Harry Geels: Triodos throws a stone into the banking pond
By Harry Geels
Recently, Triodos Bank published a report on the banking sector that was strikingly critical of its own industry. Let us take a closer look at its ten-point plan.
Most people have a complicated relationship with banks. We can hardly live without them, yet we struggle to live with them. That applies to me as well. I have written extensively about banks, though never focusing on the most common complaints about service, “bad” loans or rising banking fees. My criticism has so far mainly centred on balance sheets, and in particular on the ratio between equity and debt (banks operate with structurally weak balance sheets, and if this ever goes wrong, the taxpayer ends up footing the bill).
My second concern is that banks create large amounts of leverage in the economy, which amplifies economic cycles: in good times they lend more, in bad times less.
My third point of criticism is that the banking sector is oligopolistic in most countries, especially in the Netherlands. This implies a transfer of wealth from consumers and companies to banks (shareholders and staff).
But enough about my own criticisms. Let us look at what Triodos has to say.
1. Banking sector too large and detached from the real economy
The financial system is many times larger than the real economy. As a result, capital circulates mainly within financial markets (speculation, derivatives) rather than being deployed in productive investments. The consequence: bubbles, volatility and a growing disconnect from societal needs.
This is a valid point and ties in with my earlier criticism about excessive leverage. By reducing leverage via fractional banking (in other words: holding more equity) and tightening overly accommodative monetary financing, this problem could be addressed. Unfortunately, these solution pathways receive little attention in the Triodos report.
2. Too much concentration, too much power
A small number of large banks, asset managers and payment providers dominate the system. This limits competition, increases systemic risk and makes democratic oversight of the financial system more difficult. Triodos argues for greater transparency, tighter regulation, more intensive supervision and more targeted taxation to shrink and dismantle unnecessary structures within the financial sector.
This is also a strong point in the Triodos report, though I lean towards somewhat different solutions. Tighter regulation can, for example, have counterproductive effects, as only the largest players are able to comply. In an earlier column, I outlined seven reasons why banks should be broken up.
3. Too fragile and short-sighted
High leverage, speed and mutual interconnectedness make the system vulnerable. Crises are repeatedly absorbed by public funds, while profits remain private. Triodos proposes, among other things, lower leverage, stricter capital requirements and limits on risky derivatives and shadow banking activities.
I agree, although we should be careful not to impose too many restrictions. There are already plenty of rules.
4. Digitalisation and the struggle for control
Big Tech and crypto are shifting money creation towards private parties. This can bring efficiency gains, but also creates new concentrations of power and risks without democratic checks and balances.
I have previously predicted that if we continue on the current path, it is likely that banks and Big Tech will eventually merge. A disturbing prospect, as it would combine two oligopolistic markets and further increase the wealth transfers mentioned earlier. Money creation by private parties is less of a concern in itself, as it often does not involve leverage, which makes the system safer.
5. Detached from ecological and social reality
Too much bank capital follows returns rather than impact. As a result, destructive activities continue to be financed while sustainable transitions remain underfunded. Triodos advocates alternative valuation methods, such as “true cost accounting” (pricing in environmental damage) and long-term scenarios that include climate and biodiversity impacts.
It is logical for Triodos to raise this point, but in my view it is somewhat redundant. A good bank incorporates all risks when extending a loan, including climate risk (to avoid stranded assets). Saying that we need to take sustainability or ESG risks into account is therefore not revolutionary, but rather a confirmation of what constitutes sound banking practice. Moreover, true pricing belongs with products and services, not with loans. If the real societal costs (environmental and social impacts) are incorporated into the prices of goods and services, the entire economic dynamic changes. Sustainable production then becomes attractive by default, and financing will naturally follow that logic.
6. Entrenched in historical structures
Regulation, institutions and network effects maintain the status quo: they are locked into path dependency. Innovation is slow and often cosmetic. Solutions include more competition, for example through digital (public) money, and allowing or even (fiscally) encouraging alternative business models, such as cooperative banks, impact funds and public financial institutions.
An interesting point, though there is still much to debate about which solutions should or should not be pursued. For instance, I believe that public digital money requires far stronger democratic oversight, as I outlined in this column.
7. Ready for rebalancing
The Triodos analysis argues that change is possible, as it has been after previous crises. This requires a reorientation towards public values: the financial system should not primarily revolve around profit maximisation for shareholders.
In practice, crises do indeed tend to lead to new insights, although the market power of financial institutions usually results in too little real change. I do not see profit maximisation itself as the problem, provided there is sufficient competition. One option could be to make the utility function of the payments system public.
Other points; in conclusion
The remaining points in the Triodos report (8. Money as a public good, 9. Mobilising capital for regeneration, and 10. Financial instruments should explicitly take climate and biodiversity risks into account) are essentially further elaborations of the points discussed above. All in all, it is an interesting report that fits well with the image Triodos seeks to project. We do not have to agree on everything, but the report provides a solid starting point for further discussions, which will hopefully follow soon.
This article contains a personal opinion from Harry Geels