Here’s how a ‘good’ bank could operate

The near-bankruptcy of the Co-op bank is an awful warning of what can go wrong

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In the spring I received a telephone call from a City grandee. He was ringing me in my role as chairman of the Assets Committee of the Church Commissioners. We manage a £5.5bn portfolio of securities and real estate with the objective of supporting the Church of England. My caller wanted to know whether the Church Commissioners would consider joining a consortium that was planning to bid for 315 branches of the Royal Bank of Scotland (RBS). These must be sold as a condition of the £45bn government bailout received in 2008. The branches serve two million retail customers and 250,000 small businesses. They would be re-established as an independent bank under the Williams & Glyn’s name.

In very round numbers, we were talking about a £1.5bn to £2bn business. Alongside the commissioners, there would be two other major UK investors – RIT, an investment trust chaired by Lord Rothschild, and Standard Life. We would be in good company.

Two questions immediately arose: would this be a good investment and would we be helping to create a good bank? The near-bankruptcy of the Co-operative Bank revealed last week is an awful warning of what can go wrong. For the Church Commissioners to participate in the consortium, we would need good answers to both questions. We cannot allow our good investment record to be dented.

The commissioners’ target return is the rate of inflation plus five percentage points. For 20 years we have handsomely beaten this objective. During this period, inflation has been running at an average of 2.9 per cent a year while the commissioners’ assets have grown by 9.9 per cent. Moreover, while a chance to contribute to the public good by helping to create a bank with high standards of behaviour would be welcome, what our partners and we would be trying to do is one of the hardest tasks in any organisation – improve the culture. We carried out a searching examination of the assets being sold and the plans for the future.

While this was going on, I realised I had never before asked myself the simple question, what is a good bank? I called upon my fellow Church Commissioners for their help. As a result I was able to send a coherent account to consortium members. With minor changes, the paper was accepted and has become part of the formal bid lodged with RBS in early August. What follows is an abbreviated version.

The document first sets the stage. “All businesses that wish to endure need a public purpose. The better they serve that interest, the better they are likely to perform financially on a sustainable basis, and generate lasting returns for shareholders… It is vital that the bank’s leadership understands why doing the right thing is the best thing; finds compelling ways of communicating this to staff embeds this within the process of the bank.” Then it warns against lending into over-heated markets: “Where a bubble seems to be developing in asset prices, the bank would restrict the amount of credit it provides to the sectors concerned.”

This leads into a discussion of treating customers well. “A key public purpose…is to help individuals with their financial management, including budgeting, saving and avoiding or reducing excessive debt. This will entail focusing on customer needs and financial education, as well as ensuring appropriate credit scoring and affordability assessments.” A similar commitment for the handling the business of small and medium sized enterprises is given.

Treating staff well is arguably as important as treating customers well because you cannot have the first without the second. “A good bank is built upon employing good people, and, in turn, showing them loyalty and trust, valuing their humanity and investing in their future. Treating employees well provides the basis for their loyalty to the bank and to customers.” Staff will also be offered shares in the new venture.

Supporting the local community is also part of being a good bank. It is intended to develop initiatives to support and to contribute to local communities. The bank will, for example, engage in community-based small business outreach programmes and will make available a small percentage of its loan book to support community lending. The bank will also support financial education in schools and for its customers.

Finally executive remuneration – the consortium has accepted the principles outlined by the Ethical Investment Advisory Group of the Church of England. In summary, executive directors in receipt of competitive salaries should not be offered annual bonuses of more than 100 per cent of base salary for target performance and there must be claw back for behaviour that proves to have been damaging in the long-term.

Variable remuneration schemes should take priority long-term over short-term performance. Long-term incentive plans should cover periods of five to seven years – not the three years commonly used – and should normally be paid in shares held for the long term. All variable remuneration schemes should reward executive directors against ethical, social and environmental metrics appropriate for the individual company, not just financial metrics or movements in the share price and dividend.

So that is what we have set ourselves to achieve. We shall know shortly whether our proposals have been accepted.

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