You know I am talking to a lot of people in the industry to get inspired in the writing of my book on The New Ethos in Banking. One of those people suggested that I talk to Martin Rohner, Executive Director at Global Alliance for Banking on Values. Martin and I ended up having a long talk about what banking on values truly means.

As a teaser to read the entire interview, I would like to start with the end:

"Every bank must ask itself: what is my calling as a social institution, and where can I have an impact?"

Explore the essence of ethos in banking, the role of values-based institutions in combating inequality, and how these banks can be trusted partners in fostering positive societal and environmental impacts.

Welcome, Martin; really excited to speak to you. Could you share a bit more background on you as the Executive Director of the Global Alliance for Banking on Values and what your organisation is about?

Indeed, I'm the executive director of the Global Alliance for Banking on Values, which I like to call a global movement of frontrunners in sustainable and value-based finance. I'm 57 years old and living in Basel, Switzerland. I joined the Global Alliance in 2020, so three and a half years ago.

Before that, I was CEO at Alternative Bank Switzerland, which was one of the very first members of the GABV. My career is diverse in the sense that I've worked for different types of organisations and sectors: from the private sector, the NGO sector and the public sector to the world of finance.

After being at Alternative Bank Switzerland, which is a small bank but quite well known in Switzerland because of its positioning as an alternative model, I decided to join the GABV because I wanted to get back into a more international role.

The GABV is a movement that was founded in 2009. But discussions actually started years before that, initiated by the CEO at the time of Triodos Bank in the Netherlands, Peter Blom. His vision was a global movement of sustainable and impactful banks that could show that a different way of banking was possible. He felt that it was important that we stand together to create more visibility and, as a collective, to have more impact and also have more influence on regulators and policymakers.

From the start it was very clear that it should be a truly global organisation. So Peter brought together the front-runner banks: from North America, Shorebank, Latin America, which was Mibanco Peru at the time, Asia Pacific BRAC Bank, and in Europe, Triodos Bank and invited others to join.

Today, the movement has grown to about 70 banks worldwide and over 40 countries, ranging from Canada to Papua New Guinea and from Peru to Japan, a truly diverse portfolio of banks with a vision to put finance at the service of people and the planet. What we don't say explicitly, but what was implicit in this vision, is that profit is not the key driver of what these banks do.

It's really more about being impactful for people and protecting the environment and the climate. We're a membership organisation that works with our members to help them advance their business and progress on the journey towards values-based banking. In addition, we engage with the wider financial sector on the need for greater purpose in banking.

Or as Peter Blom used to say: “We finance change, and we change finance”.

Are these banks mainly like smaller local banks, or do you also have global institutions in your members?

We have a huge diversity, ranging from microfinance banks, retail banks, credit unions, cooperative banks, and commercial banks. The smallest banks in Africa have anywhere between 50 and 250 million US dollars in total assets. Our largest member has 50 billion US dollars in assets.

So, the diversity is huge. The common denominators are the Principles of Value-Based Banking. All of our member banks have a triple bottom line approach at the core of their business model: people, planet and prosperity.

They have a strong focus on the real economy. They are grounded in the communities they serve and, therefore, understand the business models of their clients better than others and also the risks involved. They are resilient to crises because of their robust business models, and they have transparent and inclusive governance. And finally, all of these principles are embedded in the culture and strategy of the banks.

Value-based banking is not something you can delegate to the CSR officer and say, please execute. It is something that has to be part of the culture. That's why we are a CEO-level network. In fact, we've now started working with the non-executive directors as well because the values are set at the highest level of governance, the ownership and the board of directors.

How do you define ethos in banking?

The starting point is that every bank has values that define its decisions and actions. If these values have not been clearly defined and reflected, then organisations resort to profit or profit maximisation as the default value. That works if it is a real economy business, but in banking, it can create different challenges.

Banks play an infrastructure type of role in the sense that they are enablers of economic activity. An excessive focus of banks on profit can lead to adverse outcomes that can affect the wider society. Certain businesses or segments of the population may not have access to finance, and therefore, this creates inequalities. They may put the economy in jeopardy because they prompt a financial crisis.

The focus of value-based banking is on achieving a positive impact on people and the planet. What I observed is that even though our members are not primarily focused on profit, in most cases, they are actually very successful and profitable.

They might benefit from higher credibility and higher customer loyalty, which makes them more resilient to crises, etc. So values-based banking pays off in the long term and makes banks more stable. Anyway, this may be a bit of a long definition of ethos in banking.

My point is that every bank has values. In value-based banking, these values are more explicit, and the values are centred around society and the environment rather than around the commercial success of the organisation.

So ethos, in general, is about the values that, as a bank or as an industry, they live to?

Yes.

A different way of looking at ethos, and most of the book will rather investigate that angle, is that ethos is one of the three elements of the rhetorical triangle and the reason that people look down on banking and lose trust in banks is that the balance of the rhetoric triangle broke. On both ethos, pathos, and logos, we can argue that banks make mistakes, and because of that, they're currently having a hard time positioning themselves as a trusted partner in people's lives. The story isn't compelling anymore. What should be done to fix it?

First, I don't think it's just about rhetoric. It's actually much more fundamental and structural. We live in a capitalist system where the primary drivers of decisions are usually economic and where we constantly have to rein in the homo economicus within us with rules and regulations. And this is not a value judgment on the capitalist system; it is just a fact of life that that's the system we've decided as a society to operate in.

The capital markets are primarily driven by risk and return, and the real economy underpinning that is not so relevant. Of course, you have a lot of disclosures, regulations. etc. But in its purest form in the capital markets, it does not matter how you invest. Whether this is a weapons manufacturer or a health provider, what matters is the optimal risk-return profile. That's one of the challenges.

Also, large banks have to resort to the capital markets when they raise capital because they're too large to be funded through private equity. This means that they are driven by the capital markets to focus on profits.

Finally, we still have not managed to internalise certain societal and environmental costs. This allows for individual interest groups to seek rents that are distributed unfairly. The benefits and the returns get distributed to distinct groups of shareholders, managers, etc. At the same time, the societal and environmental costs get shared across the wider society.

Could you give an example of that?

For example, if you invest in fossil fuels, the benefits will accrue as dividends for the shareholders and bonuses for managers. But the negative impact of climate change is borne by the wider society. Dealing with these systemic challenges is difficult. Even though I think there's a lot of regulation that currently is happening primarily in Europe around this trying to correct some of these challenges, I don't really believe in success if you don't deal with the incentives at the very top. Banks will always find ways to work around those regulations. So they will first start trying to walk down the regulations. And when they can't do that, they will try to work around this regulation.

That's where values-based banks are really different: they're very explicit and clear about the values that are driving their business and focusing on that positive impact.

With the rise of the Industrial Revolution, banks were seen as trusted partners in the development of a new society. Today, we witnessed a similar opportunity, the Green Deal and the fight against the global climate crisis. Would you agree with that?

That's an interesting comparison, but to be honest, no, I disagree. I think during the industrialisation the benefits for the banks were internalised. In Switzerland, for example, the big banks, like Credit Suisse and UBS, were at the time created in the 19^th century to fund the big infrastructure projects like the Gotthard tunnel, etc.

They were founded with a clear purpose that was good for the wider society at the time. And eventually, they drifted off to become something different. So in those days, they could benefit from the investments they made. But when we're talking about the Green Deal and the fight against climate crisis, the benefits for the banks are externalised. They're not really benefiting and dragging their feet. They're not interested in playing the role at the scale they did during industrialisation.

Also, many politicians are saying that the financial sector needs to resolve this. I think the financial sector has indeed a huge role to play. But we either need to have clear rules and regulations, or we need to change the values in the financial sector. Otherwise, the financial sector will not play the pivotal role that politicians often like to attribute to the financial sector.

If we find a way to internalise the social and the environmental costs and benefits, then I think the banks would indeed play a role at the scale they did industrialisation.

I recently read a report that the bank industry is not diverse enough anymore. Too many savings cooperatives, mutual banks, that kind of business models, made the shift to the private shareholder model. And because of that, banks don't challenge each other enough anymore. More diversity would create more competition, higher customer satisfaction, and perhaps more ownership of banks' actions when things go wrong.

Perhaps a naive question, but would a public bank in each market be a possible answer to that concern?

Again, a good question. I come from a country of 8 million people where we have 250 banks, so there is an incredible diversity of banks. And I was astonished as I moved into this international banking role that apparently, among many regulators in Europe, there's the perception that larger banks and fewer banks are safer and easier to regulate, and therefore many countries are deliberately driving consolidation of the banking. I think that's mistake.

First of all, consolidating the market may make the banking system actually riskier. Credit Suisse is a good example. It went under or was basically merged by force with UBS. This barely had an impact on the wider financial sector in Switzerland because we have so many other banks that are supporting SMEs and supporting different kinds of clients.

Secondly, in my role I can see into the jurisdictions of over 40 countries of our members. What I see is that when there is this concentration of banking, it creates a banking system that does not serve all people or all businesses, and therefore it creates inequalities.

In many countries I noticed that the large banks often are just interested in serving either the large corporates or simply investing depositors’ money into government treasury bills. This happens in particular in countries where the government needs funding and pays high interest rates.

This whole idea of consolidating banking really leaves many people out of the equation. There needs to be alternative financing solutions that can serve all segments of the market.

Your question was about the public bank in each market. This is one possibility to address this gap and ensure that there are basic financial services and at least the minimum degree of competition. Again, if I can cite my country as an example, in almost every Canton there is so-called cantonal bank, which plays exactly that role. Most of them still are publicly owned by the Cantons.

A public bank is an option if there is not an alternative, or if there is not enough competition. But the public bank needs to have a very clear role and mandate and it should be complementary and not become an unfair competitor with public money, or even maybe, in the worst case, destroy the private initiative in finance.

You often read that banks can enjoy the profits. But in case of a loss, it's handed over to society, which, in a way, also shows that your bad scenario of a public bank may already be happening today, but for the private sector.

That is true. If a bank is big enough to become systemic, it has traits of a public bank. I would say it's even worse than the public because at least the public bank has some public governance.

That is another case from a governance perspective, why it's important to have a diverse system, including smaller banks, medium-sized banks. Very often, cooperative banks have a bad reputation. But I see many cases where cooperative banks or banks with other collective ownership play a fundamental role serving their members and providing access to finance for underserved client segments.

That links back to the next question: how do you look at the statement that banks create inequality? The best clients receive the best rates because it goes lowest risk. People with big financial problems, who often need good financial assistance, may not even get a bank relationship, or at a significant price.

I think that's true. Profit-oriented banks will behave in this way. They have a tendency to serve those customers that have the biggest share of wallet. Or, like a colleague of mine recently said, they provide customers with umbrellas when the weather is good, and when it starts raining, they take the umbrellas back to cut their losses.

Value-based banks follow another logic. They have a sense of fairness, equity and inclusion. They will not only think about how they can support those people most in need, but ideally, they will also appeal to the better off clients to help them in doing so, creating a sense of solidarity between those that have capital and those that need capital. In the GABV many of our member banks have specific products for that purpose. For example, there are banks where depositors can forfeit the interest on their savings accounts or term investments to support a specific project or target group financed by those banks.

Are there any other themes that you see where banks can be a true trusted partner for society that we haven't touched upon yet?

What I would like to add is that value-based banks are, by nature, small and medium-sized banks at best; they're not the large players that can even shift entire markets. I think, in a way, the large players would have much more responsibility. So, value-based banks, by themselves, can be role models and do good, but they cannot by themselves, save the planet and save our world.

And so, each bank, whether small or large, needs to understand what it is that they can influence and have an impact on. What is the issue or topic they can work on? To give you an example. I just came across one of our members, which is based in Nepal. The bank started as a small self-help cooperative during the Maoist insurgency in Nepal, and today, they're operating across the entire country. But not only that, because of their rural origins, they discovered that in Nepal, the agricultural system is not capable of producing sufficient food to feed the Nepali population; they have to import 90% of the food.

So they went into a programme where they are supporting the transformation of the entire agricultural value chain, not just providing finance, but also additional services such agricultural extension services, etc. They are playing a truly transformational role in an area where they have the most know-how, an important network and where their roots are.

I think that's the way value-based banking needs to operate. Every bank must ask itself: what is my calling as a social institution, and where can I have an impact?