Much of the debate about banks is about what they should not be. Many experts have make convincing arguments for dealing with the banking system in a post crisis paradigm, to prevent the next crisis. Appropriately much of this focus is on Too Big Too Fail institutions, specific financial activities and non-bank market participants and how to mitigate systemic risk. There has been little discussion about what a post reform banking system might look like. Capping size has some very significant and meaningful benefits. However, it does answer the issue of how to foster a financial system that serves key functions for society effectively and at moderate “cost”. Smaller banks may provide an opportunity for new models to be developed. The oligopolistic power of the New York, Charlotte, San Francisco — Washington Axis is a hindrance to the evolution of a better industry.
If I had a big picture dream for a fair, just, and prosperous American economy it would involved five trend reversals. These are difficult but not impossible.
- Government provides all necessary functions while actually reducing its relative burden on taxpayers and future generations.
- Finance provides all necessary functions while reducing its size as a share of the economy.
- Quality Health Care is available to all with cost effectiveness while reducing its burden on the economy.
- Current carbon based energy sources are phased out for clean renewable sources.
- Major changes in agriculture to support local fresh food production and improved nutrition.
Please don’t assume from these that I’m suggesting government direct all this.
So here is a proposal.
Create a new banking model that is responsible, sustainable, and creates the opportunity for personal abundance and economic freedom for customers, employees, investors and all other stakeholders. The stakes are very high as we move in a period of extraordinary risk both to U.S. economic dominance and currency stability.
In light of that purpose, such an institution would support the establishment of complementary institutions without the need to own or control those institutions, would support efforts for constructive global financial regulation and emerging market prosperity and would seek to help educate and equip all parties to develop their personal sustainability. (No more cramming credit cards into every wallet)
The institution would not adopt the current monetary compensation fixation in the banking system. This is not to the exclusion of financial sufficiency for the staff. The majority of the staff below executive levels could be compensated at a pay scales that provide for their economic abundance. However, with pay structured in such a way that the money issue is not foremost in daily decision making. Executive level compensation would be based on a maximum differential between executive pay and either average employee pay or minimum full time employee pay. The multiplier could be similar to those at established stakeholder based forms like Whole Foods, where I understand maximum pay is 19X average pay versus comparative businesses where it can run in the hundreds of times. This could accomplish several things within the organization as well as model new compensation structures for banks in the emerging economy. Within the organization, it will ensure that senior management’s primary motivation is not personal enrichment in short time horizons. Throughout the rest of the organization, it will increase morale, recruitment and retention of the best staff, a high customer service ethic, and decision making in the best interest of the customer rather than to churn data points. A multiplier based on minimum full time associate pay would provide higher pay to tellers, who are undervalued and sometimes paid below the poverty line.
The institution will evaluate and adopt a plan to maximize employee and community ownership and will consider whether ultimately full employee ownership provides the best model for the future banking system.
Senior management ownership in such a system could not be overly controlling nor structured so that a windfall could be reaped by selling the institution to another that is not like minded. If such a model were to be adopted, original investors would need to be prepared to transition their ownership with a reasonable return rather than maximizing their return by selling out to a larger bank.
The Board of Directors will include new economy, behavioral economics, risk management, environmental and traditional banking expertise. The Board will include employee representation. Annual or stock based compensation of Senior Managers will be at discretion of full board and will be transparent. Some consideration should be given as to whether some retirement funding could be done on a basis blind to the senior managers until they retire.
The bank will be highly capitalized with long-term equity investment. Leverage at a holding company level will not be utilized for initial capitalization or Treasury stock repurchase. Deposits will be primary funding vehicle with a very low cap on brokered deposits or general obligation borrowing.
The bank would develop expertise in clean renewable energy, local food production, and other areas where new economic models are necessary for real progress to take place. Without developing excessive risk concentrations, the bank would put its money into the highest potential prospects in these and other areas. The high capital position of the bank would permit it to take slightly more risk in these areas. (A side note, buying solar or wind energy tax credits does not count as making an investment in these areas. Major banks have trumpeted these as some sort of big contribution to clean energy.)
Other operating principles are open information throughout the organization, rejection of disinformation, focus on long term profits versus short term, and viewing all stakeholders as an “ends” rather than a “means”. The stakeholders are entitled to equality, dignity, sufficiency, happiness, security, to the extent we can support those.
The bank would be big enough to present a competitive challenge to the mega banks in at least some geographic markets. This means it would have adequate branch distribution and competitive technology. If this can be accomplished, consumers and businesses would be provided a choice to deal with an institution with values that more closely approximated their own.