The Ecology of Finance
new economics foundation | November 2009
This paper distills lessons for the reform of the financial
system from organizations that are designed to capture social and
environmental value, not just profit. In doing so it showcases examples of
enabling legislation and a wide range of alternative financial institutions
that could help develop the kind of diversity and dynamism
needed to create a healthy ecology of finance. These include:
* Credit unions, community development finance institutions and community land trusts.
* Green investment banks such as the Nordic Investment Bank.
* The Community Reinvestment Act in the United States.
* The Mondragon Cooperatives and Caja Laboral Bank in the Basque region of Spain.
* A Social Investment Wholesale Bank and innovations including social impact bonds.
Policy-makers must act now to prevent a repeat of the kind of crisis that has just occurred. We identify a series of interventions that we believe are essential to rebuild prosperity, to support the most disadvantaged and to ensure greater stability in the future.
Preventative measures must:
- Separate out retail banking from other forms of banking by preventing deposit-taking institutions engaging in a range of financial activities.
- Regulate financial institutions appropriately according to their functions.
- Regulate financial institutions according to the riskiness of their activities, modified by consideration of their funding structure, governance arrangements and scale (with capital requirements being an increasing function of size).
- Develop counter-cyclical macroprudential regulation to offset the pro-cyclicality of the financial sector and encourage stability rather than volatility.
To achieve the vision of a financial system that fulfills the core functions the economy requires, reform will need to go beyond a focus on preventing another crisis. The goals of the White Paper—including greater competition in financial services, greater diversity in the sector and a system that is capable of investing in the long term—will require interventions that fundamentally alter the financial landscape.
nef recommends that reforms:
- Put in place a Social Investment Bank at macro level, linked into a local network of adequately funded community development finance institutions (CDFIs) and other local financing institutions.
- Establish a Green Investment Bank to channel finance towards developing the environmental infrastructure we need, in such a way that regional inequalities are taken into account.
- Establish a national Post Bank based on the existing post office network, to address financial exclusion and provide real, fairly priced competition in local communities.
- Encourage the expansion of existing mutual institutions and the establishment of new ones, including from the remains of bankrupt, nationalized banks.
- Introduce legislation to harness the benefits of disclosure and investment obligations, based on the Community Reinvestment Act, to link large, commercial banks into an ecology of finance with local, excluded economies.
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