Jean Rogers Interviews Kat Taylor
A banking partner is more than a service provider—their mission and values dictate how our money is put to work 24 hours a day. Between 2016 and 2018, banks invested $1.9 trillion in fossil fuels globally. To foster conversations on how banking can evolve to support a greener planet, Confluence organized a session at our 2019 Climate Solutions Summit. The session touched upon some larger, systemic issues within the banking system that are creating inequity and serious social challenges, one of which is climate change.
Jean Rogers, founder of the Sustainable Accounting Standards Board (SASB), interviewed Kat Taylor, Co-Founder of the Beneficial State Foundation and Co-Founder/CEO of Beneficial State Bank, to dive into the topic of Banking with Values. Beneficial focuses on implementing foundational changes at the systems level in order to promote a more responsible, sustainable banking system that better serves its stakeholders.
To start, Taylor cited the issue of how the public views their relationship with banks in the U.S. and acknowledged her desire for all customers to realize their power over these institutions. “All deposits finance a lending practice, and that’s ours to influence and own.” According to Taylor, depositors are the largest stakeholders of any bank and are essentially the bank’s creditors. “Right now, banking is the biggest industry in the world,” she said, and that is why it is so important to fix it.
Taylor talked about how banks’ ability to leverage funds at extremely low costs (through FDIC insurance and the fractional reserve system) gives them significant competitive advantage over other financial institutions, such as hedge funds or venture capital.
Taylor also discussed the pitfalls of the current system. She warned the audience about the financial industry’s outsized influence in lobbying and funding political candidates, which eventually gives big banks the power to “write the rules.” Taylor emphasized the importance of banking regulations, and criticized lobbyists for dismantling the Depression-era Dodd-Frank Wall Street Reform and Consumer Protection Act.
“Sound regulations go beyond just keeping our money safe,” said Taylor. “They are also needed to eliminate discrimination in lending practices and to serve other public interests. Banks are a branch of law enforcement and the government, and they belong to us. They are public in nature,” she explained. She believes regulations need to be enacted which will fundamentally change the banking system in order to make banks more accountable to public interests.
When asked what Beneficial State Bank considers its biggest impact, Taylor replied that proving the financial sustainability of a triple bottom line bank was probably their proudest achievement. “That was super important to us because if you can’t be financially sustainable, nobody else is going to do it [replicate a values-based banking model],” she added. Beneficial’s triple bottom line mandates that the bank operates and invests with social equity and environmental values in equal measure to its financial goals.
Taylor argued that the traditional premise—that an organization’s fiduciary responsibility is to maximize shareholder value—is deeply flawed, and has led to pernicious outcomes over decades. She proposes a better way: Beneficial State Bank uses a multi-stakeholder model, which takes into account far more criteria than financial impact when making decisions. Taylor says the bank’s allegiances are to its customers, employees, community, the environment, and the general public, as well as its shareholders. She highlighted how pioneering organizations like SASB have played an important role in reporting beyond financial risks, contending that “environmental and social equity risk ultimately translates into financial risk,” further supporting a multi-stakeholder model.
However, she argued that avoiding harm is even more important than having a positive impact: “It’s not enough just to do good things; we have to stop doing bad things.” [DL1] Taylor says that banks are responsible for a significant amount of social harm, which continues despite billions of dollars in punitive fines on them. The financial influence of banks is too centralized, and ultimately, Taylor says, we need to find a way to break up the big banks and hold them to higher standards.
Along those lines, Taylor revealed that Beneficial recently released a set of open-source standards for banks that cover six areas of activity: governance, assets, liabilities, corporate transparency, general transparency, and advocacy.
But how can a smaller bank like Beneficial go toe-to-toe with the huge banks that have invested billions into keeping the system in place? Taylor has a simple, bold solution: revoking FDIC insurance from the big banks’ trading assets. Half of the balance sheet at big banks is held in trading accounts that they use to trade equities and securities, not in financing the economy. She argues that banks should not be taking depositors’ money—that’s guaranteed by the taxpayers up to $250,000—and wagering it in public markets for the benefit of the banks.
She says that the 6,000 small banks who are members of the FDIC could invoke a contractual clause that insists all members divest trading assets and effectively ban the banks that are engaging in such unscrupulous practices. This should result in an influx of capital into financing real businesses and vibrant communities.
Taylor elaborated more about the disconnect between big banks and financing the real economy, and her support of the Global Alliance for Banking on Values (GABV), a network of banking leaders from around the world committed to advancing positive change in the banking sector. She shared how banks have become over-financialized, with convoluted products and securitized portfolios where no one really understands what they are holding. These opaque products and services take away huge resources (financial and human) from the real economy.
GABV has taken a stand against involvement in such services and offerings. As a result, returns from values-aligned banks have been positive and consistent compared to other banks’ volatile performance. As a result, big banks are working hard to classify values-aligned banks as a different asset class!
“Our theory of change is not that somehow those big banks are going to become like us, it’s more that they’re going to go away,” Taylor stated emphatically.
