The Fourteenth Banker Blog

May 2, 2010

Ownership Conundrum III – A New Banking Model

Filed under: Uncategorized — thefourteenthbanker @ 12:26 PM

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.

Please comment.



  1. […] We need a dialogue on what form of banking we should have to replace the form we have today.  Please read prior post.  If banks get involved in solving community problems with more than marketing jingo’s and […]

    Pingback by Oil Spills and Responsible Banking « The Fourteenth Banker Blog — May 2, 2010 @ 12:46 PM | Reply

  2. Required at this bank should be a senior level HR or bank Ethics Manager who reports directly to the CEO. Any employee who can support their complaint with proof should be allowed to feel completely comfortable going to this manager (unlike the current bull shit HR at every company in corporate America that works solely to justify management misbehavior)

    This is the only way an organization can completely root out the possibility of mid-management abuse of power. Btw the CEO never has to worry about handling any calls, as long as folks know that such a manger exists and that they do what they’re supposed to do they’ll fix thier act.

    Comment by Vocalbanker — May 3, 2010 @ 3:39 AM | Reply

  3. Be careful where you post this idea – you will surely be accused of ‘socialism’ by many in the financial community. I think your ideas have merit and they certainly fit in with many conceptions of a post-capitalist world… but, it looks like you have predicated this on the belief that either all players in the game will adopt the new model of ‘ethical profits’ (if I may coin a term) or that, somehow, your model will survive in the Randian universe that dominates the markets.

    In either case, creating a new model of banking will not, in and of itself, address the problem. We will have to have pretty severe, not to say ‘draconian’, rules and laws with merciless enforcement for at least 2 to 3 generations before we can reasonably expect a sea change in attitudes and mores to become the norm. We see just this kind of timeline when an attempt is made to switch nation-states from one or another form of dictatorship to some kind of democratic governance.

    The same logic applies here: when bankers truly see no conflict as they blatantly cheat their clients, when pillage and plunder of entire countries is regarded as standard business practice, when C-suite executives consider it their obligation to secure short-term profits at the expense of anything and everyone else (at the behest of their speculator investors as you point out). Then what we have is an ingrained culture of deceit and avarice which will not respond to a casual spring cleaning.

    I think your banking idea is a good part of what must be an overall, overhaul of the entire financial and governmental system on massive, constitutional level. One that we must be prepared to support for the generational timeline it will take to effect.

    That sounds drastic but the alternative is to apply patching plaster when the roof beams are rotten. The current situation does not get better if we prevaricate – it gets worse, much worse and very quickly too.

    Prison may be the safest place for the ‘Masters of the Universe’ if this goes on.

    Comment by Craig Della Penna — May 3, 2010 @ 6:42 PM | Reply

    • Well put. It certainly will come under fire. However, I am proposing a niche bank, not any kind of mandate. You are correct that regulation is a must to deal with pervasive issues. The power of the market can make a difference as well. Think how many people, even if a small minority, choose green electric power or organic food. They do change the market in small ways and make a beginning in what you correctly identify as a generational shift.

      Comment by thefourteenthbanker — May 3, 2010 @ 7:54 PM | Reply

  4. Ownership issues can very quickly create a quagmire considering that businesses (including banks) have the following stakeholders and their differing objectives:

    True Owners: Mission & Vision, Longevity, Long term ROI

    Shareholders & Investors: Maximum return in the shortest possible time

    Executive: Longevity/Dominant position/Keep the engine ticking over smoothly

    Customers: Best outcome at the lowest price

    Regulators: Keepers of the Public Policy/Restraining/eliminating negative influence on external environment

    Executive (guided by the Board) is at the center of this tug-of-war constantly balancing the opposing forces and walking a thin line in creating a dynamic equilibrium. We have seen in the past (Enron and World Crossing) that whenever the Executive’s goals get aligned strongly with that of Shareholders/investors (disproportionate compensation in the form of stocks or bonus based on transaction fees or short term quick gains at the expense of…well everyone else) all boundaries are merrily breached.

    Senator Levin may lament about lack of ethical conduct by some in GS during Senate hearing. But the concept of ethics usually gets diffused by the boundaries explicitly set by law. Ethics then is reduced to ineffective soundbyte and there is not much to be gained by trying to appeal to the moral (?) compass.

    Restoring the balance is probably the key…

    Comment by alwaysnaive — May 3, 2010 @ 11:44 PM | Reply


    when Harvard Business Review starts to talk about responsible corporations, you know things have got to be really in need of change.

    Comment by Vocalbanker — May 6, 2010 @ 5:52 PM | Reply

  6. “Shareholders love this company a lot and think it’s done incredibly well, and I think they’re incredibly supportive,” Schorr (analyst at UBS) said in a televised interview (about Goldman).

    Wonder if the customers and the taxpayers in US (for US add fueling the fire against the American Dream), Germany and UK hold the same view!

    Once again the system is biased for Executives to gain more by aligning themselves with shareholders!

    Comment by alwaysnaive — May 7, 2010 @ 6:48 PM | Reply

  7. I’m no banking expert, but the post notes that ‘the stakes are very high’ in the face of coming shifts in which US will likely no longer be dominant.

    I’d actually flip that concept; because of the changes that you mention, I have a hunch this is an opportune moment for the type of entity you are beginning to describe.

    It’s possible that I’m just nuts, but I have a hunch that there’s a large, potential market across the nation for any banks that can do more for customers than shove high-rate charge cards on us.

    Comment by readerOfTeaLeaves — May 10, 2010 @ 10:25 PM | Reply

  8. Yesterday NY Times reported that the 4 Big Banks reported a perfect 61 Day run making profit every day of trading in the first quarter.

    During the same period unemployment rate rose to 9.9%. Clearly businesses that produce jobs are not growing. Reported that GDP grew by 3.2% driven mostly by consumers (mostly in clothing for example).

    In my naivety I presume that banking & financial systems are just intermediaries that match resources to those who need them to create real value efficiently. So if traders are raking in large profits every single day and average Joe on the street is taking a bad hit every single day, where are these resources coming from (Feds, Taxpayers?). Probably more important question for me to ask is where are these profits going to? Clearly the profits are not being invested into businesses that are creating value (and jobs)! Are these surpluses being siphoned of overseas (China?) or just keep circulating in the rarefied stratosphere of high finance refusing to “Trickle down”?

    Comment by alwaysnaive — May 12, 2010 @ 10:37 AM | Reply

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