The Need for New Forms of Banking
The Sirisuk Declaration
It cannot come as a surprise to anyone who takes an interest in the news that, as I write (July 2010), the global banking system continues to be in deep trouble following the fall-out from unethical speculation by bankers over the past many years. It is partly the fault of national governments that banking regulations have been so relaxed as to encourage extreme risk-taking and profiteering within the system, but mostly it is the fault of the senior managements of the banks themselves; their lack of ethics and greed contributing more to the crisis than the naivety of government ministers who, though perhaps in awe of the power and wealth of bankers, did not always understand the types of risks being taken by the banks and the way investments were packaged to conceal their lack of value. Indeed, many bankers did not themselves understand the riskier investment packages because they made no immediate sense. Further, those who did understand such complexities, in government and within the industry, were loath to ‘rock the boat’, ‘blow the whistle’ or otherwise oppose their colleagues for fear of losing their highly paid jobs, undeserved bonuses and/or political influence.
But if we accept that the banking system we currently underwrite (have bailed out) is not fit for purpose, what might replace it? At the local level, some activists have suggested (and have tried) Local Exchange and Trade Systems (LETS), a recorded system of barter, and Localised Currencies (LC), a voucher system. And while there might be a few circumstances in which such systems are useful, they both suffer from not being tradable for real currency outside of their locale; as international instruments they are vastly limited, if not entirely without significance. And even if LETS ‘points’ or LC ‘vouchers’ were tradable internationally, the confusion they would bring to the markets would be considerable and opportunities for fraud extensive. Nevertheless, I support the limited use of both LETS and LC because they might add to the buoyancy of some local economies in which expenditure and capital ‘flight’ is problematic.
One appealing aspect of both LETS and LC systems is that they are, theoretically, examples of zero-inventory banking: if one adds up the value of the vouchers or points credited and debited within the systems they should come to zero. While such systems thus rely on either volunteers, or staff paid by charitable concerns, they do demonstrate that trade is perfectly feasible with systems of exchange that are not based upon the suppliers of the trading system taking vast profits out of the system or lending money they don’t actually have. What we need, therefore, is near-zero positive-inventory banking, with the surplus over-zero used to pay only for staff, facilities and communications; unlike current banking services, a near-zero inventory bank would not be an investment opportunity in itself even if it charged interest on loans and paid interest on deposits – it would be a public service in the private sector. And, in the same way that the Sirisuk Declaration is an entirely voluntary scheme, the near-zero positive-inventory bank (perhaps we should simply call them zero+ banks) would not be an arm of the state or of powerful corporations. Are there such banks? Banks using a similar ethical code (but not necessarily the accounting system I have outlined here) used to call themselves Building Societies or Building and Loan Companies, the very same institutions that were sold into the risk-taking banking sector by their memberships. There is also the growing movement of Community Credit Unions and ethical Micro-credit providers offering a safe haven for the ethical saver and borrower.
One might think that zero+ banking is risky; how can such a system have enough money to pay depositors if it is not making large profits? But one might consider that many existing profit-taking high-street and commercial banks operate a far riskier strategy, they rely on a less-than-zero negative-inventory system; much, much less than zero.
The ratio of capital to lending in many banks is often around 1:10, this ‘gearing’ (fractional reserve banking) or ‘cranking’ ratio, as it is sometimes called, means that for every £1 they have on deposit they are lending £10. That such a system is legal is a disgrace. Furthermore, it was completely predictable that banks that were offering sizeable dividends, paying huge bonuses and lending at gearing ratios of 1:10 or worse (some at 8% gearing = 1 : 12.5), would eventually fail; such systems are organised theft, not in the Marxist sense that ‘all profit is theft’, but in the normal legal sense of the word. Vast profits were declared and distributed where no profits actually existed because unsupported lending exceeded deposits by such a large margin. Thus money was ‘created’ out of nothing more than bogus accounting. If money does not represent real work it is doomed to be either inflationary or fraudulent or both.
The highly geared banks would, however, argue that their accounting is sound because every loan is an ‘asset’, i.e. a property that belongs to the bank but is being used by someone else. But a risky loan is an asset only in name. If you lend an unreliable friend £10, you are not certain to get your money back; in effect you have lost £10 until the unknown future of your friend’s life unfolds. The only fair way to account for assets are to include those properties and moneys under one’s direct control; a loan is only an asset if the borrower has genuine collateral to the value of the loan (plus recovery expenses) to which the bank will have legal access in cases of default. But, even under ‘perfect circumstances’ it does not seem wise or morally correct for any bank to be unable to pay its depositors should they wish to take their money elsewhere. Is one of the great scandals of our age that banking executives, already rich beyond most people’s wildest dreams, should be taking huge bonuses out of a system with insufficient reserves to pay ordinary depositors; people who might have undertaken great hardships in order to save sufficiently for their retirement or to help their children.
There is an argument put forward by bankers that without the large profits enjoyed by the financial sector, there would be no provision for pensions. This is not true. Any interest paid to a depositor has to be balanced by interest charged to lenders (if interest is not allowable for religious reasons there might be a system of fees and insurances that offer similar functions) and the difference between those rates could provide a pension. It is important to stress here the difference between a pension provided by borrowings from other customers and a pension provided by ‘investment;’ in the bank itself: in the former case one’s pension income is provided by ordinary borrowers while in the latter case the income is provided by unintelligible ‘packages’ controlled by high-risk-taking fund managers. And while experts might conclude that the two scenarios operate under precisely the same principles and are thus ‘the same’ or analogous, I would respond that it is the transparency and the simplicity of the former case that makes it both more ethical and less risky. Naturally, a pension might also be handled by an independent advisor who was paid to provide risk aversion and reliability, or ones pension might be provided by a direct investment in a small business; but not everyone has the skills, time, health or inclination required.
However one looks at this issue, one is drawn to the idea that banking must have an ethical core from which the success of the bank is judged by its reliability to provide fairly priced banking and pensions to citizens rather than high profits for the bank at the citizens’ risk. Smaller banks, more localised banks, zero+ banks, credit unions and building societies should be encouraged to flourish by the citizen. I use the word ‘citizen’ because we should consider ourselves honourable and ethical; as ‘consumers’ we are merely figures on a sales chart. We are better than that.
I would like to think that, as the idea of the Sirisuk Declaration gains momentum, experts in the field of banking will be able to write simple, understandable and binding ethical rules that will provide the type of services I have outlined and that the ethical bank will become the norm rather than the exception.
In addition to ethical banking, we also need new types of financial institutions to allow Sirisuk signatories the choice to give any surplus income or profit to charitable organisations such as ‘not-for-profit’ ethical venture capital companies. We also need mechanisms to allow creative capitalists to continue to be creative without the need for them to personally own, and benefit from, all the wealth they have created. Some of the institutions I envisage might already exist, though perhaps they are outside the usual media radar; perhaps they might publicise what they are doing more widely.
Finally, it is vital to note that the reforms I am suggesting would only be a stepping stone to a complete overhaul of the money supply system. At the moment, the re-lending of income from deposits and the increase in the cranking ratio on reserves (reserves that are themselves often borrowed) means that the vast majority of all money in the economy is in fact created out of debt. If we, as a society, pay all the debt there will be no money in circulation; because only a tiny fraction of the money loaned by banks actually exists as real value.
Nick Nakorn, Samut Prakarn, July 2010
Please show your support for ethnical banking by signing the Sirisuk Declaration at www.sirisuk.org