By Adriana Kocornik-Mina, Metrics and Research Sr Manager at the Global Alliance for Banking on Values
Building momentum for values-based banking requires that we show the value of this banking model in terms that bankers, regulators and policymakers understand. To that end, with financial support from the Rockefeller Foundation, we published in 2012 the first research showing values-based banks outperform traditional mainstream banks (the so-called “too big to fail” defined as Globally Systemically Important Banks (GSIBs) by the Financial Stability Board) across various financial dimensions, including return on assets, growth in loans and deposits, and capital strength: making a compelling case for values-based banking.
As a reference, this study, which has since been updated annually, compares publicly available information on the GSIBs with that of values-based banks, all members of the Global Alliance for Banking on Values. The GABV banks have a commitment to the six Principles of Values-Based Banking.
Annual updates of the report continue to show that values-based banks deliver higher financial returns than the largest banks in the world. These values-based banks place social, environmental, and economic sustainability and impact at the core of their business models and deliver these results while meeting the needs of their clients through lending and deposit products and services. The findings of this research help strengthen the case for a more diverse, transparent banking system that is values-based.
The 2020 report covers an analysis period of 10 years, from January 2010 to December 2019. Despite the financial crisis and the turmoil that followed, it is striking that the findings fundamentally remain the same:
- Values-based banks had a 30% higher exposure to customers in both deposits and loans.
- Values-based banks had relatively better-quality capital and lower volatility due to lesser exposure to the financial economy.
- Values-based banks offered resiliency through strong capital positions and delivered stable and solid financial returns.
- Values-based banks had, as a group, higher levels of growth in most economic measures.
Values-based banks continue to show that serving the real economy delivers better financial returns than those shown by the largest banks in the world. Moreover, values-based banks show that addressing the very real needs of enterprises and individuals within their communities for banking services, especially credit, is also good for business. As a society, clients, investors and regulators consider the future of banking, values-based banks have demonstrated stable and positive financial performance over the last ten years.
The Covid-19 response
Although the 2020 report analyses data until December 2019, it was produced after the start of the health pandemic. A survey among the CEOs of GABV members conducted in early Fall 2020 offered a helpful, albeit early indication of the impact of Covid-19 on their performance and operations:
1. Values-based banks recognised and acted on opportunities to accelerate their digital offering to ensure continued support to clients.
2. Values-based banks reported relatively high participation in government support schemes.
3. Respondents observed signs of resilience concerning profitability, asset quality, and nonperforming loans.
Values-based banks and the Real Economy
Values-based banking is a mission-driven approach to banking that puts finance at the service of people and the planet. Social and environmental impact is at the heart of a values-based bank’s business model. A focus on the real economy, strong engagement with its stakeholders, and a prudent approach to risk help make values-based banks financially resilient. Inherent in the values-based banking movement is a commitment to help deliver positive change in the wider banking sector so that it contributes to a more sustainable economy in the future.
Whether called social banking, ethical banking, or sustainable banking, these banks operate in numerous markets, serve diverse needs, and use distinct business models. Yet, they all are committed to the Principles of Values-based Banking.
To this date, values-based banks continue to demonstrate that a focus on the real economy with a dedication to supporting economic, social, and environmental impact delivers steady financial returns. Their lower exposure to the financial economy accounts in part for the lower volatility.
By real economy, the Global Alliance for Banking on Values refers to economic activities that generate goods and services as opposed to a financial economy that is concerned exclusively with activities in the financial markets.
Financial intermediation can be classified as a real economy if it is directly linked to a real economy asset or activity. This means that intermediation is aimed at directly supporting the production of goods and services instead of focusing primarily on buying and selling in the financial markets. According to the GABV’s definition, real economy intermediation is no more than one degree away from a real asset or activity.
