Is Ethical Banking Achievable on a Large Scale?

Achieving a sustainable and ethical banking system is possible but there are some fundamental things about a fractional reserve banking system that may make this a difficult task to achieve. This is just largely due to the nature of money and banking. Under a fractional reserve system every dollar in deposits is compounded upon itself multiple times leading to an exponential effect. In this system the object of any business is always to achieve profit maximization, due to this, interests aren’t aligned with ethical banking practices by default. However, the trend appears to be heading in the right direction as banks continue to shift and adapt.

The profit engine that motivates banks is meant to make use of every available dollar and this can lead to difficulty in making sure all funding is ethically utilized. Why is this difficult to achieve? Because for every idle deposit that banks have they are not fully utilizing and fully generating profits to the maximum.

How Deposits Work

When you make a deposit of $100, $10 is kept in reserves and $90 is lent out to other customers or used for other various avenues (portfolio, investments, more lending, etc. etc.). From that $90 that was lent out another deposit of $81 was created (where again $9 is kept in reserves). Another $81 deposit is generated and the $81 is lent out again and again 10% is kept in reserves (for arguments sakes). From that $81 another $8 is kept in reserves and another $73 deposit is created. This continues until the banking institution has no more lendable deposits outside what they are holding for reserves.

Responsible Use of Funds

One of the components of ethical banking is making sure that funds are used responsibly. In such a massive worldwide financial complex this is very difficult thing to achieve. This can be more easily achieved with local banks but is difficult to do at scale, however with recent shifts in technology it is something that is becoming more and more scalable. If funds were able to be more easily tracked, banks would be able to make sure they were not funding illicit activities. This would also require very strict lending parameters regarding who banks do business with. It’s a significant hurdle but something that could be achievable in the future.

Promoting Sustainable and Environmentally Friendly Business Activities

Promoting eco-friendly and green business is a big part of ethical banking practices. The general idea is that banks should promote green technology and green businesses that further wholesome societal values as opposed to just blindly lending to anyone and everyone.

KYC/AML

Thankfully, banks currently have a robust Know Your Customer and Anti-Money Laundering system in place. Although this is still a hurdle to overcome, besides cash payments, banks have a great system in place and one that is more robust than other areas. Cash payments are a significant hurdle to overcome but one that is becoming less and less popular and younger generations use less and less cash.

All in all, achieving ethical banking at scale is practical but it’ll take a lot of work. These are just a few points covered and for a significant change to take place banking institutions will need to make a lot of different changes to how they operate.