BANKS: How interesting can they be?

In August 2015, as I sat on the crest of a cliff in Amorgos, Greece, I experienced a eureka moment!

I had just finished the frenzied reading of a case study by MIT’s Dr. Katrin Käufer on Triodos, the responsible Dutch bank. I came to understand the incredible power of a bank as it multiplies its clients’ deposits by 10, and with this money, finances companies of their choosing.

My bank: A Love-Hate Relationship

Before becoming an entrepreneur, finance and the entire banking universe bored me to tears. When I founded my first tech start-up over 20 years ago, my relationship with banks became somewhat confrontational. Entrepreneurs and bankers are worlds apart! The first envisions the future and takes risks, while the other scrutinizes the past and averts risk!

With time, my sentiment towards the bank evolved. I became interested in understanding its history, mechanics, role, universe, regulatory changes, etc. And surprise! I developed a fascination, which morphed into genuine interest.

Can We Live Without Banks?

“Banking is necessary; banks are not.” stated Bill Gates in 1992.

But what DOES a bank actually do? Well, I shall put on my professor hat for a moment. No pop quiz, I promise!

The bank’s primary role, the one most understood, is to act as a middleman between two groups with conflicting objectives: savers and borrowers.

Savers, on the one hand:

• Do not want to take risks
• Often possess limited amounts for savings
• Wish to withdraw their savings at any time

Borrowers on the other:

• Initiate more or less risky projects
• Need somewhat substantial sums of money for a rather long period

The bank’s 2 primary functions are 1) to take and manage risk and 2) to ensure monetary liquidity.

Its 3rd function, much less understood, is to create money. As a bank is required to keep 10% of your deposits, each of your dollars is multiplied by 10 before being deployed in credits (loans).

Is this even possible, you ask? Well, yes! This is how it works! Sir Mervyn King, Governor of the Bank of England from 2001 to 2013, explains: “When banks grant loans to their clients, they create money by crediting their clients’ accounts. “

In a nutshell: a bank creates money every time it grants a new loan. This concept may be difficult to grasp for the layman, but banking system experts understand it well. In 2014, the Bank of England released Money Creation in the Modern Economy, a report which describes this process.

FACT: in our economy, 97% of the money in circulation is digital and was created by the banks! The remaining 3% is produced by the State in notes and coins.

The incredible power of a bank in our hands

As I walked my way down to the coastal village of Katapola (Greece, still), I started dreaming about the perfect bank…

… A responsible bank, which allocates 100% of its loans to finance projects with a positive social and environmental impact

… A mobile and digital bank, which uses new technologies to cut unnecessary costs and create a collaborative environment

… A transparent bank, which assumes its role as an economic player central to a participatory financial ecosystem!

My decision was made: my next start-up would be to create a responsible bank in Canada!

Paul Allard,
Chief Ecosystem Officer