Harry Geels: Can a banker be a degrowth advocate?
This column was originally written in Dutch. This is an English translation.
Commercial banks rely heavily on lending for their profitability. Degrowth, on the other hand, calls into question the need for continuous economic growth. Can the world of degrowth really be reconciled with the banking system?
By Harry Geels
A banker who supports degrowth. At first glance, that sounds like a vegetarian butcher, a tobacco executive campaigning against smoking, or a brewer advising people to drink less beer. Yet I am increasingly coming across people in the financial sector who sympathise with ideas such as ecological limits or even object to the ‘growth model’. This raises the interesting question of whether the concept of a commercial bank is actually compatible with such views. To answer that question, we must first understand what a typical bank actually does.
For many years, economics textbooks have described banks as intermediaries. Savers deposit money and banks then lend that money to borrowers. The bank acts as an intermediary. However, this picture is incomplete. In the modern banking system, commercial banks create new money when they grant loans. When a bank grants a mortgage of €500,000, it simultaneously records a loan of €500,000 on the assets side of the balance sheet and a deposit of €500,000 on the liabilities side. The loan creates the deposit, and in this way, lending creates new money.
This may seem like an accounting detail, but the implications are enormous. Take the property market. Thanks to the mortgage, the buyer suddenly has purchasing power that did not exist before. When the supply of housing is limited, more credit often translates into higher property prices. This does not mean that banks are solely responsible for all asset price inflation. Interest rates, demographics and housing policy also play a significant role. But banks are clearly not passive bystanders. Through their lending decisions, they determine where newly created purchasing power flows within the economy.
Four key sources of income
This raises the question of how banks actually make money these days. The answer is less mysterious than many people think. A typical European retail bank derives the bulk of its income from four sources. Firstly, and by far the most important, is interest income from loans. Mortgages, business loans and consumer credit remain the main profit driver for most banks. Secondly, there is interest income from securities and reserves, such as government bonds and balances held with the central bank.
Thirdly, there are fees and commissions earned from payment services, investment products, asset management and payment packages. Fourthly, there are trading income and other income. For traditional retail banks, this is usually the smallest category. Most of the money is therefore earned from interest on loans. Recent figures from ING illustrate this. Although ING is trying to generate more revenue by selling investment products and subscription services, its net interest income is still considerably higher.
Green growth is still growth
This is where the tension with degrowth arises. If around 60 per cent of a bank’s income comes from its loan portfolio, then the bank’s profitability is closely linked to the expansion and maintenance of that lending. A degrowth advocate might counter that it is not so much the volume of lending that matters, but rather how it is used. Instead of financing larger homes, extra consumption and carbon-intensive activities, banks could finance heat pumps, insulation, renewable energy and public transport.
That is understandable. But it remains a growth narrative, not infrequently euphemistically referred to as ‘green growth’. The bank is still granting more loans, the balance sheet continues to grow and new investments are being made. The nature of the credit may be changing, but credit remains central. And even a bank that wants to earn more from investment portfolios still benefits from more clients investing, rising share prices and increased investment, even if these are labelled ESG, sustainable or impact, just as products in supermarkets are given all sorts of labels.
That is why I find the figure of the ‘degrowth banker’ so fascinating. There is probably little that is contradictory about an individual banker who believes that society should consume less, waste less and respect planetary boundaries. The contradiction lies between a philosophy that challenges the constant drive for expansion and a financial system whose profitability remains heavily dependent on growing lending or rising asset values – in other words, on hard growth, whatever name it goes by.
Conclusion
So can a banker be a degrowth advocate? In my view, this is only possible if he or she is prepared to accept a system in which banks are only permitted to lend on the basis of existing savings, or in which leverage is significantly restricted. In such a system, money creation by commercial banks would be much more limited, meaning that credit expansion would play a less central role in the economy. Such a model would not only slow down economic growth, but also make the banking sector more stable and less dependent on government support during financial crises.
On the other hand, banks would become less attractive to shareholders. Personally, I remain an advocate of economic growth. Growth can facilitate the climate transition and offer people opportunities to escape difficult circumstances. Nevertheless, I find that I also have great sympathy for certain arguments, such as limiting leverage, reducing dependence on ever-expanding lending and, ultimately, making the financial system more stable.
Perhaps that makes me, despite my belief in economic growth, more of a degrowth advocate than I would like to admit.
This article contains the personal opinion of Harry Geels