A Primer on Civic Banking

From Greedy Banking to Civic Banking

The banking profession is going through rough times. So far the cost of the bail-out worldwide is well on the way to US$ 5 trillion or one–tenth of the Gross World Product. Some analysts put the eventual estimate at the exorbitant figure of US$10 trillion. This would increase by one-fifth the world’s stock of public debt .Taxpayers and future generations will have to shoulder the extra burden .Ordinary folks are angry at the largesse of top banking executives .They pocketed stratospheric paychecks during the boom years. And now governments everywhere are socializing the losses to prevent a systemic collapse. Adding to the public outrage is the fact that banking regulators did little to rein in high leverage ratios , reckless risk- taking , and related self-serving perks .Opinions are still divided as to whether regulators were ignorant , ideological , negligent , “captured” – by the very banks they were expected to regulate – or all of the above.

The fact of the matter is that bankers have seldom been held in high esteem. In biblical times, making a living by charging interest on loans was deemed immoral. In the middle ages, “usury” laws kept lenders at the edge or in the shade. It was precisely the search for alternatives to “usurers” what gave birth to the so called “mounts of piety” – or not- for- profit pawnshops – first set up by Franciscan monks in 16th century Italy. They were replicated elsewhere in Europe in the 17th and 18th centuries. In 1797, the British philosopher Jeremy Bentham – father of “utilitarianism” and one of the founders of modern economics – put forth a proposal for the creation of savings banks as a self-help scheme to help paupers out of poverty. Bentham coined the name of “frugality banks “. Some even see the origins of saving banks in an essay written one hundred years earlier by Daniel Defoe – the author of “Robinson Crusoe” – in which he called for the establishment of what he termed “pension offices”.

These are the roots of a myriad of savings banks that sprung up all over Europe and overseas starting in the 19th century. Each homegrown variety adopted its distinctive name: building societies in the UK, caisses d’epargne in France, sparkassen in Germany, savings and loans(S&Ls) in the USA, and cajas de ahorro in Spain and Latin America.

Like other types of financial institutions, saving banks have had mixed fortunes, averaging good times with bad times. Two recent examples are, first, the failure and liquidation of 800 S&Ls in the US during the 1980s; and second, the demutualization or merger with banks of about one half of the largest building societies in the UK during the 1990s.

In Spain the sector has thrived in recent years. It comprises forty five cajas de ahorro that manage total combined assets of US$ 1.3 trillion or about one half of total banking intermediation. The largest and better known are Caixa and Caja Madrid, respectively third and forth largest banks in Spain .The jury is still out as to how cajas will fare in the aftermath of the current real estate and banking crises. But this is not the point of my article; my purpose is to analyze the Civic Banking model adopted five years ago by one of these institutions.

Cajas are expected to be run on commercial principles and are subject to the same operating framework and supervision as any other bank. The main difference between private banks and cajas is ownership. The cajas have no private owners; their shareholders are foundations typically controlled by municipal, regional governments, and stakeholders .Moreover, they are mandated by charter to allocate a share of profits (although the law does not specify how much) to social projects and charities. In 2007, their total allocation to charities was US$ 3 billion or about one fifth of after tax profits .The remainder of profit is channeled by each caja to strengthen its capital base.

And who in the cajas decides what charities to fund? The norm is a top down system whereby an ad hoc board defines what type of projects will be eligible and decides, out of all the applications, which ones will be funded. The board typically comprises representatives of local and regional governments and other stakeholders. This selection is thus biased by political and stakeholder preferences. And this brings me to the topic of civic banking.

In 2002, a medium-sized institution, Caja Navarra (CAN), adopted a strategy of radical reform. Until then, CAN have been a mediocre bank that ranked fifth from the bottom in profitability, out of the forty five cajas. To turn things around, the board appointed a new CEO, Enrique Goñi, with a strong mandate and full powers to carry it out. In designing the strategy, his reasoning went as follows .His point of departure were two central questions: what is it that people dislike about banks? What can be done about it?

Goñi came out with the following vision: transfer as many rights and as much power as possible from the board, management, and employees to the clients with the sole constraint of not compromising on sound banking principles.

The first move was to abandon the top down allocation system of social grants in favor of a bottom up approach. To do it, CAN bestowed on each individual client the power of selecting what social projects will be funded. This client empowerment and other innovations were launched under the brand name of Civic Banking.

Description of the Civic Banking model

I summarize below the main building blocks .The reader can find a detailed description at: http://www.cajanavarra.es/PortalCAN/enGB/CanalCaja/WhatisCivicBanking

1. Profit reporting to clients. Each client is informed periodically about how much profit results from his / her operations with CAN. The typical letter to a client reads:

“Dear Mrs. Smith, in 2007 CAN made US$ 210 profit from banking with you, of that amount US$ 70 will be allocated to local and international social projects….”

To apportion profits to specific lines of business ( mortgage , credit card , savings account, life insurance , etc ) , CAN devised a cost-accounting calculator so that the client knows how much profit will result from each operation .

2. You choose, you decide .Each client is asked to select up to three projects from a catalogue. Hence, the letter to Mrs. Smith goes on:

“Please indicate to us the codes of up to a maximum of three projects from the attached catalogue, to which you want Caja Navarra to apply your social cheque of US$ 70”

CAN typically allocates one-third of total after-tax profits to social grants, more than the one-fifth on average allocated by the sector .The list of projects currently applying for funding can be searched at the website above by line of action, activity, and location .The client can exercise the right to select the projects at a branch, an ATM, by internet or by mail.

3. Open sourcing of projects. There is no need to be a client of CAN to present a project. Anyone, anywhere in the world can present a request for grant funding provided that: (a) the project and the implementing entity meet broad defined criteria; and (b) the entity agrees to provide progress reports and be subject to auditing if required.

At present the catalogue comprises 3600 national and international social projects. The projects range – to mention a few – from a daycare center for Alzheimer patients in Valencia (Spain ) , to a nutrition program for poor children in Ocongate (Peru ) or a low-cost housing project in Anantapur (India ) .The number of social projects sponsored in developing and transition countries is in an upward trend. This fact has attracted a fair share of immigrants to banking with CAN. By the same token, the possibility to raise grants for the care of relatives with special needs has acted as a magnet in enticing their families to bank with CAN. Similarly, the rising share of clients sensitive to environmental a development issues confirms that “you choose, you decide “is a formidable marketing tool.


The percent allocation of grants across the five broad categories of social projects – before and after the introduction of Civic Baking – is provided in Chart 1 .The striking feature in the chart is that the “before” and “after” distributions are perfectly negatively correlated .Whereas now clients allocate 60% of total grants to disability- care , international aid , and the environment ; under the previous board-based decision system ,board directors used to allocate 70% to the two groups least favored by clients : sports-leisure , and culture-heritage .This is indeed a case study worthy for inclusion in Milton and Rose Friedman’s bestseller “Free to Choose”.

4. Volunteer program. Clients and the public at large can volunteer to work in selected national and international projects funded by CAN.

5.Traceability .Clients with civic and ethic motivations or constraints are offered savings vehicles that invest in loans for one or several pre-specified “socially responsible” projects .These clients can “trace back” where their money went.6. Branch utilization by clients .

6. Branch utilization by clients. Bank branches are designed in such a way that can be utilized as a social club for clients, their children, and friends , after the branch’s office hour’s .The concept is termed “cancha” – what could be translated as “my space”. So far 51 branches –or 15% of all – operate as “canchas”.


The finances of Caja Navarra have improved markedly since the adoption of Civic Banking in 2003 .Of course , that improvement cannot be solely attributed to Civic Banking , surely banking services themselves must have been upgraded and made more cost effective .After all, the primary product costumers expect from a bank is banking , not social policy . However, since my focus here in on Civic Banking, I leave the other issues for researchers .As Chart 2 indicates, the standing of Caja Navarra among Spanish savings banks has advanced dramatically .In terms of profitability, its return on both equity and assets has leapfrogged from positions 41st and 32nd (out of 45 cajas) to 4th and 5th, respectively. In turn, in terms of total assets and profits, its rankings have risen from positions 22nd and 20th to 17th and 12th, respectively. I conjecture that a key driver of this performance is the fact that Civic Banking augments the franchise value of the business. Clients are attracted because they are provided banking and more. This hypothesis appears to be consistent with the fact that Caja Navarra has recently expanded its network of branches beyond its natural habitat of Navarra – a region in northern Spain .At present, 166 of its 351 branches are located outside the region .Soon operations will start in Hungary where CAN has acquired a local bank as a stepping stone to introducing Civic Banking in other Eastern European countries. Fitch confirmed the rating of Caja Navarra at A in May and the outlook has been maintained at stable ,despite the banking and real estate crisis . In sum, Caja Navarra’s Civic Banking model is an example of doing well by doing good.

I believe that the primary objective of banks is providing good banking services at a low cost, and without a downside for the taxpayers .Provided that this principle holds, I do not favor one specific type of bank over another type. All varieties have a role and a market niche, from pawnshops through credit unions to investment banks. I am not presenting savings banks as a panacea. On the contrary, I believe that they are vulnerable to political patronage and fund peddling; proclivities that can be more of a challenge to keep in check than the self-serving recklessness of greedy bankers.

Privatizing the upside and socializing the downside breaks with the basic ethics of the market economy and private property rights. The game of “heads I win and tails you lose” – as popular jargon has it – is socially unacceptable. Commercial bankers and their regulators have dammed themselves for a while. In the process they have tarnished the reputation of the market economy, very much to the regret of those of us who believe in a free market .The current crisis will no doubt shake the foundations of every garden variety of banking as we know it.

As a pragmatist, I am open to any banking model that works and Caja Navarra’s Civic Banking model seems to work. Whether or not its success can be replicated elsewhere by another management, in a different country, and under different banking institutions remains to be seen .Reshuffling a portion of the upside back to the clients and bestowing clients with a code of rights will , in any case, be appealing to many in today’s “planet bail-out”.

3 Responses to "A Primer on Civic Banking"

  1. ARI   November 30, 2008 at 11:43 pm

    impressive ,it’ll be great if it could be imported into LatAm ,commercial banks would not be happy .I had doubts whether could workout to create that kind of inst from scrath ,saving banks have tradition in Spain it appears.Nice piece

  2. Gabriel   December 1, 2008 at 11:30 am

    Amazing. These “Cajas de Ahorro” (Saving Banks) in Spain have been the subprime mortage originators par excellence. That includes CAN. They write about sound banking principles, just wait a month or two, their house of cards is starting to. Believe or not, until mid-2007 these Cajas de Ahorro have regularly originated 70% DTI ARM mortgages with LTVs above 100% to anyone who could breath.I wonder… would the “civic bankers” kindly report losses to clients?1. Loss reporting to clients. Each client is informed periodically about how much losses result from his / her operations with CAN. The typical letter to a client reads:“Dear Señor Pepito, in 2007 CAN made 90,000 euro loss from your 125% LTV, 70% DTI Spanish-style subprime toxic mortgage, of that amount 30,000 euros will be cut back from local and international social projects….”Esta es la gente que ha pervertido la noción de “Derecho a Vivienda Digna” y la ha cambiado por “Derecho a Invertir en Ladrillo”Se creían que estaban ayudando al Pepito medio español a cumplir su sueño de tener vivienda propia, a pesar de que el alquiler era y es una alternativa mucho más económica que comprar (rara vez se encuentran propiedades que rindan más del 3% cuando en intereses se paga el 5-6%) y con los cambios demográficos que empezamos a experimentar ahora (cohorte de 25-35 años en rápido descenso) nadie puede esperar ninguna clase de revalorización en las propiedades inmobiliarias de este país.Estas cajas de ahorro, banqueros de segunda clase, no cumplieron su función de MEDIR EL RIESGO al conceder créditos, y en general las hipotecas desde el 2005 hasta mediados del 2007 son una locura detrás de otra. Estos van a pagar buena parte de los platos rotos, pero al Pepito medio español lo han jodido de por vida.

  3. Alex   March 18, 2013 at 10:59 pm

    This is very interesting, particularly now after all the dust seems to have settled somewhat. I would be interested to hear of any followup analysis on Banca Civica or any other Civic Banks. Please contact me via e-mail below. Regards Alex.