Response to Smaller, Greener Banking: Banking for Sustainability in a New Scotland: A Discussion Paper by Ray Perman and Friends of the Earth Scotland
The authors of this report claim that ‘there has been a failure of government policy to decide the role banks should play, and therefore what sort of institutions they should be.’ and that ‘we have ended up with a banking system dominated by a small number of giant banks…’ These institutions are only able to survive because they are ‘too big to fail’, yet they offer poor customer choice and service, have acted illegally in rigging markets and indulge in ‘socially useless’ activities.
So far, the main government response in the UK and Scotland has been to create new banks such as the UK Business Bank, Scottish Investment Bank and the Green Investment Bank, rather than to reform the existing ones.
While banks have been diligent in publishing their own direct environmental impacts, little has been disclosed about the environmental impact of their lending decisions. Yet, increasingly, there may be strong business reasons for taking these impacts into account.
The paper documents the gradual loss of Scottish roots (accelerating after the financial crisis) from the nominally Scottish banks, as their strategic decision-making centres move to London. It notes recent attempts by the Scottish government to encourage and create diversity and sustainability within the banking sector, but notes also its lack of powers over financial services regulation or competition policy. With or without independence there is scope, however, for extending the role of community and local government backed lending institutions,
Perman and FOE Scotland advocate the breaking up of the dominant banks in Scotland to increase competition for customers, although they recognise the practical difficulties this would involve. New models of governance and accountability could be introduced in an independent Scotland, so as to rebuild trust and local accountability in banks. An independent Scottish government could also build on successful community sustainable energy initiatives as well as taking the lead in developing new technologies. The contradiction between Scotland’s potential future reliance on fossil fuel extraction and efforts to combat climate change are noted.
While I would agree with almost all of these points, I think there are some important points that can be made about banking in general, and some issues that perhaps need more emphasis.
Firstly, we need to be careful not to re-invent the wheel. Banking and bank money is, in theory, a well-tailored solution to a dual need in a modern economy with complex patterns of inputs and outputs. The creation of money as tokens of public or private debt allows the initiation of production processes, the time-shifting of consumption and the transfer of productive assets where these would not otherwise be possible as a result of uncertainty about the future and the lack of direct trust between economic agents. Moreover, since these tokens are given value by the tax and private debt obligations backing them, yet are supremely portable and durable and otherwise without use, they make perfect media of exchange. As such many currently-offered solutions (such as these) to problems of money and banking could almost certainly only serve to reduce welfare.
These facts alone indicate the special place of banking in the modern economy. Since banks operate the system through which all other economic activity is organised they must be run in the interests of society as a whole, and so they uniquely warrant democratic oversight. This is not to deny that there are merits to banks operating as entities independent of the state banks and in competition with others; or to deny that they should generate returns for their own service development, for their employees and those that provide the capital that allow them to operate independently. It does however mean that all these features of private banks demand particular scrutiny as to whether they serve the greater good of a secure and effective monetary system.
What do we mean by a secure and effective monetary system? A secure monetary system is one in which we can have confidence in the acceptance, value and accessibility of our money, both now and in the future. The financial crisis required large scale government interventions to maintain these, as a result of banks putting their capital base at risk in poorly-evaluated investments. An effective monetary system is one where the government and private banks have the information they need to offer funding and loans respectively for all and only those activities that have the capacity – for the government – to enhance public welfare for which the public are willing to accept higher taxes, and – for private banks – to increase revenue-generating private welfare. Effectiveness of the monetary system also involves the recipients and users of money, once it is created, understanding the basis on which funding and lending takes place and so being be able to influence those processes by their demand for labour and goods. This latter requires a wider base for democratic influence and corporate governance in general, not just for banks, and possibly in the long-run a more fundamental rethink of our exchange mechanisms.
Returning to banks, it has repeatedly been demonstrated that regulations exist to be flouted or ‘arbitraged’ by those that see profit in doing so, whether working for their own interests or those (in the short-run at least) of their institutions. Any regulation able to match the resources of the big banks is going to be unnecessarily costly for society. For similar reasons I am not convinced of the ability of greater competition in itself to solve many banking ills. It is clearly important that customers can choose the banking service that most suits their needs at a cost that is a fair reflection of the effort, skill and risk involved in providing it. Given the central importance of banking to modern life, however, it is not reasonable to expect the average person to be spending much time and effort on finding it; a decent, fair service should be guaranteed. Moreover, competition can exist at various levels, and it has been documented how competition between the Wall Street investment banks over equity returns drove them to ever-riskier behaviour in the run-up to the financial crisis. There is also the question of scale efficiency – the optimal size for a bank may be large, but this doesn’t necessarily preclude the possibility of many lending decisions being taken at a local level, factoring in social, community and environmental concerns.
Ultimately, to get the banks we want I think we need to change the people that run them and their motivations. There needs to be the right mix of banking skill and knowledge along with human, social and environmental concern in those governing banks and their operations. Exactly how that is achieved in an unequal society, increasingly in the thrall of wealthy and unscrupulous media concerns, is a problem that does not to relate to banking alone.