Society, environment, and economy focus on value-based banks vs. global systemic banking institutions.

Real Economy- Real is an annual research that the Global Alliance for Banking on Values (GABV) publish since 2012 comparing the results of values-based banks and banking cooperatives (VBBs) with the largest banks in the world (GSIBs). Value based banks, refer to banks that work with principles: triple bottom approach, transparency, real economy, long term resilience and client centred.

Examining traditional metrics – growth, resilience, profit and contribution to the real economy- it has contributed to the rise in visibility and relevance of sustainable finance globally. However, the growing consciousness around the topic the profit focus remains dominant in the sector.

Following, we summarise the main key facts of the 2021 report, with the aim of reflecting about how the triple bottom line (TBL), based on the purse of three objectives: societal, environmental, and economic is practice and to what extent in the banking sector activity.

What support does a bank provide to the real economy?

Bank’s intermediation in the real economy is proxy evaluated through the portion of assets on its balance sheet that is allocated to lending. As a result, it reflects that the level of lending is on average 30% higher for VBBs than for GSIBs. Moreover, it remains core to VBB’s activity, with 69% of their balance sheets devoted to lending compared to 40% for GSIBs in 2020.

In addition to a focus on lending, VBBs rely much more on client deposits to fund their

balance sheets than GSIB. This reliance on deposit taking is another example of their focus on the real economy while represents a return to the roots of banking.

How resilient is a bank in the face of economic challenges?

The capital comparisons between VBBs and GSIBs over the years have reflected

growing regulatory pressure on all banks and banking cooperatives, and especially

GSIBs, to increase capital. Shifts in capital comparisons provide evidence that this

regulatory pressure has improved the resilience of the overall banking system. When measured by Equity/Total Assets VBBs have stronger capital positions, and the

gap with the GSIBs that had narrowed to just over 1% in 2015 has reverted to almost

2% observed at the beginning of the 10-year period of research.

Risk-based capital measures show historically stronger levels of capital by GSIBs, although the gap with VBBs has all but disappeared in 2020.

What returns does a bank provide to society, clients and investors?

VBBs have historically stable Returns on Assets (ROA) with limited volatility. Furthermore, the ROA for the VBBs is, on average, slightly higher when compared to the GSIBs.

Relative to Returns on Equity (ROE), VBBs have superior performance over both time

periods analysed with lower volatility over the five-year period and comparable over

the 10-year one. The ROE is impacted by the level of equity capital. On balance, it

appears that banking focused on meeting societal needs can provide acceptable

returns to investors in bank equity instruments.

What growth does a bank achieve to expand its impact?

The issue of growth further demonstrates marked differences between the two groups. VBBs have had much higher growth in Loans, Deposits, Assets, Equity and Total

Income compared to GSIBs over the period analysed. One element driving higher growth for VBBs is their relatively small scale.

This 2021 research edition show how values-based banks continue to demonstrate steady financial returns and growth with a strong focus on the real economy, built on solid capital positions. These entities support the intermediation of money to individuals and enterprises that deliver positive economic, social and environmental impact. Consequently, its evidence that financial returns are not reduced due to a triple focus on society, the environment, and the economic development. This fact may incentive GSBIs to go further with their commitment to three objectives, what is known as ESG (initials of environment, society, and governance). However, nowadays, still work to do and ESG can not be equated to the activity of value-based-banks. While the later are based on TBL principle, GSIBs still to purse financial even when ESG criteria are taken into consideration. Nonetheless, all conform crucial developments and sustainability issues, that demonstrate possibilities for a widening of the ethic and sustainable scope of banking institutions. It is relevant to the consecution of the sustainable development goals (ODS). Specially, to reduce inequality and to fight climate change, challenges that required of concerted action at the front on both the social and environmental. Social Progress Index (2021) is clear: “Achieving sustainability is tied to improving key areas of social progress”.

References

GABV- Global Alliance for Banking on Values (2021). Real Economy-Real Returns: The Business Case for Values-based Banking. https://www.gabv.org/projects/business-case-values-based-banking/

Social Progress Imperative (2021). Social Progress Index. https://www.socialprogress.org/