Finance

Cooperative banks and the real economy: A long-standing and close connection

August 13, 2014

In a recent publication by the International Cooperative Alliance, the growth potential of the cooperative business model is explored. This business model has been fairly ignored in the last decades, due to the dominance of the shareholder value model and lack of reliable data on cooperatives. One chapter in this publication is devoted to European cooperative banking groups (henceforth ECBGs).

Image: © Nationale Beeldbank

It appears that cooperative banking is closely linked to the real economy. Their business orientation can be largely ascribed to their specific governance with member influence and authority. The data reveal that cooperative banking groups behave differently throughout various stages in recent business cycles than all other banks. They are robust pillars in the financial intermediation process and provide households and firms with loans and credits in economically good and difficult times. They also seem to behave in a counter-cyclical way and dampen economic cycles. Moreover, ECBGs also exhibit a relatively smooth growth pattern over the last decade. They expanded considerably faster than all other banks in their respective banking sectors and strengthened their market position. ECBGs attracted more members and expanded their shares in key markets. This could reflect an increased enthusiasm for the cooperative model, disillusionment with other banks, or both.

To date, ECBGs are confronted with increased volatility in results, a surging number of bankruptcies of SME firms, a damaged reputation of the entire banking industry and an explosion of regulatory and compliance measures and costs. In fact, due to their close ties with the real economy, ECBGs probably suffer more from economic slack in local economies and declining industries in the regions where they operate. Consequently, they have to find ways to increase their efficiency to survive in the new market environment. In the past, ECBGs have demonstrated their capacity to adapt to changing circumstances. Of course, this is no guarantee for future success.

From a policy point of view, this think piece stresses the importance to acknowledge the relationship between the specific governance and ownership structure of ECBGs and their stabilizing role in the financial intermediation process. These findings have important implications for academics and policy makers alike, since they indicate that ignoring this ownership structure can lead to erroneous banking regulations which may eventually undermine the positive impact of their specific governance on economic development in general. ECBGs should not be subject to a special treatment, but regulators and policy makers should be aware of their specifics when developing and implementing new policies.

Another important issue concerns the funding of ECBGs in order to satisfy future credit demand of members and customers. While these organizations have traditionally relied on retained earnings and member financing, they are now operating in a very different environment, like all other banks. Their reservation capacity has deteriorated, due to lower profits, thus increasing the necessity to tap new sources of funding to remain able to support the real economy in the future.

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Cooperative growth for the 21st century, Bruno Roelants (2014)

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