by Margaret Heffernan
This article is reprinted from the Huffington Post. Visit www.huffingtonpost.com
We bailed out the banks because we
couldn't afford not to. We award absurd salaries and bonuses to bankers because
we think we can't function without them. In any other context, being made to do
something you know is wrong is a crime called blackmail; in banking it appears
to be normal. But it doesn't have to be this way.
We feel ourselves to be at the mercy
of the banks because they are so big. But that is also why they go wrong. So
why don't we just make them smaller?
A recent study, funded by the Rockefeller Foundation and the
Global Alliance for Banking on Values (GABV) compared the performance
between 2007 and 2010 of 17 values-based banks with 29 Globally Systemically
Important Financial Institutions (GSIFI) as defined by the Financial Stability
Board. The value banks are smaller, mission-focused banks like credit unions,
Triodos and Handelsbank. The globally significant banks are 'too big to fail'
and include Bank of America, JP Morgan, Barclays, Citicorp and Deutsche Bank.
And guess what they found? The value
banks did more for their customers and were financially stronger.
"Values-based banks were twice as likely to invest their assets in loans,
lending more than 70% of their assets during this period on average. The
values-based banks also appear to be stronger financially with both higher
levels of, and better quality, capital. The BIS 1 Ratio, an important measure
of a bank's solvency, averaged over 14% during the period studied, compared
with under 10% for the mainstream banks. The sustainable banks also had an
average Equity/Asset ratio of over 9% while the GSIFI banks averaged just over
5% during the period covered." In other words, the smaller banks were less
likely to fail.
Even more important, the smaller banks
also delivered better returns: "Return on Assets, the measure increasingly
considered most relevant for judging a bank's financial performance, averaged
above 0.50% while the big banks earned an average of just 0.33%. Values-based
banks also had returns on equity averaging 7.1%, compared to 6.6% for the GSIFI
banks."
The report argues that what accounts
for the success of the values-based banks is their values. They're embedded in
their communities, have transparent governance, enjoy long term relationships
with clients and pursue a triple bottom line that won't trade off performance
for social impact. And it argues that having these values at the heart of the
organization makes them stronger and better.
I couldn't dispute any of that but I
think the report overlooks something so obvious it's easy to miss. These
values-based banks are not huge. They are small. That means that the values
they pursue are not just statements posted in reception and left to gather
dust. It means that personal relationships - between employees and reaching out
to customers - are up close and personal. It means that oversight is actually
feasible. And it means that titanic, market-shifting deals are impossible.
Many of the problems posed by the
banks derive from their sheer scale. Because they are so vast they can move
markets. Because they're huge, they reap enormous profits which then fuels big
salaries and giant bonuses. Because the institutions are so mighty, the people
running them feel themselves to be immensely powerful. The money and the power
both change the way that people think and both work to move leaders ever
further away from engagement with society.
The executives who go astray inside
these institutions don't start off as market manipulators; the money and power
that size brings changes them. It's easy to cast stones but the truth is that
most of us, given the rewards, status and flattery that surround these
positions, would find it impossible not to start believing that we were gifted,
brilliant and virtuous; it would require the psychological defenses of an
elephant not to. The institutions make these people, not the other way around.
Much has been said and written about
the need to change the culture of high street banks. I think these motherhood
statements are naïve at best and disingenuous at worst. Everyone in business
knows that culture is the hardest thing in the world to change. Think about it:
most fat people want to get thin and can't. Most people want to save and don't.
Changing human behavior is so unbelievably difficult that there is an argument
as to whether it is possible at all. The idea that a vast institution the size
of Barclays or RBS or HBOS can change the behavior of every individual it
employs is a fantasy.
You cannot achieve cultural change
without structural change. This is the central truth that everyone - bankers,
regulators, politicians, economists and pundits - have been willfully blind to
now for years. It's about time we stopped fooling ourselves and put an end to
this painful economic fiasco. Rules won't change banks. A few resignations
won't change banks. Inquiries won't change banks. And cultural change is beyond
us. Break the banks up and they won't be too big to fail; they will - finally -
be small enough for success.
About the Author: Margaret Heffernan is the British author of Willful Blindness: Why We Ignore the Obvious at Our Peril and How She Does It: How Women Entrepreneurs Are
Changing the Rules of Business Success. Both books are available on
Amazon.com
