briefing on banks and trust, june 2010

Briefing: banksand finance

12 Banks slow to change

14 Re-evaluation boosts

banking brands

18 More reform, say activists

The recent US Senate grilling of GoldmanSachs executives neatly reveals a root

cause of the US financial crisis. After seniorexecutives at the Wall Street icon werecompared to bookies, Republican senatorJohn Ensign said: “In Las Vegas most peopleknow that the odds are stacked againstthem. On Wall Street they manipulate theodds while you’re playing the game.”

This alleged market manipulation is atthe centre of a Securities and ExchangeCommission lawsuit that alleges Goldmandefrauded clients by marketing a subprimemortgage product it had bet against. In itsdefence the bank called the lawsuit“completely unfounded”, adding: “We didnot structure a portfolio that was designedto lose money.”

The hearings highlight the heated debateover the role of banks and whetherspeculative, highly risky activities shouldbe combined under the same roof as thestewardship of the public’s savings andloans. Should banks be charged withsafeguarding their clients’ interests ormake money for shareholders and execu-tives, some of whom are taking homebillions in bonuses? As Goldman Sachs chiefexecutive Lloyd Blankfein bluntly put it in aJanuary testimony to the US Senate: “Weare not a fiduciary.”

Regulators have very different ideas. USsenators responded to public calls foraccountability in the financial sector byapproving in May a far-reaching financialregulatory bill. Announcing the break-through – described as the biggest overhaulof the banking sector since the 1930s – USpresident Barack Obama lambasted WallStreet for resisting reform.

“The recession we’re emerging from wasprimarily caused by a lack of responsibility

and accountability from Wall Street toWashington,” Obama said. “That’s why Imade passage of Wall Street reform one ofmy top priorities, so that a crisis like thisdoes not happen again.”

Throughout what had been a verybumpy passage through Senate, whichfollowed the December passing of the billby the House of Representatives, Democratsfended off most major changes sought byRepublicans and some members of theirown party. They were eventually joined by

three Republicans in a 60-40 vote to enddebate on the bill.

Michelle Chan, California-based directorof Friends of the Earth’s Green Investmentsprogramme, says that members of the USCongress, Republican and Democrat, wantto look like crusaders for reform.

“And of course the electorate is very keento rein in the excesses on Wall Street,” shesays. But she suggests there are huge ques-tions as to whether and how the ultimatefinancial reform package which emergesout of the Senate will have enough clout toessentially prevent a repeat of anotherfinancial meltdown.

Splitting up is hard to doThe passage of the bill through the Senatetriggered a conference between delegatesfrom the Senate and the House to reconciletheir differences on the legislation to formone compromise bill. That bill would needto be approved by both chambers by simplemajority votes before going to the presidentto sign into law.

Both the final versions of the bills requiremost derivatives to be traded through thirdparties, with the intent of increasing trans-parency. But the Senate bill clamps down onbanks finding exemption from some of thenew rules.

The reform measures aim to rein in bigfirms’ use of high-risk practices blamed forthe global financial crisis and put an end totaxpayer-funded bailouts of banks previouslydeemed “too big to fail”. They also aim tocurb the sector’s largely unregulated deriva-tives business and include several measuresaimed at increasing the transparency andaccountability at the US Federal Reserve.

Friend’s of the Earth’s Chan attributesthe banks’ lack of enthusiasm for reform

Regulation and reform

Resistance to rules

By Oliver Wagg

Resistance to bank regulation within the sector was strong in the lead-up to thesuccessful US Senate banking reform vote in May, despite public furore over WallStreet excesses

Briefing: banks and finance12 Ethical Corporation • June 2010

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“On Wall Street theymanipulate the odds whileyou’re playing the game”John Ensign, US Senate

The Volcker Rule

US president Barack Obama proposed in January that“banks will no longer be allowed to own, invest,or sponsor hedge funds, private equity funds, orproprietary trading operations for their own profit,unrelated to serving their customers”.

Named the Volcker Rule, after former FederalReserve chairman Paul Volcker, the proposal meanstwo major reforms to banks:• Derivative products should be sold and cleared

through conventional exchanges, which aretransparent and can be properly supervised.

• A new resolution regime for banks, to replace“too big to fail”.Volcker is not advocating a return to Glass-Steagall

– a bill that separated investment and commercialbanking activities – or a stipulation that retail banksshould be prohibited from engaging in investmentbanking. And the impact of the new US legislationremains to be seen. Meanwhile, politicians and campaigners

alike have taken aim at the UK government’slackadaisical approach to environmental,social and governance (ESG) stewardship atthe newly acquired financial institutions.

A UK select committee hearing into thebanks’ use of taxpayer money in March sawMPs quiz officials from the Treasury andUK Financial Investments (UKFI) – thegovernment-owned corporation set up tomanage these stakes. The sometimes stormysession revealed the government hadplaced no environmental or sustainabilityconditions on the operations of the banks,other than limits on executive pay andlending.

UKFI officials struggled to justify directintervention in a government-ownedbank’s business other than if it took any

actions to harm its value.Asked if there was anything that a bank

might do in terms of environmental sustain-ability that might actually prompt UKFI totake some action, its chief executive, RobinBundenberg, said: “It comes down to theimpact on value and that is quite a broadissue because where a company’s reputa-tion is brought into question, that oftendoes have a very direct impact on value.”

Campaigners say the government ismissing a big opportunity. UKFI, at theminimum, should follow standard goodpractice for institutional investors, says a

coalition of NGOs including Platform,Friends of the Earth and War on Want. Thisinvolves such action as behaving as anactive owner and incorporating environ-mental, social and governance issues intoownership policies.

No end in sightInvestment specialists warn that by tacklingthe symptoms, regulators are failing totackle the systemic causes of the globalfinancial crisis, raising the chance of furtherhits on the world’s markets and economies.

Towers Watson’s global head of invest-ment content Roger Urwin says risk-takingin the banking sector traditionally has beenexceptionally high. He argues that thebanking industry is obviously chastened bythe financial crisis, is rebuilding capital to acertain degree and reducing certain types ofrisk. In other words, “it is in a better placeright now”. But the degree to which bankswill accept that regulatory reform is onbalance desirable is, he says, small. “There’sno zeal.”

Urwin, who participates in the Networkfor Sustainable Financial Markets, says riskand uncertainty are endemic in today’sfinancial system. “We live in a more tightlycoupled, interconnected financial world.”And being tightly coupled means themarkets are predisposed to acceleratingforms of crisis or financial accident.

“Narrowly defined, the global financialcrisis was over in the summer of 2009.Broadly speaking the global financial crisiscontinues, because all we have done is sortout some of the symptoms and not some ofthe systemic causes,” Urwin adds. �

Briefing: banks and finance 13Ethical Corporation • June 2010

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Too much playing the market

to the profit-making potential of thesector’s over-the-counter (OTC) derivativeoperations.

“OTC derivatives remain a very largeprofit centre at many banks, even duringthe downturn,” Chan says. New rules –including the so-called Volcker Rule (seebox) – may be “very scary to the banksbecause [the changes represent] a challengeto their business model.” The derivatives billthat came out of the Senate may requirebanks such as Citigroup, and Bank ofAmerica, now that it’s part of Merrill Lynch,to spin off their derivatives trading.

Bailouts, but little duty of careKeen to prevent systemic financial marketmeltdown, governments acted swiftly tobuy stakes in failing banks during thefallout of 2008. But recent data and govern-ment hearings indicate the resulting stateownership failed to spur business recoveryor foster improved environmental andsocial stewardship.

A recent US government report revealedthe biggest Wall Street banks actuallyslashed their small business loan portfoliosby 9% between 2008 and 2009, more thandouble the rate at which they cut theiroverall lending.

“Big banks pulled back on everyone,but they pulled back hardest on smallbusinesses,” says Elizabeth Warren, chair-woman of the Troubled Asset ReliefProgram oversight committee, charged withmanaging the US government’s financialstabilisation package effort.

Regulators are failing totackle the causes of thefinancial crisis

Trust is everything in banking. The globalfinancial crisis of the past three years has

jeopardised that most valuable of commodi-ties. The hard-won reputation of thefinancial sector dived to all-time lows in thewake of the credit crunch. And now – evenwith an economic recovery under wayacross most western economies – it mayremain irrevocably damaged.

Many banks have resolutely set them-selves on a course for recovery by developingand strengthening the corporate socialresponsibility and sustainability initiatives forwhich they were once so well known. Somehave developed brand new programmes,while opening their vaults to customers andshareholders in a new spirit of transparency.

But few have radically changed the waythey do business, which suggests thatfuture systemic financial breakdowns couldbe inevitable.

Financially, banks are certainly on theroad to recovery in the UK, one of theeconomies hit hardest by the fallout of thebanking crisis.

Royal Bank of Scotland, bailed out by theUK taxpayer, reported a first-quarter loss inMay, but it was the only major UK financialinstitution to do so. HSBC joined Barclaysand Lloyds Banking Group in postinghealthy profits.

In the UK, the credit crunch was quicklyfollowed by a rise in customer complaints.Now high street banks face possible finesafter UK’s Financial Services Authority saidin April that it was formally investigatingthe sector for mishandling customercomplaints.

Serious complaintsThe FSA hasn’t named names, but says fivebanks have weaknesses processing griev-ances after reviewing lenders responsiblefor 70% of complaints it received.

Peter Vicary-Smith, chief executive ofconsumer advocacy group Which?, says thefindings provide “another damning indict-ment of the banking industry, many ofwhose members consistently put salesbefore customer service”.

RBS, for instance, was responsible for2,557 new complaints received by the Finan-cial Ombudsman Service in the second halfof 2009, while the service received 9,952 newcomplaints about Lloyds in the same period.

Given the scale of the credit crisis andthe impact on people’s back pockets, this ishardly surprising, senior banking execu-tives say.

Andrew Cave, head of corporate sustain-ability at RBS, admits the group’s brand is“in a difficult place right now”. But the

bank’s ignominious fall from grace is notborne out by sales data: last year RBScustomers opened one million new savingsaccounts, 1.1m more current accounts and80,000 mortgage accounts.

“This indicates the underlying strengththat exists in the core businesses at RBS, anddemonstrates that our employees’ commit-ment to customer service is reaping rewards,”RBS chairman Philip Hampton said in thebank’s 2009 corporate responsibility report.

“I have always said that if we continue todeliver for our customers on a day-by daybasis RBS will restore its reputation soonerthan some commentators believe.”

Cave admits banks have been underpressure. “But when you step back, if ourproducts are delivered responsibly and effi-ciently, they are deemed to be socially useful.”

Across Europe, banks once hailed fortheir corporate responsibility have sufferedhuge setbacks. For instance, public opinionsurveys conducted last year indicated thatDanish customers were among the leastsatisfied in Europe.

Danske Bank, the largest bank inDenmark, which has won accolades for itscorporate responsibility programmes, wasdeeply affected by a general lack of trust,according to its 2009 corporate responsi-bility report.

Marion Swoboda, senior equity analystat investment boutique Sustainable AssetManagement, says that globally the bankingsector has weathered the storm relativelywell. She singles out pockets of best practicein Australia (particularly ANZ, Westpac andNAB), Spain (Santander and Banco Bilbao)and France (BNP Paribas and CreditAgricole).

One particular standout in the March2010 DJSI World Index review was Italy’s

Banks and bankers

The search for brand revival

By Oliver Wagg

Some financial institutions have taken the opportunity of the banking crisis tore-evaluate policies and business models. But is there really a change in culture?


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services companies in the world,” the banksays in a section headed Rebuilding Trust.

In the wake of the global financial crisisand the ensuing credit crunch, banks nowneed to forge a much stronger contract withsociety.

Anne Søgaard Melchiorsen, head ofcorporate responsibility at Danske Bank,says that corporate responsibility andsustainability must have a much broaderfocus, and that they have to move evencloser to the bank’s core business.

“Beforehand you could have some ‘nice

to do’ projects – perhaps some microcreditprojects, some [investment] screenings etc –but now responsibility is about the corebusiness,” she says. And this means respon-sible lending, and how the bank acts as anadviser, she suggests.

Citigroup, one of the biggest bankinggroups in the world, says it has plotted apath to recovery through the provision ofresponsible finance in response to whatcustomers want.

Pamela Flaherty, president and chiefexecutive of the Citi Foundation anddirector of Citigroup’s corporate sustain-ability, says group chief executive Vikram

Banks need to forgea stronger contractwith society

Banca Monte dei Paschi di Siena (BMPS),which progressed a lot. Like the Australianbanks, BMPS “really understands the impor-tance of rethinking business strategy,”Swoboda says.

“That might not get you points with thetraditional analysts – having a more down-to-earth, steady growth strategy as opposedto perhaps a focus on structured finance –but it is certainly the way forward.”

Francesco Mereu, corporate responsi-bility manager at BMPS, says the bank’ssustainability efforts are in reaction to amarked decline in trust and reputation ofthe banking sector in Italy.

“Regaining that trust is certainly thefocus of our business plan for the next year,”he says. Mereu is confident that the bank’sCEO is keen is keen to prioritise sustain-ability objectives. The bank’s new coreproject, set up over the past year, is simplynamed Sustainability – “the aim is tocompletely embed environmental, socialand governance [ESG] aspects into ourmanagement cycle”.

Mereu says sustainability will now becentral to the overall business strategy,adding that the bank will use key metricsthroughout the business to incentivisechange.

BMPSwas judged the best financial insti-tution in the CSR Online Awards 2009, theannual ranking of the best online corporateresponsibility communications conductedby financial communication consultancyLundquist.

According to Lundquist, BMPS shows“remarkable sensitivity to corporate respon-

sibility issues and uncommon completenessin reporting”. The bank provides, Lundquistsays, a high level of detail, with a great dealof relevant information from its corporateresponsibility report available in differentformats.

Opening up?But have UK state-owned banks beenforced into becoming more transparent andaccountable since the government became asignificant shareholder?

Royal Bank of Scotland, 83% owned bythe state, has made some significant strides,according to Cave. “Clearly the newmanagement team had to mark a change inculture. It fell to them to re-engage ourstakeholders and win trust by being moreopen and disclosing more information,” hesays.

He adds: “Our stakeholders have to beable to track us, not just trust us.” And so,RBS has moved to quarterly financialreporting, now discloses more financialinformation to give investors a much betterfeel, and includes detailed information ofprevious write-downs.

Lloyds Banking Group, 43% owned bythe UK government, was unable to answerEthical Corporation’s questions. But in its2008 corporate responsibility report, thebank said it had communicated a “shared setof values” since the government acquired astake. “We have the opportunity to createone of the strongest and safest financial


Retail banks face risingcomplaints

The UK banking groups responsible for over 70%of customer complaints had a number of featuresin common.

• Poorly designed staff incentive schemes.

• Inadequate complaint handling by staffin branches and call centres, leading toinadequate investigation into the problems.

• Poor decision-making and unsatisfactorycorrespondence with customers.

• Complaint handling procedures that led to staffissuing multiple, repetitive responses to customers.

• Failure to learn from previous complaints andto make changes to prevent similar complaintsarising in the future.

Source: FSA

£4.15 owned by UK taxpayer

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Pandit talks a lot about finance that is“responsible and responsive to consumers”.

“In the US, our CEO is constantly rein-forcing the importance of a return toprofitability through providing responsiblefinance. He has talked about the importanceof Citi demonstrating it is contributing tothe economic recovery of the country,”Flaherty says.

For Citigroup, responsibility meansdirect action in the markets in which itoperates. For example, since the start of thefinancial crisis in 2007 Citigroup has helped824,000 consumers avoid foreclosure,Flaherty says.

In May Citigroup launched a $200mCommunities at Work Fund to fuel smallbusiness lending in low-wealth and low-income US communities. The fund willprovide financing to both non-profit andfor-profit community development loanfunds that will then lend to local businessesin low-income communities.

The bank will provide $199m of capitalthrough a combination of equity and loans,with the Calvert Foundation and Opportu-nity Finance Network contributing thebalance.

Executive pay continues to be one of themost contentious issues following a crisisthat many attributed to greed.

Tom Powdrill, head of communications

for UK corporate governance adviser PIRC,recently likened the market for high salariesand bonuses to a “remuneration arms race”.

Lloyds’ remuneration report may,depending on the performance of Lloyds’shares, see chief executive Eric Daniels netup to £6.2m in salary and bonuses overthree years. Lloyds’ remuneration reportwas approved by 90% of shareholders at itsrecent AGM.

Royal Bank of Scotland saw its remunera-tion package approved by 99% of its investors– a vote higher than in 2008. RBS chairman

Philip Hampton told shareholders at theAGM that the bank would listen to investorconcerns over its new bonus scheme forsenior executives, which could net chief exec-utive Stephen Hester a maximum of £4.8m.

Meanwhile the head of HSBC’s invest-ment banking business, Stuart Gulliver,received in March the largest bonus paid bythe bank: worth a whopping £9m. Gulliver,who in addition to running HSBC’s globalbanking and markets business and its assetmanagement arm is also head of the bank’s

operations in Europe and the Middle East,was paid the stock bonus in addition to hisbasic annual salary of £800,000.

HSBC, Barclays and Lloyds BankingGroup did not respond to Ethical Corpora-tion’s repeated interview requests.

The British Bankers’ Association takes arelaxed view of executive pay. “Banking isglobal in nature and highly competitive,”says the BBA’s Brian Capon. “The bankingindustry in the UK is a world leader andearns a great deal of income for the UKeconomy.” He says that to retain thisposition the industry needs to competeinternationally and that means employingthe best people, and to “provide a competi-tive remuneration package.”

BevisWatts, head of UK business bankingat sustainable bank Tridos, says bankingculture is too wrapped up in excessive paythat is based on short-term targets. “We havehad a financial system that has been entirelyfocused on short-term profit performance.”

Watts suggests that at most, people lookat business plan objectives for a bank overthree to five years. “But in actuality every-body is focused on performance in thecurrent financial year,” he says.

Greed cultureThe blame rests with payment structures,Watts argues. “The way that bankers areremunerated has to change because it is aninherent part of this culture that supports thisgreat nonsense of greed and chasing after anever more unsustainable system,” he says.

Martin Lawrence is head of research atgovernance advisory firm RiskMetrics inMelbourne, Australia. He is hopeful theglobal financial crisis alerted enlightenedshareholders to excessive pay packages.

“The big issue is huge cash bonuses andguarantee for failure, but that’s not confinedto a bank, that’s in all industries,” Lawrencesays. But he points out that in reality veryfew remuneration packages get turned overat AGMs.

Lawrence says there is hope thatcontinual naming and shaming will rein insome excess. “Board directors are timid crea-tures on the whole. The threat ofshareholder opposition can be enough topersuade them. At least that shows they arebeing responsive.”

While pressure builds to limit executivepay, some institutions are attempting toleapfrog public outrage with innovativecompensation packages.

Goldman Sachs said in late 2009 that itwould pay top executives in restricted stock, a


Citi flying the responsible flag?

Executive pay continuesto be one of the mostcontentious issues

Piechocki says. Customers becomemembers of the local cooperative Rabobankbranch and have a say in how the bank isrun through elected member councils,which feed into the broader governancenetwork.

“We believe a company can only survive[in] the future if sustainability becomes a corepart of the business – [if] there’s a solidbusiness case. Now you have to organiseyour operations in a sustainable way. Other-wise you lose to competition,” Piechocki says.

Triodos, the Financial Times SustainableBank of the Year in 2009, has also benefited

from its lending practices and alternativeownership. The bank says it finances compa-nies, institutions and projects that “addcultural value and benefit to people and theenvironment”, that this is done with thesupport of depositors and investors “whowant to encourage corporate social responsi-bility and a sustainable society”.

Bevis Watts says sustainable banking isbased on three main tenets at the bank: howthe money is used; transparency; andgovernance.

“We give an assurance to customers thatwe will only be supporting projects that candemonstrate they have a positive social andenvironmental impact,” he says.

He argues that sustainable banking isimpossible without transparency, “both inhow you use the money – we have a Google-poweredwebsite that you can search and seeall the organisations supported by the bank –and in the products you offer customers”.

With governance such a high priority,Triodos offers shares that are held in trust,with shareholders receiving depositoryreceipts. Everybody has the right to electa board of trustees to represent that trust.No organisation can own more than 10%of the bank’s share capital, ensuring itsindependence.

With all this in place, Triodos achieved30% growth across Europe last year as themainstream banking sector contracted.

“The fact we are not exposed to thewholesale money markets has been the keyto having that stability and ability to be ableto lend,” Watts says. He contrasts this withwhat many other banks have done: vastlyleverage their balance sheets, borrowingand lending funds beyond what they cancomfortably secure.

“They have become too big to have anyresponsibility for the risks that they run. Wehave ended up with a system that is too bigto fail,” he concludes. �


Ramping up responsibilityin response to crisis

Some leading banks have boosted responsiblepractice as a response to the financial crisis.

• Royal Bank of Scotland’s commitment tocustomer service has seen savings/mortgageaccounts grow.

• Danske Bank has developed a financial literacyprogramme, and wants CR at the core of operations.

• Citigroup now helps customers avoid foreclosureand kick-starts microfinance for low incomefamilies.

• BMPS has been lauded for its online corporateresponsibility communications strategy.

Still big bonuses to be made at HSBC

Sustainable bankingis impossible withouttransparency

HSBC

scheme that will defer compensationexpenses. The awardswill consist of shares-at-risk that start vesting in 2010 and can’t be soldfor five years. Goldman, which has repaidwith interest the $10bn it received from theUSTreasury, was derided for allocating a near-record $16.7bn to pay employees in the firstnine months of 2009 after benefiting fromgovernment support. Goldman Sachs did notrespond to interview requests.

The crux of the problem, critics say, isthat senior executives at mainstream banksare not on the whole incentivised to priori-tise sustainable business practices.

Dutch financial services group ING isperhaps an exception, after announcing inApril the integration of sustainability intothe personal accountability and perform-ance objectives of its senior management.

“To ensure that corporate responsibilityis an integral part of our corporate strategy,our social, ethical and environmental objec-tives will be quantified and used as ameasure of performance in the remunera-tion policy of the executive board’s variablepay programme,” the bank says.

An ethical umbrellaRabobank’s head of corporate social respon-sibility, Richard Piechocki, says the Dutchbank – one of the 20 biggest banks in theworld – was virtually insulated from thecredit crunch.

The bank, which has a cooperativeownership structure, was founded over 110years ago as a rural credit cooperative byDutch farmers who sought to provide theirrural communities with access to fair andsources of credit.

“Customers believed we were an islandin a rough sea since we have very strongpolicies and avoid high-risk products,”

The global financial crisis that triggeredthe failure of some of the world’s biggest

and best-known banks has led to ferventcalls for wholesale reform from investorsand civil society alike.

But change has been sluggish andpatchy at best. It has been held up by regu-latory and political hurdles and thereluctance by the banks themselves – mostof them beneficiaries of large public bailoutpackages – to search for and deploy alterna-tive business models.

Many social justice and environmentalcampaigners see the financial sector ’smeltdown as a huge opportunity for funda-mental reform of the way banks conducttheir business. But most are worried thatlittle has changed.

Ruth Tanner, campaigns and policydirector at anti-poverty campaign groupWar on Want, says her organisation isextremely concerned that the public is notgetting the fundamental change they aredemanding. “At the moment we are seeing‘back to business as usual’ and back to bonusculture and casino capitalism, which got usinto this mess in the first place,” she says.

She says that the City has been consid-ered untouchable [by the UK government].While some “tangible ideas” have been putforward over the last year, such as tackling

tax evasion and taxing the banks to funddevelopment projects, “the banks havefought very, very hard against what we arecalling for”.

Johan Frinjs, coordinator of Banktrack –an international network of campaigngroups – says the bank sector is actuallymoving in the opposite direction of reform.“You would expect after the turmoil that thebanks would be looking at some very strongpolicies, but mainly they aren’t and arequite defensive.”

Tanner agrees the sector is not seriousabout changing its business practices. “All Ihave heard is PR spin on some very seriousissues, such as investing in the arms trade.”She says that UK banks have been effec-tively lobbying to oppose structural changethat would be good for the economy andsecurity, and “the rights of some of theworld’s poorest people”.

Leveraging public ownershipCampaigners in the UK and the Nether-lands are keen to persuade theirgovernments to use their clout to reformstate-owned banks. These include UK banksRoyal Bank of Scotland (83% owned by thegovernment) and Lloyds-TSB (43%), andABN Amro, whose remnants were nation-alised by the Dutch government after it was

bought in 2007 by a consortium of RBS,Fortis and Santander.

The Dutch parliament released a reportin May that encapsulates the lack ofprogress. The Report of the ParliamentaryCommittee Inquiry Financial System saysthe committee calls for “serious and criticalreflection” by all parties involved in thefinancial system.

The report states that some of the impor-tant factors that served as the causes of thecrisis in the financial system are still present,both in the structure of the system itself andin the culture and conduct of those withinit. “These factors could once again causeproblems in the financial system in the nearfuture,” it concludes.

And Banktrack’s Frinjs says: “ABN Amrois planning to be the very same bank that itused to be, rather than something that haslearnt from the monumental mistakes itmade. The culture hasn’t changed at all.”

Banktrack recently published a majorinvestigation into the business conduct of 49global banks – Close the Gap – the thirdstudy of its kind designed to stimulate thedevelopment of world-class investmentpolicies by the banking sector.

Despite the turmoil caused by the globalfinancial crisis, the sector has developedmore policies covering more sectors andsustainability issues. However, the overallquality of these policies “still leaves a lot tobe desired”, the author of the report JoraWolterink says.

The key to all this lies in better trans-parency. One environment, social andgovernance researcher who preferred toremain anonymous pointed out that nobanks report on their actual business.Miners and oil companies report on theimpacts of their business, he says, but banks

Campaigning pressure

Short-changed on bank reform

By Oliver Wagg

Banking sector activists are concerned that the reforms being promiseddo not go far enough


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St Vince to the rescue?

Hope for tougher bank regulation in the UKemerged in May with the appointment of Lib DemTreasury spokesman “Saint” Vince Cable – hailedby right and left as a prophet who predicted thebanking crisis – to the post of business secretary inthe new coalition government.

Lib Dem policies have tackled the area of financesector regulation, supporting a tax on financialtransaction, a new green investment bank and inter-vention to curb speculation through breaking upthe banks. At its conference in 2009 the party laidout policies to end taxpayer support for Royal Bankof Scotland’s investments in tar sands extraction.

“Introducing these policies from the outsetwould signal a real commitment to cleaning upthe mess that the financial crisis has left Britainand the world in,” says Deborah Doane, directorof the World Development Movement.

Kevin Smith, co-director of Platform says: “VinceCable needs to ensure that the reform of the bankingsector involves addressing environmental as well asfinancial sustainability.” He argues that the newgovernment’s plans for a green investment bank willbe dramatically undermined if it continues to allow RBS“to use public money to support and expand carbonintensive industries and operations around the world”.

But just days after the new coalition government

was formed, reports emerged that the new chan-cellor of the exchequer, George Osborne, will takeresponsibility for reform of Britain’s banks and notthe Lib Dems’ Cable.

The Treasury is to remain in charge of bankingpolicy and the financial services sector, with Osbornechairing a key cabinet committee that wouldcommission a top-level report into the feasibility ofsplitting the “casino” investment banking arms ofbanks from their mainstream high street operations.

The parties agree that a banking levy will be intro-duced and state that they will bring forward detailedproposals for robust action to tackle unacceptablebonuses in the financial services sector. “In developingthese proposals, we will ensure they are effective inreducing risk,” the new government says.

19Ethical Corporation • June 2010

“generally report on admin, not their corebusiness. A lot of banks tend to win awardsfor their sustainability reports, but this isnonsense.”

A taxing problemA significant portion of the criticism levelledat the banking sector focuses on the myste-rious ways some conduct their tax activities.Consequently banks have a great deal togain by lifting the shroud of secrecy,campaigners say.

The stakes are high. Taxing Banks, asubmission to the IMF by Christian Aid, theTax Justice Network, UK trade unionmovement the TUC and others estimatesthat recommendedmeasures to tackle corpo-rate tax avoidance by banks might raiseexisting yields by 50% to $180bn worldwide.

The potential revenue streams fromenhanced bank reporting on customeractivity are much greater still: a significantproportion of the current estimated $255bnlost to tax evasion as a result of bank opacitymight be recovered.

Christian Aid’s chief policy adviser, AlexCobham, says tackling the root cause of theglobal financial crisis would help stamp outtax evasion, which has huge potential for

alleviating poverty in developing countries.Cobham argues that financial secrecy not

only reduces the tax base, it also distortseconomic and social processes. “Effectivelyit tips the balance within a developingcountry away from giving people incentivesto invest and carry out genuine productiveeconomic activity and towards things that

involve them taking their slice of the cake,”he says.

With the G20, OECD and the IMF allstarting to scrutinise these issues muchmore closely, there is an opportunity for thebanking sector to be seen to be clean.

For most banks this isn’t a great part oftheir business – there are some banks,probably a minority, where tax avoidance isa particularly large part of their business. Butfor most banks the reputational risk of beingseen or revealed to have been involved intax evasion is probably quite large comparedwith any financial benefit. �

Briefing: banks and finance

Leaders try to get tough

Banks have a great deal togain from lifting the shroudof secrecy

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High hopes for Vince Cable

briefing on banks and trust, june 2010

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