From Fragile to Resilient: Libor to RSF Prime
November 28, 2012
by Don Shaffer
Let’s recognize the historic opportunity we have to change the current culture of money!
We know, for example, that big banks like Barclays pushed the adoption of Libor over another benchmark—a comparatively simple cost-of-funds index that many observers now say was better for borrowers and much less volatile. The switch was made for one reason: to increase short-term profits for the banks. The foundation of trust in Wall Street has been completely undermined as a result of this and other recent scandals.
Based on our core principles, RSF is taking small steps to create a fundamental transformation in the way the world works with money. A great example is RSF Prime. We developed RSF Prime to create community among the participants in our flagship loan fund, the RSF Social Investment Fund.
For many years, we based our investors’ return rate on the 13-week U.S. Treasury Bill. Each quarter we recalibrated the rate based on this well-publicized benchmark. In 2006, we shifted to Libor because it represented the most commonly accepted barometer for short-term interest rates worldwide.
But as the first wave of the financial crisis unfolded in 2008, we became increasingly uncomfortable with this approach. We realized that pricing to meet the needs of our stakeholders could most productively be determined by the community of stakeholders itself. So we began hosting face-to-face meetings at our offices in San Francisco with representatives of the three stakeholder groups of our RSF Social Investment Fund: investors, borrowers and RSF staff. In October 2009, we adopted a customized interest rate collaboratively recommended by these stakeholders each quarter. We dubbed this new base rate for borrowers “RSF Prime”.
We believe this is the first time that a lending institution has facilitated meetings between investors and borrowers to determine loan pricing. With RSF staff at the table facilitating the conversations, all three stakeholders are visible to each other and engage in a direct and transparent exchange to understand intentions, motivations, and needs. We feel that other financial institutions such as community banks and credit unions have similar stakeholder groups that could be engaged in this way.
The loan-pricing meeting is one step towards modeling a more resilient financial system. At its heart is building community, which RSF also holds in how it works with borrowers by bringing them together to share wisdom and resources, and in its innovative grantmaking through Shared Gifting. A web of trusting relationships and a spirit of collaboration are foundational to a resilient economy. We have observed that by bringing all the stakeholders together, there is more engagement, fulfillment, and accountability.
Just as an organic or biodynamic farm relies on far fewer external inputs than a conventional farm, we are eliminating our reliance on Wall Street rate-setting, going “off-the-grid” as much as possible, so that we can be more resilient based on the strength of our investor-borrower community.
We invite you to share other ideas with us—either suggestions for what we can do at RSF, or ways you think other institutions can change to make our financial system more transparent and trustworthy. You can ask your bank about how they set their interest rates, for example.
Ultimately, we have to “be the change”, as Gandhi said. In our view, energy spent modeling a new way of working with money will have much more positive, transformative, and long-term effects than trying to change the existing system from within through regulation.
Let us know what you think!
Don Shaffer is President & CEO at RSF Social Finance.