Financial innovation is not very popular right now. Share lease constructions, subprime mortgage bundles and flash trading (so shockingly described in Michael Lewis’s recent book Flash Boys) are just some of the financial innovations that have had disastrous consequences. A cry of "Stop financial innovation!" has gone up, but this would be like saying "Stop thinking!" So how can we make sure that financial innovation serves a social purpose while at the same time being financially rewarding?
Financial innovation is not a bad thing in and of itself, yet new instruments should be used carefully.
Richard Kooloos Head of Sustainable Banking
Financial innovation: neither good nor bad
Numerous financial innovations have initially been received with great enthusiasm, only for excessive or improper use to cause substantial social damage down the road. Warren Buffet has even gone so far as to refer to derivatives as “weapons of mass destruction”. Nevertheless, these financial instruments are very useful, in the same way that a hammer is useful: a hammer can be used to build houses, but also to smash a person’s head in. It is the person wielding the hammer who chooses how to use it. Financial innovation is not a bad thing in and of itself, yet new instruments should be used carefully. How do we go about this? By ensuring transparency, keeping the instrument simple and carefully examining every new step on its merits and in relation to our values.
Invent a new financial instrument, make the world a better place
An example of a financial innovation that has a positive impact is the Social Impact Bond that ABN AMRO launched last November. Essentially, this instrument allows private parties to invest in tackling a societal problem that costs the government large sums of money. The government pays them back from the money that it saves, possibly including some return on the investment. This innovation has been given practical shape since 19 December in a partnership between the Municipality of Rotterdam, a company called Buzinezzclub and Start Foundation. Buzinezzclub helps 160 unemployed and unqualified youths in Rotterdam find jobs or return to school, getting them off social security more quickly than the average for comparable groups. The Municipality of Rotterdam pays the investors back based on the benefits saved. ABN AMRO has partnered up with Start Foundation to invest in this bond, putting its money where its mouth is.
Of course the initiative in Rotterdam will not be the only one. We are currently negotiating with other local authorities to introduce the same instrument in their municipalities to fight youth unemployment. Numerous other societal problems might benefit as well: healthcare, safety, biodiversity, etc. In the long term, we also hope to offer the bank’s customers the possibility of putting their money to work in this manner: "Buy a bond, make the world a better place."
By ensuring a positive corporate culture that enshrines creativeness, professional expertise and ambition, we can continue to develop financial innovations that make the Netherlands stronger and more competitive.