Co-operation, mutualisation, innovation

Solutions to the banking crisis

THE MURMURED ANTIPHONY of counsels assisting, witnesses and the commissioner that fills the bulk of any public hearing is supposed to be dry. Hearings are methodical and patient, on the scale of hours and days, with revelations building slowly, quietly. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – or the Banking Royal Commission – wasn’t unusual in this regard. It had its moments. A witness collapsed and was hospitalised upon being accused of having lied. Bank executives stumbled over simple questions, flustered by the web they had distractedly spun for themselves. But it played out, largely, as one expects royal commissions to. Scandals by calcification. Much of the testimony concerned structural problems with the sector. The incentives that bankers are paid, the failures of the regulators. But there was one instance, at least, that cut through this abstract discussion – one example of how bankers and financial advisors had lost the basic stock of their trade: trust.

Sam Henderson – a celebrity financial planner – took to the stand. For an hour prior – it must have been a long hour for Henderson – a Fair Work commissioner, Donna McKenna, had been detailing the financial advice given to her by Henderson. Poor advice, extremely poor: it would have cost her half a million dollars in savings had she followed it. Strangely poor advice for a celebrity financial advisor. Over the two hours of questioning that followed, the revelations brought against Henderson were, by the Banking Royal Commission’s pace, swift and brutal. He lied about his academic credentials in product disclosure statements. He was a part-owner of financial planning business Henderson Maxwell, which would have been the beneficiary of the poor advice given to McKenna, and had failed to mention this to her.

But a most extraordinary revelation came in a rare, reality-bending moment in the austere setting of the interrogation. Rowena Orr, the intense and exacting counsel assisting, requested that a sound recording be played to the hearing. It was a recording of a phone call – two female voices, one of McKenna, and the other of a representative at her superannuation company. The representative needs to put McKenna on hold. Polite elevator music begins to play. At first, an electric piano riff. The drums kick in a moment later. On the live stream of the proceedings, the camera cuts between Henderson, Orr and the Royal Commission’s Commissioner, Kenneth Hayne QC – who, despite his famous stoicism, lets escape a wry smile. The moment is absurd – even surreal. This man, Henderson, dragged before the commission to defend his twin media and financial advice careers, has to sit on hold in a courtroom. So weird is this moment that Orr actually assures Hayne, quietly, that there’s a point to the recording. The voices start again; the tension breaks. McKenna extracts the required information, and the phone call ends.

From this mundane, procedural phone call, Orr extracted this startling fact: that the person representing herself as McKenna wasn’t McKenna at all. She was an employee of Henderson’s, who – without Henderson’s or McKenna’s instruction, on her own initiative – had impersonated McKenna to gain better information on McKenna’s superannuation. The call was fraudulent – a breach of trust that was conducted casually, unremarkably. It was just another part of the job.


TRUST IS AT the core of banking in a basic way. Banks and bankers occupy a privileged position in modern Australian society. Not only do banks protect the wealth of most people in this country as well as provide a significant amount of investment into the nation’s economy, they assume the role of guarantor of trustworthiness for all sorts of transactions. Holding a bank account is required for all sorts of situations – applying for a rental property, receiving welfare payments, applying for a job. A good credit score – a measurement of one’s trustworthiness, of one’s likelihood of rendering unto Caesar the things that are Caesar’s – affects one’s life in all kinds of visible and invisible ways. Trust is, like money, another asset.

Unlike money, trust is not fungible. At its most basic level, trust is a relationship between two particular people. If I trust you, then I expect you not to act in bad faith, or not to act contrary to my best interests. If I betray your trust, you are far less likely to interact with me in good faith. In Debt: The First Five Thousand Years (Melville House, 2011), David Graeber locates trust as the primal stuff of economic activity, the clay from which economic edifices are built, precisely because of this threat to withdraw interaction. He points out that one-sided economic relations – those that require no exchange – always lack trust. Perfect charity, like throwing a homeless person some change, is a relationship that ends with its only interaction, and the same is true for stealing what little they have. For Graeber, all exchange requires a degree of equality between the transactors, and fair transactions require a degree of reciprocity. Repeated custom is likely to be withdrawn by a party if they are ripped off.

This individual-level threat of withdrawing interaction from untrustworthy partners scales up into social pressures to behave in good faith underpinned by threats of ostracising, of casting out from society. These social pressures become, in turn, laws and regulations that enforce a basic standard for what is considered good faith – transacting fairly, not robbing or exacting violence on one’s neighbours – and what isn’t. Not abiding by this standard is punishable – and often enough the punishment is expulsion from society. The most obvious example of this is exiling criminals to distant lands – but the expulsion need not be so literal. In the ancient legal codes of Rome, the Germanic tribes and – in more recent times – the colonies of Queensland, New South Wales and Victoria, egregious offences were punished by being outlawed: put outside the law, so that the protections afforded subjects of the law do not apply. Outlaws could be killed without punishment by anyone, without explicit sanction.

It is when economic relations scale past the local community level that we have the emergence of banks in the system of trust. Indeed, banks – organisations that store the wealth of participants in the economy – are probably among the only institutions that could act as large-scale guarantors of trust in a large economy with many participants. Why? Trust isn’t easily scalable. After all, creditors will lend only if they trust that the debtor will pay back their money at some stage. This works if the debtors are the creditor’s neighbours – or, at least, if the debtor will interact multiple times with the creditor. But in our day-to-day lives, we transact with strangers – many strangers – and think nothing of trusting that the milk we’re buying won’t be off when we open it later that day, or that the bus driver won’t improvise a route to somewhere unexpected. Money itself is a matter of trust, since it is, as Graeber argues, a product of a generalised, society-level debt: the only way to guarantee that the money I have in my pocket will pay for goods, services, other denominations of money and even repay my debts is for someone to provide a guarantee that that note or those coins are worth something. No such guarantee exists if I take my Australian dollars to Japan, or to Zimbabwe: there is no local guarantee of worth, and so most people won’t accept it without exchanging the cash for a locally accepted currency. Without a centralised guarantor of trust that the money has value, it’s just another piece of paper.


BANKING RELIES ON trust. Yet banks have shown themselves to be among the least trustworthy institutions in the nation. The Banking Royal Commission received more than 10,000 submissions in its fourteen months. The final report details widespread, flagrant abuses of customers in the banking, superannuation and financial services industries. In the most salacious of these abuses, banks were charging the dead for financial advice. All of this taking place during a decade of record growth and a doubling of consistent annual profits.

The report handed down in 2019 by Commissioner Hayne at the conclusion of the Royal Commission – informally called the Hayne report – discusses trust, but in an oddly indirect way. The ‘four observations’ laid out at the very beginning of the report concisely spell out how trust permeates the failings of the sector: ‘rewards have been paid regardless of whether the person rewarded should have done what they did’ (untrustworthy conduct is rewarded); ‘entities and individuals acted in the ways they did because they could…they set the terms on which they would deal, consumers often had little detailed knowledge or understanding of the transaction and consumers had next to no power to negotiate the terms’ (bankers hold the power over customers and demand trust); ‘the interests of client, intermediary and provider of a product or service are not only different, they are opposed’ (intermediaries are, by nature, not going to reciprocate); and ‘the community expects that financial services entities that break the law will be held to account’, but they weren’t (guarantors of bankers’ trust have no credible threat, and there are no social pressures on bankers to be trustworthy).

Trust permeates these observations, and yet in the report the word ‘trust’ – as in trust between people – appears only a handful of times. Surely a year-long investigation into the banking sector – a sector entirely predicated on trust – would have more insight into betrayals of trust, into failures to act in good faith? The bankers, in trite apologies, don’t make the same omission. Trust is everywhere in their laments: ‘We will make the investments required to build a bank worthy of the trust and respect of our customers and the community’ (Shayne Elliott, ANZ); ‘We have already made a number of changes and will make more to meet the community’s expectations and earn trust’ (Matt Comyn, CBA); and – most interestingly – ‘Banking was built on putting people first and earning the trust of customers’ (Andrew Thorburn, then of NAB).


THE FORMAL HISTORY of banking recognises a lineage of banks that emerged in the Italian city-states of the Renaissance, which were not established for common benefit – for ‘putting people first’ – but expressly as vehicles for the amplification of family wealth and prestige. The best known of these is the Medici in Florence, who, with other families in other parts of Europe – including the Fuggers in Augsburg, and in later centuries the Rothschilds in Frankfurt – became the centre of European power for centuries through their ability to bankroll monarchs.

But in fact, small-scale, community-led banking has always existed alongside these larger institutions. Informal credit systems between relations and neighbours who lend to one another are common where financial systems are not developed. In these small, peer-to-peer credit systems, there is far more flexibility than in larger systems, and repayments may be made with assets or services rather than with money. This peer-to-peer arrangement, based on trust between people known to one another, can also be scaled up outside of an impersonal institutional context. The Poor and their Money (Practical Action Publishing, 2009), edited by Stuart Rutherford, documents some ways that informal banks, formed by the poor and marginalised across the world, directly serve their communities. Rotating savings and credit associations (ROSCAs) – in which members pay a nominated amount at each meeting that is then contributed to a given member in a set, cyclical order – and accumulating savings and credit associations (ASCAS) – in which a group member is given rights to manage the shared fund, distribute loans and collect repayments – are examples of peer-to-peer banking and credit that scale trust without any bureaucracy. ROSCAs and ASCAs show success in varied economic and social contexts, from Dhaka to the slums of Nairobi to villages in Indonesia.

Co-operative ownership and management of wealth, and of the means of value creation, has its roots in the distant past, but the formal establishment of co-operative enterprises are more recent, taking root in the Industrial Revolution era in England in the nineteenth century. The Rochdale Society of Equitable Pioneers – a worker-owned store that bought and sold groceries at discounted prices for its members – was founded in 1844. The Rochdale Society provided the template for modern co-operatives. Its operating model was rooted in existing joint-stock companies, including the world’s largest corporation colonial power at the time, the East India Company. Stakeholders raised the capital to fund the society, and by investing they became members of the society – similar to purchasing stocks in a corporation – which entitled them to a dividend on the capital each year. Its principles, though, were radical and forward-looking. The most notable of these principles was that the society was democratically controlled – that every member of the society had a vote in the enterprise decisions made by the co-operative. This idea is now so commonplace that it seems obvious, but to nineteenth-century Britons – where a political voice was extended only to property owners and tenants paying sizeable rents, and where business decisions were the domain of property-owning shareholders in corporations – allowing votes to any and all members was a radical innovation. The society continues to operate as an amalgam of a number of co-operatives, The Co-op, with the principals still in place, addressing the needs of its members and of society.

Worker co-operatives position themselves in the long tradition of mutual aid and groups of workers coming together to create their own employment. Workers share in the risk of the business, and in its returns; they are not mere renters of their labour, but are active participants in creating their employment. In Argentina, worker co-operatives emerged as a viable response to the catastrophic 2001 collapse of the national economy, precipitated by the largest sovereign default in history. Workers occupied their former workplaces and reopened them, using their collective economic power to retain their employment. The most famous of these are factories, like the textile factory Brukman, which was to be sold off and stripped of its machinery. The workers intervened, and formed ‘18 de Diciembre’ – a worker’s co-operative named after the anniversary of the first night the workers occupied the space that, almost two decades later, still operates today. Factories are the most famous examples of this movement of reclamation in Argentina, but other businesses – hotels, restaurants – continue to operate because their workers refused to be jobless, and potentially destitute.

Housing co-operatives, co-operatively run tango clubs, even shepherds’ co-operatives have been established around the world. The democratic nature of co-operatives has meant that their responsiveness to community need has persisted from the nineteenth century to today. Indeed, co-operative organisation has proven effective in binding together traditionally powerless groups. In Argentina, a co-operative organisation of cartoneros – jobless people who collect and recycle cardboard waste around Mendoza, to be paid a tiny amount per item by the city government – has formed a community of workers who are able to collectively demand recognition of their labour as real work. The Debt Collective in the US organises to resist agencies that buy debt and then pursue it aggressively. Driver-owned rideshare co-operatives are appearing around the world – like Eva in the US – to place ownership of work back in drivers’ hands, and to grant them better pay and conditions.

Could this old model of co-operative enterprise reinject trust into the banking sector? Co-operative banks – also called credit unions or mutual banks – already operate in most banking systems throughout the world. They are owned by their customers and so are incentivised to work in the interests of those customers. As the members of the banks are custodians of the bank’s wealth, they are incentivised to act in the co-operative’s best interests and – in the case of banks that identify with a social mission, such as refusing to invest in fossil fuels – in the interests of society. Mutual banks take the seeds of trust sown by informal banking models like ROSCAs and ASCAs, and scale them to larger stores of wealth that can compete with larger, shareholder-owned banks.

Like other co-operatives, these banks can respond to the needs of their members. Cities of Northern Italy – Trento, Bolzano, Cantù – have a rich tradition of casse rurali (literally, ‘rural treasuries’), which are mutual banks aimed at small-scale agriculture. The cassa rurale in Trento, in particular, runs artistic and social events – well beyond the remit of traditional banks. Because the casse rurali are community owned, they have expanded their scope to provide services to these peripheral communities, filling the vacuum left by neoliberal, austerity-driven governments. Mutual banks reimagine what banking is, and how banks fit not only into the economy, but also into the social fabric.


THE BANKS INVESTIGATED by the Royal Commission were large, shareholder-owned banks, not mutual banks. The recommendations made by the Royal Commission – designed to curb banks acting in bad faith, and to reinstate trust in banking – relied on more traditional forms of reinstating trust: legislative and regulation changes, self-policing by professional associations, some greater penalties for misconduct. The recommendations do not aim at a reimagining of the banking sector to ensure fairness. Not even at reform. Instead, they rely on the financial, regulatory and government bureaucracies policing as they ideally should – dispassionately, with procedural fairness, blind to the status of the parties under investigation.

But there’s a fundamental conflict here. As Greta R Krippner argues in Capitalising on Crisis (Harvard University Press, 2011), bankers are too important to the modern nation state to be treated dispassionately. Bankers have always been central to the Western nation-state – from the personal financiers of absolute monarchs to the institutional guarantors of cash-strapped governments. This relationship has only intensified in the last few decades. Krippner charts the recent history of finance in the US. The postwar boom was an era of big spending programs that saw redistribution of wealth to the worse off through spending on, among other things, social programs. When the high inflation of the early 1970s led to a trebling of the unemployment rate, policy-makers became more unwilling to face the increasingly difficult responsibility of deciding on how to best redistribute wealth. Their solution was to deregulate the financial sector. This freed up financial services to grow unchecked, both in terms of size and influence, and has effectively made finance into another arm of government. Just as governments can’t wither into nonexistence because of policy mistakes, banks of a certain size can’t fail, even as a result of disastrous policies, such as those that precipitated the 2008 financial crisis.


THOSE RESIGNED TO the fact that banks are incapable of acting in a trustworthy manner, or acting as the guarantors of trust in financial exchange, have pioneered a radical new approach. This impetus to abandon the established banking sector has prompted the creation of bitcoin and, as a result, cryptocurrency in general. In his bitcoin paper, written in late 2008, the pseudonymous Satoshi Nakamoto identifies the trust model – the model relied upon by banking – as precisely the problem with online financial transactions. A trust model in this traditional sense means that verification of transactions – that is, that no single unit of money is spent in more than one place – requires centralised guarantors of trust. The problem, according to Nakamoto, is that these guarantors of trust are banks. Blockchain is technology that is designed to overcome this by embedding transaction verification in the currency itself – so that verification uses computations that ensure trust, rather than using central trust guarantors.

The blockchain process of verification relies on technology originally developed to protect data from access by unwarranted parties: cryptography. Cryptographic software encrypts – or scrambles – data in such a way that it is difficult to decrypt – or unscramble – without a secret code, or ‘key’. An early form of this process was used by Julius Caesar to transmit military secrets: each letter of a message would be shifted through the alphabet by a certain amount – ‘A’ would become ‘C’, ‘D’ would stand for ‘B’ and so on. To unscramble a message written in this way, the recipient needs both the message itself and the letter-shifting number as a key to decode it. The cryptographic systems that we use today are, obviously, far more complex and rely on using incredibly long prime numbers to make the scrambling method implausibly difficult to perform for even extremely powerful computers. These systems allow us to transmit sensitive information (such as credit card numbers or private WhatsApp messages) across public channels, so that even if untrustworthy parties can see the data, they can’t do anything with it.

Keys themselves are designed to be impossible to guess. They can be generated even on smartphones, but the maths that underpin them means they can’t be broken simply through the computational power of even the best available computer. And so, keys can be used to identify unique individuals: if I generate a key, then it is almost impossible for anyone to impersonate me using that key if I keep the key’s password secret. Keys can provide the basis for online and, in some cases, legal identities – as in Estonia, where cryptographic keys are loaded onto government identity cards, and digital signatures generated from the keys can be used in place of handwritten signatures as legal proof of identity. The uniqueness of cryptographic keys means they ensure that, if something is signed using keys, then we can assume with practical certainty that the thing originates, or is at least approved by, the owner of the key. Keys are one part of the mechanism for democratising trust in Nakamoto’s scheme, since they can sign transactions, verifying that the owner of the key has spent or received the unit of currency. In bitcoin’s process, transactions are multiply signed to distribute the verification of transactions.

Blockchain is bitcoin’s most well-known trust mechanism. Just as society-level trust emerges from the trust relationships between the many individuals in any society, blockchain generalises the trust gained through cryptographic keys and constructs a permanent, unchangeable record. A blockchain is a ledger distributed across a network that can only be written on using cryptographic signatures. Every member of the network can audit the blockchain and can view the transactions that are written on it. In the case of bitcoin, the information that can be seen is simply whether a unit of the currency has already been spent, so that units cannot be double spent. The identities of the traders are anonymous, since their cryptographic key is not linked to a real-world identity. This, and not the currency itself, is Nakamoto’s real innovation: a system of trust that scales from the individual relationship – that is, from individual transactions – to a network of trust, without requiring central trust guarantors.

A note in the first transaction in bitcoin’s blockchain records a headline that ran in The Times on 3 January 2009: ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’ The 2008 financial crisis, and the bailing out of the banks, provided Nakamoto with the impetus to engineer a new means of guaranteeing trust. But despite his lofty aims, it hasn’t over the past decade become a widespread, large-scale disruption of the financial system. As it stands, cryptocurrencies are like casino chips: they may be traded lucratively, and their value may be multiplied according to the caprices of a market, but ultimately, their value is not intrinsic and requires the ability to exchange with currencies that are guaranteed by central banks.

Most people aren’t willing to accept an innovative currency that isn’t guaranteed by long-established, trusted authorities. The traditional banking and financial system is thick with inertia, commensurate perhaps with the enormous wealth that is invested in it. Most of us have our life savings entrusted with banks. Formal and informal banking represents the culmination of a centuries-long process of building trust – a trust that arises from centuries of depositing precious items and wealth. Doing away with the banking system, as some proponents of cryptocurrencies propose, probably isn’t plausible – and neither would it be a wise idea. Removing institutions that have evolved over centuries, institutions that propelled the evolution of the nation-state, will always have unintended consequences.

But perhaps the inspired idea of creating a new trust model provides a new way forward for enforcing trust. If co-operatives represent an ancient way of systematising trust through members buying into co-operatives and being custodians of mutual wealth, then could this ledger provide a novel way of instilling trust – through incorporating an innovative transparency mechanism? By making banking activity auditable but still anonymous and secure – as the public ledger of bitcoin already does – trust can be demanded by citizens, rather than by bankers.


TRUST IS, AND always has been, mediated and enforced by social pressures that act primarily through favouring individuals who have a history of acting in good faith and ostracising those who do not. Mutualisation and blockchain rely on the same basic idea. Mutualisation establishes an in-group – the members of the co-operative – and punishes those who act in bad faith by making any action that is detrimental to the group also detrimental to the individual. A blockchain-driven ledger may well have the force to pressure the banks into demonstrating that they are trustworthy.

In one of the rare mentions of trust in the Hayne report, Jacqueline McDowall, another witness at the Royal Commission, comments: ‘I will never, ever trust anybody again, even if they say they’re a professional this or a professional that. It’s all just to gain money for their side.’ In this one comment, McDowall locates the problem precisely. By being untrustworthy, the professionals are no longer on her ‘side’. They’re no longer on her team. They’re no longer, in other words, acting towards the same goal, working for mutual benefit, being members of a society predicated on acting in good faith – predicated on trust. They were able to behave in this way because the normal mechanisms of social pressure – especially those ossified into laws and regulations – were not enough to dissuade them from acting in bad faith. It may not be enough anymore to outsource social pressure to these abstract, bureaucratic machines. We may need to exert it ourselves.

Griffith Review