The financial crisis revealed a fragile banking system. Banks incurred significant losses, governments had to intervene and this was followed by an ongoing string of banking scandals. Thus, the dominant model of banking today is viewed sceptically by the public. Many feel that the regulatory reforms and changes made by banks are not sufficient, and that the building of truly resilient banks may require a deeper transformation of the practice and culture of banking.
Whilst the dominant model of banking may look bleak, we often forget that there are banks that showed resilience and continued growth and profitability throughout the crisis. However, these positive outliers receive surprisingly little attention in the public, political and academic discourse. Yet there is a chance to learn something new from such positive outliers about the makeup of resilient banks. It seems that the secret of resilient banking lies in a long-term focus that permeates the everyday culture and business practices of a bank.
What we learn from positive outliers is that four key business practices underpin and maintain a bank's long-term focus: A commitment to transparency, inclusive governance, relationship building, and sustainable human resource practices.
A focus on transparency aligns with investing in the real economy where the value underlying transactions is evident and can be easily verified. Transparency towards customers and investors means being clear about the risks taken and helping them to understand the investments they make. Such transparency creates trust. For instance, Triodos Bank lists all individual firms and projects that it finances on its website via a map tool allowing everyone to see "where their money goes".
Inclusive governance means a sense of accountability towards all stakeholders of banks, not exclusively those who own shares. Research suggests that among the mainstream banks those that had more shareholder friendly boards lost more money during the crisis. Inclusive governance can be achieved through boards that represent diverse stakeholders groups, and through a commitment to dialogue and transparent communication with all stakeholder groups. The online mapping of investments, mentioned above, is one example. A true commitment to inclusive governance and long-term thinking may require decoupling from stock-markets.
Options for inclusive governance are many, from cooperative and mutual models to models whereby banks create their own tailor-made governance mechanisms. Triodos Bank for instance created a governance structure for the administration of its shares overseen by a board that broadly combines business and civil society expertise. This allows the bank to raise capital from institutional investors in a long-term focussed investment relationship. Banks like Triodos supplement expertise by building deep networks in the sectors in which they invest thereby managing investment risk through relationships.
Sustainable human resource practices
Human resource practices play a big role in engraining long-term thinking into a business. Long-term thinking can be one selection criterion for hiring employees into a bank. In terms of remuneration, fixed as opposed to variable pay is a powerful driver of a long-term focus. It can be structured in a way that small bonuses are paid after the fact as recognition for good performance - as opposed to acting as up-front incentives that narrowly focus attention on maximizing personal income.
Overall, the analysis of positive outliers suggests that combining economic and social concerns leads to more sustainable and resilient banks because of a focus on the long-term. To borrow an analogy from agriculture: any monoculture is easily wiped out by shocks because it has no resistance to disease. This is seemingly what happened during the financial crisis. A resilient financial sector needs diversity, including more banks like the positive outliers sketched here, from which other banks may be able to draw inspiration.
This blog is based on joint research by Ute Stephan, Aston Business School, UK; Marieke Huysentruyt, Oksigen Lab & Stockholm School of Economics, Sweden; and Bart Van Looy, KU Leuven, Belgium. This article is based on the blog of the Industry and Parliamentary Trust (IPT). You can find the original version here.