A path toward bringing banks under democratic control

The struggle to create a democratic economy based on human need requires finding a path to a drastically smaller financial industry. Banking should be a utility, under public control and existing to serve the productive economy, in contrast to its current incarnation as an uncontrollable behemoth that exists to extract wealth from all other human activities.

Given the stranglehold of financiers over the world’s economies, democratizing banks will be no easy task. But it can done. Countries such as Norway and Sweden have nationalized their banks, only to promptly hand them back to private owners.

As always, a word of caution is in order: Although the financial industry acts as both whip and parasite in relation to the productive economy (providers of tangible goods and services) — the whip spurring ever harsher working conditions and intensifying the movement of production to low-wage havens and the parasite extracting money from every possible human activity — there is no neat separation of finance from the productive economy in capitalism. Many manufacturers have financial subsidiaries, for instance, and corporate executives grow wealthy from stock-market bubbles inflated by speculators and other financial manipulations.

The giant piles of money thrown into speculation are the products by industrialists’ profits created through exploitation of employees. There is a symbiotic relationship between financiers and industrialists; together they constitute a globalized class that maintains power through a web of institutions while scrambling to manage the ceaseless instability of capitalism. Although the financial industry is powerful, nonetheless there is not a small cabal of bankers who somehow control everything, an idea rooted in Right-wing conspiracy theories that easily shade off into anti-Semitism.

Caveats in place, the power of financiers must be broken to make any meaningful progress toward a democratic economy. What would a real socialization of banking look like? Specifics would naturally vary from country to country, but the Left Party of Germany has put forth a plan for the socialization of the German banking system that can serve as an excellent starting point for discussion. The Left Party’s model is based on specific aspects of existing local German banks, but contains concepts that are applicable to any country.

The report, How a Socialization of the German Banking System Might Look Like, written by Axel Troost and Philipp Hersel, envisions a banking system based on credit unions (some owned cooperatively by members and others owned by municipal governments) and democratized state-owned banks. Private banks would be either closed or drastically shrunk, depending on their solvency. All banks would be responsible to supervisory boards comprised of representatives of community organizations such as trade unions, environmental groups and consumer associations, and citizens directly elected in community votes.

Requiring banks to provide only basic services

All remaining banks would concentrate on what the report terms the core “PSL” functions — payments, loans, savings. Socialized banks would ensure a “low-cost system of payments including a corresponding supply of cash”; finance public- and private-sector investment that is socially and economically useful; and be secure and sustainable places for savings to be held. In the Left Party conceptualization:

“[S]ocialisation should be regarded as the subordination of the financial sector to steering and control by society and the anchoring of the sector in society.” [page 6]

The report stresses that a reduction in the size of the banking system is unavoidable, both to curtail its influence and to eliminate speculation:

“The false principles which have become established in recent decades were primarily propagated by the financial markets: shareholder value, lean government, competition to attract investment and tax competition. This process needs to be reversed, and the financial sector needs to be reduced to the role of a service provider for the overall economy. …

The aim has to be to substantially reduce the size of the financial sector and to diminish its economic and political power. As a service provider for the real economy and society, the financial sector must not be understood any longer as a place where value is added on its own account, but must be regarded as infrastructure needed for the economy as a whole.” [page 5]

Toward that end, private banks would largely disappear, as far as possible through insolvency. Private banks that remain solvent after all liabilities are placed on the balance sheet and who are so interwoven into the larger economy that their immediate shuttering would unravel other banks and enterprises would not be eliminated, but brought under public control and drastically shrunk in size in a manner that would not cause a cascade of collapses in connected banks and enterprises.

All banks would have to put all liabilities on their balance sheet for inspection, including non-performing loans and bad assets; they would no longer be able to hide them. Those without enough assets to cover the losses would be shut down. European law insures all deposits up to €100,000, and that would remain in force. Shareholders would be wiped out, however, and creditors would absorb losses, not taxpayers.

Only if an institution could not be shut down without causing a cascade of losses in other banks and enterprises would any government money be injected, but in these (hopefully rare) cases, shareholders and creditors would be wiped out and the government would assume ownership. The government would then restructure the bank so it would only perform the core “PSL” functions described above.

Credit unions as the foundation for banking

The current German banking system consists of three “pillars”:

• Public-law banks (municipality-owned local credit unions and state banks).
• Cooperative banks (credit unions cooperatively owned by their members).
• Private banks (which operate across the country and include dominant institutions such as Deutsche Bank and Commerzbank).

The municipal- and cooperatively-owned credit unions have have continued to function well since the economic crisis struck. These continue to provide loans to small and medium-sized enterprises and basic services to depositors, and do not engage in speculation. The state banks (banks owned by the state governments within Germany) were supposed to act like the municipal credit unions (on a larger scale) but instead mimicked private banks by engaging in risky businesses outside their original mandates, saddling taxpayers with covering losses. Private banks concentrated on speculation and have done the worst of the pillars; moreover, despite receiving bailouts, private banks provide the least amount of credit.

Putting all banks on the model of the municipal- and cooperatively-owned credit unions, prohibiting speculation and limiting them to the core “PSL” functions would be the outcome of a socialized banking sector. Simply making banks public is insufficient, the Left Party report says:

“It would appear that banks in public and co-operative ownership can at least partially evade the dictates of the desire for profit. However, public ownership alone is no guarantee that an institution will take this opportunity. But private commercial banks have no alternative to an unconditional orientation to profits, because the financial markets systematically enforce the dictate of the profit motive. In view of this, a socialisation of private commercial banks can probably only succeed if they have first been liberated from the dictate of the profit motive by being transferred to public or co-operative ownership.” [page 8]

A key to the success of the municipal- and cooperatively-owned credit unions is that they operate on a small scale and are anchored in their immediate city or region.

“[Germany’s municipal- and cooperatively-owned credit unions] tend to be small-scale and very much anchored in their region. This includes on the one hand the municipal or regional ownership or patronage, and on the other hand the networking with stakeholders like local chambers of industry, commerce and crafts, sports and charity associations, as well as leading local authorities from religious communities, trade unions and intellectuals. To put it another way: [the credit unions] are integrated into their local environment; they can be said to be territorially socialised. This fits in with the fact that these two pillars of the banking system adhere to a strict territorial principle.” [page 8]

Be socially useful, or be shut down

Surviving state-owned and private banks would be required to adhere to the same core “PSL” functions; those that do not go out of business because those functions would be largely covered already by the credit unions would provide loans for large-capital projects beyond the ability of any credit union on its own. But there would be strict limits on the size of any bank and no bank would be allowed to be a national business. Socialized state and regional banks would coordinate on the large projects. Those larger banks are foreseen as being owned by the credit unions to provide another check on their behaviors.

Limits on territory and legal orientation toward social usefulness are see as as keys toward the goal of converting banking into a utility serving society:

“The [municipal and cooperative credit unions] show that a bank can be very successful if its statutes stipulate that its purpose is not abstract orientation to profit, but the exercise of a certain business model in a certain region. … A socialised bank must be characterised by the fact that the core functions of payments, savings and loans (PSL) are stipulated in its statutes as the area of its operations and its business model, and that these activities are only carried out in a certain geographical area. The region covered by the business operations determines which geographical section of a society is responsible for the societal control.” [page 11]

Nonetheless, a federal system of strict regulations would be implemented, including much higher capital requirements, caps on executive salaries and a ban on bonuses and stock options, an extra tax on the highest earners in banking, a tax on all financial transactions, and a requirement that half of the supervisory boards of banks would be allocated to employees and their trade unions and half must be filled by women.

Although the Left Party model is based on existing conditions in Germany, the basic principles are easily adaptable to other countries. Credit unions, for instance, are common in many countries. At least 7,000 exist in the United States (ordinarily owned by members) and more than 300 exist in Canada, although in those two countries they are buffeted by capitalist market forces and face hostility for being an alternative to large private banks. Similar to Canada, the number of credit unions in Britain is declining as smaller ones in particular face difficulties.

Socialization of the banks includes community control, strict restrictions on financial activities, an end to speculation and an environment in which market forces no longer prescribe behavior. The point of a market is to serve humanity — a strong contrast to the current world capitalist system, in which human beings exist to serve markets. And markets are nothing but the aggregate interests of the most powerful industrialists and financiers.

The Left Party model for bank socialization isn’t a ready-made formula, nor does it purport to be one, but is does provide a valuable starting point. Socializing banks is one only component of the broader task of creating a better world. Viable plans such as the Left Party’s nonetheless explode the idea that the current economic system is the only way to organize society — which is just as much an elite-propagated myth as the idea that a monarch is chosen by God to rule over everyone.