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PCBB Banc Investment Daily March 03, 2016
Banc Investment Daily
March 03, 2016

On The Green Path To Sustainability

In the banking business, green is a good color. It's the color of money, of course, and having a lot of green is usually associated with being in the black--which is a lot better than that other color, red. Green reportedly has a calming effect and it represents tranquility, good luck, health and jealousy. It is also a symbol of fertility, which is why people love green M&Ms. Researchers have even found that the color green can improve reading ability and stimulate inventiveness and creativity.
Green is also a soothing color when it comes to the environment. Being philosophically green suggests a world view in harmony with Mother Nature. To the tree huggers of the world, being green is golden.
In the banking world, green practices, or its cousin, sustainability, can win a banker brownie points in a community. But bankers need to recognize that green loans are not like plain vanilla loans. They can be complicated and demand specialized knowledge, living in a sort of gray area of finance.
As the country seems to grow ever greener, it can be worthwhile for community bankers to consider or enhance green and sustainable initiatives. Although successful green lending may not make a big difference to the bottom line today, it could become a growing part of your business over time. It could also engender goodwill that translates into more business.
To get a better understanding of the merits of green banking in general and green lending specifically, it's helpful to examine the record of some of the few green banking purists that have sprung up in the last few years. These community banks provide a test lab for green lending.
One ominous example is GreenChoice Bank of Chicago, which went under in 2014. GreenChoice promoted its sustainable bias (its chief operating officer was certified in green building practices) both internally and in its lending and banking practices. The government audit that resulted in the bank's takeover made no mention of green practices specifically. Instead, the audit by the OCC found that poor board and management oversight, excessive concentration in construction and commercial real estate loans and weak risk management processes led to insolvency. If nothing else, the report suggests that going green does not relieve a bank of the basic requirement for sound risk controls and management practices.
Still, other green banks seem to be quite successful. One example is New Resource Bank in San Francisco, which relies on its expertise in sustainability to run a loan portfolio that is nearly three-quarters sustainable. In a recent report, New Resource Bank is not only profitable, but also has non-performing assets to total assets of only 0.10%. This compares to a more typical peer bank of around 1.50% or so.
What the New Resource Bank results perhaps demonstrate, and which green banking advocates stress, is that well-managed green loans can also be less risky and therefore less volatile. They can also get the bank into new customers, so that can help as well.
Green-oriented banks show that if carefully managed and monitored, green loans can be profitable. The challenge in trying to do so is to be sure to gain enough expertise to properly evaluate and monitor such a green strategy.
Banking remains challenging, but bankers who focus on green lending and do it well may be onto something that will grow both customers and profits over time.