e3bank...On the Road to an Integrated Capital System
The financial system collapsed around the extraordinary vision that was to be e3bank. Although that vision was never realized, Sandy Wiggins still believes that we can transform our financial system to nurture natural capital and increase social equity. Pictured above: Frank Baldasarre and Sandy Wiggins.
In 2007, Sandy Wiggins, then the Chair of the U.S. Green Building Council, met a career banker named Frank Baldasarre. Both were looking to use their skills to rechannel capital into businesses that would build a more sustainable world. Together they spent four years trying to start e3bank, a truly regenerative bank that, as it turned out, never was to be.
Some would have viewed that as a failure, but Sandy never has. Along the way, he believes, he and Frank may have altered in critical ways how at least a handful of FDIC regulators understand risk. And it was through his work trying to breathe life into e3bank that Sandy connected with a small, vibrant community of people working in the integrated value and integrated capital space, where he is now wholeheartedly engaged.
Sandy tells the story of his journey with e3bank here.
During the time that I was chair of the U.S. Green Building Council I did a lot of public speaking to communities of business people who were engaging with green building and other sustainable business initiatives. The refrain I kept hearing over and over again was, “here is what we would like to do, but we can’t find the capital to do it.” It became clear to me that the financial industry was “the pig in the pipe,” to use a metaphor from the construction industry. It was blocking the flow of the good work that people wanted to do. I knew it was a problem that needed to be solved, but I didn’t have a clue about how to go about it.
It was after probably two years of noodling on that that I met Frank Baldassare. After experiencing a personal epiphany about how his own business practices were impacting the world, Frank had left his job in the banking industry and was thinking about what he now wanted to do with his life, where he could use his skills. So we decided to start e3bank together. Our discussion really began with the mission of e3 and what its guiding principles would be. It was going to be an altogether different kind of banking enterprise.
And every aspect of the business would exhibit radical transparency.
When we started working on the business plan we looked at the current banking system. The majority of people in the U.S. who put their money in a bank know the FDIC insures it, but they don’t know how the bank puts that money to work. It may be completely out of sync with their personal values. So the first thing we wanted to do with e3bank was to create transparency so that people knew what was happening to their money.
We came up with a whole suite of ways to create that transparency. So when you would go on the online banking platform you would see a Google Maps interface that showed all the places e3bank was investing your money, and you could get some basic facts about it. What were the social and environmental benefits of that loan, not just the financial return.
We also wanted to create real connection between the borrower and our family of depositors. We wanted our borrowers to sign a social contract, another document they had to execute at loan closing that specifically articulated they were not borrowing money from the bank, they were borrowing from their neighbors.
If you were a commercial borrower, you would have to fill out a B Corp survey. We weren’t going to require you to become a B Corp, but there were two reasons why we wanted you to fill out the survey. First, the very act of going through the survey raises awareness. When LEED standards were introduced to the market in 2000 one of the most important things it did was raise awareness. The act of reading through the LEED rating system forced people to ask themselves questions they never would have asked before about the buildings they were developing. Same with the B Corp survey. If you read through it and you were not familiar with the triple bottom line landscape, the questions would make you think differently about things.
The survey also would give a snapshot into how you were performing as a business across the triple bottom line and, just like your income statement and balance sheet that would become part of the annual review process with the bank. Then we would ask ourselves, what could we do as a bank to support you in improving over time? And if your score was not improving over time maybe it wasn’t a good relationship for the bank.
We launched in January 2008 and six months later the industry went into a complete tailspin. As it turned out, it was the hardest business venture I’ve ever engaged in. We filed our application with the FDIC late in the spring of 2008. Here we were trying to get this alternative, out-of-the-box bank off the ground, not comparable to anything else the regulators had seen, and they were scrambling to keep the system from melting down.
In spite of the market turmoil over that summer, we were summoned to the FDIC’s regional headquarters on Wall Street to meet with them. I now understand that was quite unusual for a de novo bank.
We had a banking attorney representing us who was trying to coach us on the trip from Philadelphia to New York. He was counseling us to minimize the alternative nature of what we were trying to do. Instead I made the decision to talk about the mission of the bank. I explained the reason we wanted to start this bank was to try to find a way to redirect the flow of capital toward a more sustainable world. I talked about the values that were driving what we were doing, but also weaving in the story of why we felt that made sense from a safety and soundness perspective.
It was very tense meeting at the beginning, but by the time we left they were patting us on the back. One of the women actually followed us to the elevator. She had a daughter studying environmental science, and she was so excited. But we still had to convince them that what we were proposing to do made sense from a safety and soundness perspective.
because, from the bank’s perspective, you were a better risk. To convince the regulators, we ended up conducting three independent market studies and compiling all kinds of supplemental data. We drew a lot of our evidence from the green building industry.
For example, we were able to demonstrate that a green building that was certified under LEED, a third party, objective standard, was an effective way to protect that real estate asset from obsolescence. The evidence showed that you could expect higher tenant occupancy rates and the building’s appraisal value from an operating income perspective would be better than a conventional counterpart. And we were saying the same thing about commercial borrowers. The more sustainability oriented, the higher the score on the B Corp survey, the better the risk bet.
That was language the regulators understood and eventually they got it. In March 2011 they approved our ability to operate a bank but they didn’t give us a new charter. Instead they told us to buy an existing bank, so we had to find an acquisition candidate.
Ultimately we did find a unique opportunity, a tiny little federally chartered bank, American Eagle, that was about to be closed down by the FDIC because their capital ratio had dropped below a critical level. We got the FDIC to stop that process. Unfortunately, OTC and FDIC then set a capital target for us that was over three times what a pre-2008 bank would have had to have as a start up. Pre-2008 you could start a new bank or acquire one with as little as $7-8 million. We were given a target of $27 million. Meanwhile the clock was ticking because American Eagle was continuing to lose money every quarter.
We spent the next nine months on the road trying to raise the money. We focused exclusively on values-driven impact investors around the country because we felt that mission-aligned capital was critical to our ultimate success. We didn’t want the money to be questioning the “why” behind our business decisions. But, while many investors displayed interest, most were feeling very uncomfortable with the banking industry or simply didn’t understand it.
Then American Eagle’s capital ratio dropped to one percent and the FDIC told us we were out of time. They did try to work with us, lowering the capital target and giving us an additional 30 days, but we were unable to raise the money we needed. In February 2012, four years into our effort, all of our approvals evaporated. We had burned through $3 million dollars of at-risk capital and expended an enormous amount of our life energy, but the clock had run out.
While we were not able to reach the capital requirements set by the regulators, we did receive substantial support for our initiative. There were several dozen investors who saw both the importance of what we were doing as well as the business opportunity and who put their money behind us. I'm incredibly grateful to them for their vision. And we received substantial support in the form of intellectual capital, most notably from Triodos Bank in the Netherlands, which has been pioneering this kind of banking for decades. We were contacted by their CEO and Chair of the Global Alliance for Banking on Values, Peter Blom, shortly after an article about e3bank appeared in the New York Times. On his invitation, we visited Triodos where he gave us open access to his entire management team so that we could learn from their experience.
The banking industry as a whole is evolving in ways that continue to support aggregation and the growth of the large money center banks. The bigger ones buy up the little ones. It’s true, some of the little ones are started just so they’ll be bought up by the bigger ones. Banking, in that respect, has become like speculative real estate. But there are other small banks that are really place-based and exist to serve their communities. There is a lot that could be done to retool the regulatory environment to support those small, closely held community banks. Many of those smaller banks came through the financial crisis without suffering any of the financial setbacks of the larger ones and yet they are being suffocated by the regulatory environment. It has become so hard for a small bank to even exist due to the expense of compliance. They are being squeezed out of existence.
I would like to think that our experience working with the FDIC regulators plowed the ground for another startup trying to go down this path – that they will find less resistance in the system, assuming they connect with the same people we did. I would also say the individual regulators we came in contact with were absolutely changed in their thinking. But it will take a lot more than that to change the system. I think we’ll either see a system collapse or other pioneers like e3 will start to gain market traction and people will see that there is a paradigm that makes sense, much like the green building industry did. That was one of my personal objectives with e3 (and one of my principal takeaways from the green building industry).
If an e3 started to make inroads into the market in spite of the naysayers precisely because of its mission and values, eventually others would start to imitate it.
As difficult as it was to navigate those four years and then have to shut e3 down, I don’t regret it. It was a tremendous learning journey. The great personal benefit for me has been my connection to the growing community of amazing people focused on changing the financial industry.
The work I am now doing with RSF Social Finance is focused on supporting the emergence of what we’re calling Integrated Capital - values-driven coordination of 100% of an institution or individual’s financial assets (investments, loans, and gifts) to address a particular set of social and/or environmental issues – and an Integrated Capital Network, which is basically a trust network that connects co-investors to each other through their values, impact focus, and place.