Banks as a Social Institution Part II: Utility Banking

Banks were historically more of a social institution directly embedded into a community in which they had local knowledge and direct relationships with their customers. With the advent of technological advances banks lost their unique edge as it became easier for non-banks to access the same local data allowing them to effectively compete. As these competitors started offering cheaper credit, banks moved away from the fundamentals of more personalized dealings. Transactional gains displaced the relational model, and both banks and non-banks competed on loans, deal making, servicing fees, credit cards, etc. The banking industry thus moved away from being a community embedded institution and turned into a business.

The financial crisis has brought to light the fact that states and local communities have lost control of their own financing capacity. The flows of capital became concentrated in the mega-marketplace under Wall Street control, and liquidity - the liquidity they were supposedly creating through the derivative markets - was ultimately drained from local communities. Community development banks as a whole seemed to weather the financial crisis better because they maintained a semblance of relationship banking remaining close to their borrower base. While their clients tended to be lower-income higher risk borrowers, community development banks were more vigilant about underwriting their loans - unlike the helter-skelter subprime mortgage lenders whose loans were bundled up into the CDOs which transmuted into destabilizing toxic securities.

Many believe we need to re-examine all facets of our banking system, and look to the model of community or regional banks which have as part of their mission the goal of maintaining the robustness of the local economy. The concept of utility banking has been making the rounds of late. Suzanne McGee in her book Chasing Goldman Sachs very astutely likened the money grid to an electrical grid. Just as we have electric and water utilities, McGee proposes that we need a banking utility. The financing system is just a crucial a resource as water and electricity, because without healthy flows which facilitate our everyday economic exchanges our livelihoods and necessities of everyday life are threatened. When liquidity dries up it can be just as devastating as a water or electrical shortage.

Playing off the proposed public option for health care, Ellen Brown in her book Web of Debt suggests that we consider a public option in banking. Instead of taking profits out of the community system, the public banking system would be better positioned to reinvest in the community. An example of such a successful regional bank already exists. Bank of North Dakota is unique in that it is owned by the state. It dates back to the early 1900's, when the bank was developed to partner with other financial institutions initially to support farming communities and their financing needs including housing, consumer loans and educational loans. When the freeze was on after the financial crisis, Bank of North Dakota was largely insulated. The bank's president Eric Hardmeyer attributes their hardiness to the fact that they practice a more Warren Buffet (who well before the crisis called derivatives "weapons of mass destruction") style of investing, wherein they focus on economic fundamentals. Therefore, they did not participate in subprime loans and stayed away from the exoteric derivatives and swap markets because, per Hardmeyer "if we don't understand it, we're not going to jump into it."

Another model the Common Good Bank, a project spearheaded by William Spademan, is a proposed hybrid between a credit union model and a public bank. There would be a for-profit stock ownership model but it would operate more as a cooperative which has a focus on financing projects for the good of the community.

Economist Hyman Minsky once wrote of bankers that "a loan officer is a success if his customers are successful." Perhaps the time has come to redefine what it means to be a socially responsible financing institution.

Photo Credit: by Andrew Filer