On these issues, Laurence Moret, the Press Relations and Institutional Partnership Director in Crédit Coopératif, invited Jean-Louis Bancel, Chairman at Crédit Coopératif, François Champarnaud, Head of the Financial Division of the French Stakeholder Agency and David Korslund, Senior Advisor at Global Alliance for Banking on Values at Finance4Good Conference to debate on if and how banks can contribute to the real economy.
The difference between sustainable banks and systemic banks
A question that plagues the minds of many is the real difference between sustainable and systemic banks. Mr. Korslund provided some insight into this: the main difference is that sustainable banks operate on the principle of sustainability centered on supporting clients that deliver People, Planet and Prosperity. They are client-centered with a focus on real economy, while systemic banks focus mainly on the financial markets and the factors affecting the bank’s bottom line. Sustainable banks are fairly transparent on how they report and how their governance works. Another significant difference between these two styles of banking is their respective lending approach.
Systemic banks lend no more than 40 percent of their total assets, so the question remains where do the other 60 percent go? On the other hand, sustainable banks lend up to 85 percent and are reasonably transparent on the sectors they finance. It has also been found that the long term return on assets is higher and less volatile for sustainable banks. In conclusion, as a bank you can do financially well by doing societal good.
Why did systemic banks turn their backs on the real economy?
To better understand the reason why systemic banks abandoned the financing of the real economy, moderator and HEC Paris lecturer Laurence Moret turned to François Champarnaud. He has witnessed the evolution of finance in the world these past years through the management of the annual report “Money and Morals”. “Systemic banks did invest in the real economy, but not enough.” Mr. Champarnaud explained, “The banks reasoning over investing in the real economy shifted after the 2008 financial crisis.
Before 2008, banks neglected potentials risks of various financial securities. But after the crisis, there was too much demand for long term financing of economic projects. So they lowered their demand for credits. Globally, energy-producing countries have increased their savings because they did not have strong enough banking systems to finance the economy, they are not stable enough.” In Mr. Champarnaud’s opinion, banks did not live up to their role. However, he insisted, in such situations, sovereign funds, or other actors such as the government, should be able to take over this role, to invest in projects that are not profitable in the short term.
What does a strategy of a bank dedicated to real economy look like?
Crédit Coopératif was started by a workers’ association in 1893. The workers felt their financial needs were unmet because no one was willing to finance their projects. Thus Crédit Coopératif was born. As a bank, the members asked themselves: “Where are we coming from, where do we want to go and how can we meet the needs of the people?” The driving force of Crédit Coopératif is their values. They believe good values help good business. It is not about staying neutral but about building forward.
The purpose of a bank is to provide money and finance to those who need it. For Crédit Coopératif, it is important to get feedback from stakeholders, especially their customers. Consumers have been fed up with traditional banks ever since the financial crisis of 2009 and they are making their voices heard. They want to know where their money sleeps at night. Their manifesto is both transparency and letting customers decide which part of the real economy they want to invest in, placing the decision-making power in individuals.
In the case of Crédit Coopératif, the power of money derives from individual investors. According to its chairman Jean-Louis Bancel, banks do not need huge amounts of capital. In the real economy, many sectors are capital intensive but others, like banks, are not. Economic capital is needed, perhaps in the form of long term loans. With banks holding onto a lot of cash, it strangles real industries like agriculture. Are huge amounts of capital really required for banks and is it in the interest of the market that they hold on to it?
Are sustainable banks the antidote?
At this juncture, the world needs an antidote to the current destructiveness of systematic financial institutions. Mr. Korslund believes sustainable banks, with their focus on the real economy, are a key part of the answer. According to this senior adviser in banking, there were a lot of financial product innovations in the Eighties and Nineties but only one was truly beneficial to the financial world: the ATM. Many others have turned out to be “weapons of financial destruction”. Large banks have broken business models and they don’t know how to fix it.
Systematic banks should ask themselves: “What is our role in the economy?” Sustainable banks have already found their answer and that is why they appear to be going forward. Is there a way of creating societal value through banking? Traditional banks ask themselves two questions: “How do we make money and how can we exploit human needs to do so?” Sustainable banks flip the questions around: “What do people need and how can we deliver on a financially sustainable basis?” The order of the questions is the main point and the key answer to finance for good. There needs to be a more prioritized focus on the real economy.
Assessing banks
Global Alliance has developed a Scorecard, an instrument to assess the sustainability of banks. It is a structured way to assess both their core characteristics, their quantitative results and the qualitative elements of their business model. GABV hopes this will help to change the strategies of current banking institutions. More information can be found on their website GABV.org.
Small is beautiful? How can sustainable banks grow and create impact?
In relation with the positive impact of sustainable banks, some may think that Crédit Coopératif and GABV members correspond to the notion of “small is beautiful”, and compare favorably to the “too big to fail” banking sector. Can these kind of banks grow further and influence the financing of the real economy? In response to the concept of “small is beautiful”, Mr. Bancel pointed out that it all depends on the perspective. “What is big and what is small? The size of balance sheet? The number of people working in infrastructure?”
To Mr. Bancel, what is more important is whether the bank can contribute positively. “We have to find ways to cope with two hands. On one hand, on the local level, we should help people change their lives and be an actor of the society; on the other hand, globally speaking, we should think of how we can be useful as a global citizen and preserve diversity of players to be resilient in crisis.”
Capacity of banks to channel ressources into the real economy
Banks are sometimes hesitant to finance long-term projects due to the following reasons: cost of capital and cost of high level of regulatory capital they should maintain. A way to achieve financing for long term projects is through Mutual Banks or cooperative banks, as they recreate the link between the shareholder and the customer. Mr. Champarnaud emphasized the belief that banks must take the ‘know your customer’ approach. It is essential for them to know the risk they are taking, to whom they are lending and to which sector. It is not advisable to be a global bank, one that lends to any sector. The bank should have a direct link to the territories, the sectors and the customers it lends to.
Do digital technologies help banks get closer to the real economy?
Lastly, in the age of digital transformation, the importance of technology on the future development of banking system is intriguing. Will digital technology help banks get closer to real economy? Both Mr. Korslund and Mr. Champarnaud are reserved in regards to the extent to which digital technology can bring significant progress. In their opinion, human interaction in the assessment of the credit process is indispensable. “What is your project? Who are you? What is your personality? We need human point of views.” Mr. Champarnaud explained. Mr. Bancel, on the other hand, had a more optimistic view. “I believe in the importance of technology, it helps the work move forward, faster and in a more complex way.”
Written by Valerie Wang, Nikita Chu & Shagun Telwar, HEC Paris Students.
