Banking: Adopting values that could avert another financial crisis

Embracing a values-based banking system could avert another financial crisis as financial institutions would be banking on the real economy, says David Korslund, senior adviser to the Global Alliance for Banking on Values (GABV).

He points out that today’s financial system is in many ways too large, too complex and too removed from the real economy. The banking sector — an important component of the economy devoted to holding financial assets — has become so focused on short-term profit maximisation that it does not pay enough attention to social and environmental risks and leaves billions of people without access to adequate or any financial services.

But when banks are driven by the real economy, they are financing real goods and services, says Korslund. “I believe that if banks focused on values-based banking, the odds of a crisis are substantially less. It comes from a strong focus on the real economy, which means you are financing real goods and services, and not speculations in the financial markets,” he adds.

“You are very closely tied to your clients and communities. If you are further away from your clients or community, it gets harder to know what is really happening.

“There is too much focus on short-term shareholder apparent values. I say apparent value because it can easily disappear.”

Korslund spoke to Personal Wealth on the sidelines of the recent Global Islamic Finance Forum 2018.

The GABV was set up a year after the 2008 global financial crisis, which wreaked economic devastation and resulted in many losing their faith in the banking system. It started with 12 members in 2009, but has since gone from strength to strength. Today, it has 54 member banks.

Banks play an important role in the economy, but they can do more by contributing to cohesive sustainable development, says Korslund. “I think values-based banking is a very good antidote to financial crises. However, whether or not we are at the cusp of another financial crisis, it is very hard to tell.”

Read the full article here.

Courtesy of The Edge Markets.