Co-operative banks as key players
Co-operative banks have proven resilient and sustainable. Post-crisis financial regulation and reform must recognise the sector’s rich diversity
Co-operative banks form decentralised networks that are subject to both banking and co-operative legislation. They play an important role in Europe and in the global banking industry. They serve 180 million customers mainly households, SMEs and local communities and have a market share of about 20 per cent in Europe. In some European countries, like in France, Austria, the Netherlands, Germany, Finland or Italy the market share ranges between 20% and 60%. Co-operative banks employ 750,000 people and have more than 50 million members across Europe. Furthermore, 1 in 3 Small and Medium Enterprises is serviced by a co-operative bank.
These figures demonstrate the power of cooperative banking and the contemporary form of its business, which brings prosperity in both industrialised and developing countries. For co-operative banks historically created to improve access to finance for their co-operative members, who would have otherwise had limited access to financial services based on reasonable conditions, this remains a key objective.
Indeed the history of many co-operative banks can be traced back to the financial exclusion faced by many communities in the 19th century. Most co-operative banks were established following the ideas of Schulze-Delitzsch and Raiffeisen to offer opportunities to rural communities and small businesses that would have otherwise remained unserved. In economic terms co-operative banks were established to address market failures: the members were owning and financing the institutions, taking part in decision making. The community monitoring and relationships offered the necessary incentives to ensure timely repayments of loans and allowed co-operative banks to flourish and become the banks of today.
In short the co-operative banking model was an innovative answer to unequal access to financial services and the principle of mutualisation was a means to emancipating people from economic, social and even political dependency through self-reliance and solidarity. While evolution of the structures and national legislative frameworks and traditions have differed in the different EU countries, this basic set of values and characteristics still holds true.
In particular the key distinguishing factor of member ownership is a common and defining feature. The local banks are effectively owned and controlled by the local customers through membership. The local banks in turn own and control the supporting infrastructures, regardless the number of tiers, roles and authorities delegated to them.
As co-operative banks networks are established at local level, they are fully integrated in their immediate environments. This feature of proximity means that the credits collected are reinvested at the local and regional level and as a result the co-operative banks play a key role in development of areas in which they are based. In other words the decisions in co-operative banks are taken at local level and granted to local projects from the member/owners. “This reflects the primary banks’ awareness of their social and economic responsibility in their respective local communities and it is in line with the co-operative principle: from the local community and for the local community.”1 In this respect co-operative banks have continuously promoted entrepreneurship through fostering self-help, responsibility, co-operation and solidarity while emphasising the common good of the communities they belong to.
Proximity: improving access to financial services and fostering regional development
With 65, 000 branches in the EU-27, co-operative banks provide EU-wide coverage, from the inner cities up to the most remote areas and villages. They provide access to finance for customers in regions that would typically not be served by other players of the credit sector due to decisions based on the profitability criteria alone.
The market share of co-operative banks in rural areas ranges from approximately 41% in Germany to up to 85% in France (3 co-operative banks groups combined). In most European countries, including France, Portugal, Italy, Spain, UK, Austria, the Netherlands, Greece, France and Finland, co-operative banks are often the only financial institutions present in areas that are considered remote.
The inclusive role of co-operative banks has been illustrated in literature, a study of 2005 examines the consequence of historical presence of local co-operative banks on long-term growth (data from 1970 to 1993) and finds that the size of the total financial sector has little impact on regional growth, while the presence of co-operative banks is crucial.2 The authors argue that the less complex and smaller co-operative banks, with high knowledge of the local community are more suitable for providing funding for locally based businesses, than large financial institutions owned by a vast number of shareholders. On account of their proximity to the members and their local establishment, co-operative banks are well placed to gather more comprehensive information that allows for better evaluation of the needs of customers and their solvency. For example, processing soft information on borrowers, reducing information asymmetries and lowering moral hazard and adverse selection.
Recent research conducted by the CEPS (Center for European Co-operative Studies) in 2010 across 7 EU countries has demonstrated the contributions of co-operative banks in fostering local growth.3 The research confirmed that the regional presence of co-operative banks has a positive impact on regional growth and GDP. Moreover in some countries like Austria and the Netherlands co-operative banks appeared to play a stabilising role through maintaining their presence in regions that experience slow growth and therefore contributing to future economic recovery.
Resilience: contributing to the stability of the financial systems
The member-customers are fully involved in the decision-making process of co-operative banks. Apart from allowing for risk minimisation, creditworthiness and customer need identification, member control is key to a long-term vision. Unlike other companies quoted on the stock exchange, co-operative banks are not subject to the volatility of financial markets. Their primary aim is the long-term relationship with customers/members and members value maximisation. The continuous increase of profits is not a goal per se. Thanks to this long-term approach ─ high level of capitalisation, stable incomes from retail business, a diversified credit portfolio and prudent risk management ─ co-operative banks demonstrated their resilience during the recent financial crisis and weathered the storm relatively well. The stabilising role of co-operative banks was illustrated in a recent study of the IMF and acknowledged by several commentators and policymakers, including EU and International institutions. They underlined the continuous support of co-operatives to local economy and small businesses also during the turmoil.
Towards an enabling regulatory environment
Thanks to their co-operative features and structure, co-operative banks are resilient and sustainable; they are an asset for stability and for providing accessible and inclusive financial services. As recently declared by the Secretary General for the United Nations, Mr Ban Ki Moon: “Cooperatives are a reminder to the international community that it is possible to pursue both economic viability and social responsibility.” However an enabling regulatory framework that fully takes into account the diversity of banking models in Europe is fundamental to be able to continue playing their crucial role.
One of the lessons drawn from the sub-prime mortgage and financial crises is the importance of diversity in the banking industry. Although still difficult to apply in practice, several commentators, public authorities and international organisations have fully acknowledged that "just as an ecosystem benefits from diversity, so the world is better off with a multitude of corporate forms."
Several researchers at European level (Lwellyn, Ayadi, Ferri, Kalmi et al.) have recently stated the powerful systemic benefits to be derived from diversity of business models and ownership structures in the banking sector. In short a pluralistic approach is likely to ensure greater financial stability and growth, as it responds to different objectives and business purposes.
Despite these recognitions, the recent banking reforms and the post-crisis financial regulation show that legislation at international and European levels is conceived on the basis of the mainstream shareholders banks model (with high level of sophistication) and does not take properly into account the diversity and characteristics of the other models. If diversity has to be translated into practice, a cautious approach must be taken by the legislator to avoid a detrimental one-size fits all approach that might hamper growth and local communities.
Elisa Bevilacqua is head of research and communications at the European Association of Co-operative banks
1 Androniki Katarachia, “Social responsibility and customer satisfaction in cooperative banking”, 2nd International CIRIEC research conference (2009)
2 Usai, S and Vannini M., “Banking structure and regional economic growth: lessons from Italy”, Annals of Regional
3 Ayadi R., Llewellyn D., Schmidt R. et alt, “Investigating Diversity in the Banking Sector in Europe, Key developments, performance and role of cooperative banks”, CEPS (2010)
Ban Ki Moon