Transparency in Banking:

An Analysis of the Approach to Information Reporting and Communications by

Members of the Global Alliance for Banking on Values

PRESENTED BY:Beatrice

Casamenti

SUPERVISOR:Barbara Petracci

FINAL DISSERTATION inEthical Finance

22 March 2016

IndexI. Problem StatementII. Agency Problem in BankingIII. Transparency in Banking

I. Functions & costsII. The Flux of Information

IV. A Values-based Approach to BankingV. Descriptive Research Methods

I. Case Study of Triodos BankII. QuestionnaireIII. GABV’s Experts Interviews

VI. Main ConclusionsVII. Limitations & Potential Ways Ahead

• All banks have a significant economic, social and environmental impact.

• Being accountable to stakeholders is a major condition for banks: accountability in the banking sector cannot be attained without transparency;

• Nevertheless, the culture of reticence is hard to be replaced by the culture of transparency, especially where there is fear of negative impact of greater disclosure.

Problem Statement

Transparency of information and its implementation in banking is therefore an extremely important topic to face as it represents a strategic factor to build a relationship of trust with stakeholders and an up-to-date issue with significant space to make contribution.

Agency Problem in Banking– Banks play an intermediary role among several stakeholders

and, accordingly, they use to collect principal-agents contracts. – Whenever these contracts are not respected, due to different

priorities and incentives, a principal-agent problem will arise.Adverse Selection

(before the transaction)Moral Hazard

(after the transaction)It can refer to the difficulty to select and distinguish healthy commercial and individual borrowers.E.g. bad borrowers more likely to seek a loan than good borrowers.

It can refer to the risk that the bank, guided by self interest, does not use the money as was intended to do.E.g. banks bail out

Potential Solution: collaterals. Potential Solution: bail in.

Is there a viable alternative?

Transparency in Banking: functions & costsTransparency is the pro-active disclosure of information which allows stakeholders to monitor the

bank ethical commitment.

Reducing information asymmetry

Sharing risk information with

stakeholders

Achieving standards &

requirements

Building a reputation

Discouraging public intervention.

Main functions:

Main costs:• Obtaining

information• Reporting

information• Competitive

disadvantage

Transparency in Banking: the Flux of Information

Collecting information

Analyzing information

Evaluating information

Reporting information

Comunicating information

Metrics Department

Communications Department

An effective internal communication between the two departments, is a key factor to ensure proper, consistent, clear and accurate disclosure of information.

Transparency and communication: a shotgun wedding or a marriage of convenience?

A Values-based Approach to Banking

Values-based banks (VBs) are innovative banking institutions whose primary focus is on delivering social finance products and basic financial services while financing community based development initiatives and social entrepreneurs, thereby fostering sustainable and environmentally sound enterprises and fulfilling human development potential, including poverty alleviation, while generating a triple bottom line for People, Planet and Profit. (GABV, 2015)

What is the role played by transparency in VBs?

Figure 1. Six Principles of Sustainable Banking

Source: GABV

Descriptive Research Methods & SubjectCase study of Triodos

BankQuestionnaire

distributed to GABV members

Interviews with GABV experts

Role and challenges of transparency in a VB

Functions & implementation of transparency in VBs

Alliance’s role in strenghtening members’ transparency

Figure 2. 27 GABV Members (December 2015)

Case study of Triodos Bank: Role & Challenges of Transparency

« We(i.e. Triodos Bank) introduce and connect saving costumers and loan customers in person, in different countries and in different ways. We create direct transparency relations through meetings where entrepreneurs financed by Triodos come and talk with our client base about their product and their history.» James Niven, Head of Corporate Affairs

« Because sustainability as a topic is becoming more and more mainstream, and more companies have a sustainability strategy, there’s more job to be done for banks like us, to make the distinction between being ethical and do CSR more evident. It’s a big communications challenge because people tend to consider it as the same.» Christine Van Waveren, Head of Corporate Communications

• Transparency is part of the core, not a box on a checklist;

• Engaging stakeholders through transparency (‘Where your money goes’ App);

• Inform, educate & convert through transparency;

• Transparency works with shared knowledge;

• Marking the difference between CSR and values-based business.

Questionnaire: Participants (29)

55%

45%

METRICS COMMUNICATIONS

5%

20%

30%

40%

5%

Australia Latin America North America Europe

Asia

0 2 4 6 8 1012141618200

500100015002000250030003500

GABV VBs

N. co

-wor

kers

0 2 4 6 8 10 12 14 16 18 200

2000400060008000

1000012000140001600018000

GABV VBs

2014

tota

l ass

ets

Chart 1. Survey Participants (29)

Chart 3. Survey Participants Geographical Representativeness

Chart 2. Survey Participants2014 number of co-workers (Average: 818)

Chart 5. Survey Participants 2014 total assets (average: USD 2452M)

Questionnaire: Transparency’s Functions

Achieving standards & requirements

Increasing efficiency

Enabling public control

Preventing unethical behaviour

Engaging stakeholders

Limitating eco impact

Changing financial system

Improving communications

Being accountable

Raising awareness

Educating

1.0 2.0 3.0 4.0 5.0

3.7

3.8

3.9

3.9

4.1

4.2

4.2

4.3

4.4

4.4

4.6

Average of importance

Tran

spar

ency

func

tion

s

36%

64%

ImportantExtremely impor-tant

Chart 6. Function: Educating people that they can make a difference by where they put their money

1 = Not at all important, 2 = Not very important, 3= Quite important, 4 = Important, 5 = Extremely

important

Chart 5. General: level of importance of the functions related to transparency initiatives

4%8%

12%

44%

32%Not important at allNot very importantQuite importantImportantExtremely important

Chart 7. Function: Preventing moral hazard behaviours

Questionnaire: Transparency’ Success Factors

Financial Knowledge

Transparency Plan

Stakeholder Engagement

Data Clarity & Consistency

Expertise

Motivation and Buy-in

External Communications

Internal Cooperation

- 1.0 2.0 3.0 4.0 5.0 6.0

4.0

4.0

4.2

4.4

4.5

4.5

4.6

4.8

Average level of agreement

Succ

ess

fact

ors

Chart 8. Transparency implementation’ success factors

Success factors Mean Median Mode Standard Deviation

Internal Cooperation 4,8 5 5 0,408248

External Communications 4,56 5 5 0,583095

Motivation and Buy-in 4,52 5 5 0,585947

Expertise 4,458333 4,5 5 0,58823

Data Clarity & Consistency 4,44 4 5 0,583095

Stakeholder Engagement 4,24 4 4 0,723418

Transparency Plan 4 4 5 1,154701

Financial Knowledge 3,96 4 4 0,734847

1 = Strongly Disagree, 2 = Disagree 3= Indifferent, 4 = Agree, 5 = Strongly Agree

Table 2 Descriptive statistics for transparency implementation’s success factors

48%48%

4%

Excellent relationshipGood relationshipLimited relationship

Chart 9 Communications-Metrics relationship in transparency initiatives

Questionnaire: Transparency’s Tools & Measurement8%

7%

22%

18%7%

12%

25%

Social Media Groups BulletinIntranet Internal BrochureInternal Social Media Internal Online MeetingInternal Offline Meeting

4% 5%6%

6%

14%

15%16%

17%

17%

Newsletter TV Online MeetingRadio Social Media WebsitePrinted Brochure Offline Meeting Online Brochure

57%

7%

21%

14%

Local Standards International StandardsIntegrated Reporting Other

21%

7%

50%

21%

GRI Formal StandardsIntegrated Reporting No Social Report

65%

20%

15%

No YesI don't know

61%

39%

No Yes

Chart 14. Organisations with a written policy on transparency

Chart 13. External communications channels used for transparency initiatives

Chart 12. Internal communications channels used for transparency initiatives

Chart 10. Standards/framework used to disclose financial data

Chart 11. Standards/framework used to disclose non-financial data

Chart 15. Measuring stakeholder engagement in transparency initiatives

GABV Role in Strengthening Members’ Transparency

Educating, raising

awareness of values-based approach to

banking;

Strengthening internal

communications between

communications and metrics

officers.

Offering support for reporting

information

Amplifying members’

information

Main Conclusions• Transparency is one of the VBs founding principles. It is part of the

core, not just a box on a checklist (Triodos Bank case study).

• Transparency in VBs performs several functions, the most important are educating (64%), and raising awareness (52%) (Questionnaire).

• A shared vision of transparency between the actors involved in its related tasks (Questionnaire).

• Good (48%) or excellent (48%) internal communications between the communications and the metrics departments (Questionnaire).

• Next challenge: marking the difference between MBs that implement a CSR strategy, and VBs (Triodos Bank case study).

• The GABV plays a leading role in strengthening members’ transparency (GABV expert interviews).

Limitations & Potential Ways Ahead

Limitations:• Can transparency be considered a powerful tool

against adverse selection?• I was a GABV intern. May this have influenced the

survey’s questions and/or responses?Potential ways ahead:

• Transparency’s multiple dimensions index for VBs & Mainstream Banks (MBs);

• Stakeholders reaction to higher transparency.

Any Questions or Comments?

Thank you all for your kind attention.