sector for the society as a whole that emerges from its power. The bank is not just the administrator of the capital, but also a vividly and active "agenda‐setter" that has a major say on our economic activities. Conscious of this responsibility, the value‐
oriented banks do not set the focus of their business on the greatest possible bank/presse/pressespiegel/geld‐hat‐menschen‐zu‐
dienen‐nicht‐umgekehrt.html (2010/03/04). 14
Not every speculation that is made on the financial market has to be necessarily condemned in the current economic system. Some arrangements with regard to a future price even enhance the security of a trade. It is becoming critical when bets are placed on the arrangements already made ‐ that is when speculations become "wild". It is, however, not the task of this article to go more deeply into this topic. 15
“Money means to form society“, said Andreas Neukirch in his lecture at the International Summer School on Social Banking 2008. The lecture was filmed and can be watched online: www.social‐
banking.org/de/summer‐school/summer‐school‐
2010/ (04.03.2010). maximisation of their profit16, but also on the cultural, ecological and social needs of humans and nature. This wide "stakeholder orientation" allows them to generate the kind of profit that goes beyond the pure and material profit which they, as companies, of course have to also generate. "Needless to say, we have to be profitable", says Georg Schürmann. However, this is no contradiction to his attitude towards money that he sees as "a means to an end". The end is to serve the people. Nevertheless, social values not only play an important role in the ethical banks, which when calculated according to their market share, are still relatively small, even though they are on the increase. According to the Divisional Leader of the Executive Board of the Savings Bank (Sparkasse), Rainhard Quante, at the forefront of the business model of the savings banks is not profit maximisation, but "public‐interest orientation, proximity to customers, a close relation to the region and social engagement". A "lifelong partnership" and "comprehensive consulting" are the fundamental values pursued by the savings banks, an approach that also plays an important role in the principles of the cooperative‐based institutes. The fundamental understanding of the banking system as a bearer of social responsibility (at least for the members of the cooperative) thus has a long tradition. “A warm interest towards fellow human beings“ Banks that assume "responsibility for humans and nature" ‐ that might sound somewhat strange to many people living in our culture of monetary success. However, 16
See also: Scheire, C., de Maertelaere, S., “Banking to make a difference. A preliminary research paper on the business models of the founding member banks of the Global Alliance for Banking on Values“, June 2009, Artevelde University College, available online: www.social‐
banking.org/forschunglehre/literatur‐artikel/ (2010/03/03). 5 Beck, Katharina, Values in the banking industry it is exactly this responsibility that drives the employees of the value‐oriented banks. Andrea Valdinoci, financial consultant at the GLS Treuhand, calls it "the delight of being able to think on a larger scale, for example, about the possible consequences before granting a loan". Alternatively, in the words of André Presse: "An insatiable hunger and thirst to understand and meet the needs of other people – with a warm interest towards the fellow human beings" and the underlying "trustworthy handling of money". The joy in creating the possibility, as Valdinoci puts it, "to build relationships through money transactions, instead of destroying them." In this context, it is especially important to him that the bank has to perform an educational function with respect to everything related to money, because “if I don’t make it clear, I will maintain the power“. The acknowledgement of this power and even more the willingness to share it through education, shows the fundamental values of ethical banking: To take responsibility, to enter into a fair and constructive dialogue with the customers, to let them participate, to respect and trust each other and to communicate transparently.17 In what kind of society do we want to live? Why do these values seem to be so far away from today’s reality? I believe that this is because it has been a long time since we have dealt with the fundamental values of our society. Due to the final "victory" of capitalism as the one and only liberal society and life model in 1990, the "maximization of profits at all costs" and the economization of our lives has not been questioned for a long time. Until 2008, the faith in the free 17
See also: Global Alliance for Banking on Values, "Charter of the Global Alliance for Banking on Values“, 2009, available online: www.gabv.org/AboutUs/OurCharter.htm (2010/03/04). market, in the sense of Adam Smith, as a guarantor for general prosperity seemed to be a sacrosanct wisdom. Even the Casino capitalism was justified with the "freedom of markets", a miracle cure that was impossible to criticize without being called "leftist". Now however, this principle is subject to debate again: "The so called Washington Consensus, that based on the theoretical hypothesis of the efficient market, is not going to survive this crisis" reckons Stephen Green, CEO of HSBC and thus head of the biggest international bank. Thus, after the most profound crisis of capitalism in 80 years, we should ask ourselves once again: In what kind of society do we want to live? Of course each of us will give a different answer to this question, but everyone would probably agree at least on the following values: Safeguarding human dignity, generational equity, the fight against poverty or a fair distribution of wealth (well aware of the need of a further discussion about what "fair" means), protection of the environment as a basis of all life and freedom for all – which is bounded by the freedom of another. Of course, this freedom includes the economic needs of the people, but also their social and cultural needs that de facto and on an intellectual level, have been neglected over the last two decades due to the primacy of economic success. Even today, you can still observe this phenomenon when some politicians do not understand the current situation and in spite of everything stick to their one and only god, namely growth18. On the other hand, it is important to stress that in most "talent hotbeds" for future economists (in Germany mostly public universities) the so‐called "economic experts" teach a quite one‐sided interpretation of Adam Smith´s theories: Although Adam Smith coined the term "invisible hand“ and attached great 18
A good example here would be the German law called: „Wachstumsbeschleunigungsgesetz“ ("Growth Acceleration Law") 6 Beck, Katharina, Values in the banking industry importance to the division of work (“The Wealth of Nations”, 1776), it is just as important to emphasise the matter of his work "Theory of Moral Sentiments" (1759), that he continually revised for the rest of his life. It begins with the sentence: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it." Would Smith be happy about himself being the father of the hypothesis of the unregulated and efficient markets? At least it is precisely obvious to him that this "warm interest towards fellow human beings", which shapes the business of the value‐
oriented banks, is a key characteristic of humans. To him, we are social and not purely economical beings.19 Nevertheless, up until now, this "human" aspect does not play any role in the course of training of our (bank) managers. At present, we have the chance to promote a rethink in those places that educate and form our managers. Organisations such as the Institute for Social Banking or oikos or sneep, student organisations for sustainable development20, have been working hard on this issue for a number of years. We have learned that banks do have the power to shape our society. Some already use this influence to serve not only themselves, but also "humans and nature" (money as a means to an end, and not as an end in itself). From their responsibility they derive values such as transparency, fairness and participation, aspiring a trustful dialogue with their customers and the society as a whole (wide Stakeholder Value). The commercial banks are also beginning to think about their social influence and their responsibility. We as citizens, however, now also have the opportunity to think about what kind of society we want to live in. How do we want to define the framework for the economy? How important is our economical freedom to us? Do we prefer to create economic incentives instead of drawing limits? How do we achieve a rethink in education? In our democracy we have the beautiful and internationally privileged possibility to actively shape and shape all this! Let’s make the most of this possibility! About the author Katharina Beck is a graduate in Political Sciences of Latin Amercia, is now working as a project manager at the ISB where she is responsible for, among other things, communication, the International Summer School and other seminars. In 2008, she was president of oikos International. Beck is a LEAD Fellow, writes online at www.kathas‐welt.de about sustainable lifestyle and lives in Cologne, Germany. Short Link list Institute for Social Banking | www.social‐
banking.org Global Alliance for Banking on Values | www.gabv.org GLS Bank | www.gls.de 19
The fact that the human being as a pure homo oeconomicus is nothing more than a legend, is merely subject to dispute in science. This is underlined for example by different experiments linked to Game Theory. Nevertheless, it is still a basic assumption of many scientific models in Economics. Triodos Bank | www.triodos.de BankTrack | www.banktrack.org 20
Available online: www.oikos‐international.org and www.sneep.de (2010/03/05). 7