Europe's co-operative banks

Europe's co-operative banks

Mutual respect

Taking stock of Europe’s islands of socialist banking

CDO with your kale crop, sir?

YOU can almost sense faint embarrassment, perhaps even a hint of regret, when Europe’s co-operative banks talk about “earnings”. The term “dividend” is certainly taboo; instead, euphemisms about “member benefits” abound. Disdain for notions like profit made mutuals, which do not have shareholders to please and are owned by their customers, look boring in the boom. But many have put their more capitalist-minded brethren to shame during the downturn.

Over the past decade, dull but safe co-operative banks have steadily increased their share of retail banking in Europe’s crowded banking market. A paper by Oliver Wyman, a banking consultancy, found that almost one in five Europeans is a customer of a co-operative and that, when comparing the number of complaints they generate relative to their market share, their customers love them far more than they do those that are red in tooth and claw. “Overall the mutuals didn’t have a worse crisis than the commercial banks,” says Mark Weil of Oliver Wyman. And the losses they did incur “are not necessarily because of the mutual structure.”

Some have stumbled. In France mutual banks seem to have fared rather badly compared with their publicly traded rivals, although a further €1.4 billion ($2 billion) write-down of toxic assets at Société Générale in the fourth quarter has helped even the balance. Two mutuals, Caisse d’Epargne (the country’s third-largest retail bank) and Banque Populaire, were forced together to prop up Natixis, an investment bank that they jointly own and that racked up heavy losses. In Britain several smaller mutually owned building societies collapsed under the weight of bad bets and were folded into bigger ones.

Their fans argue, however, that the sins of the few should not condemn the lot. A report commissioned by Rabobank, a large Dutch co-operative focused on agricultural lending and the only bank still to boast a AAA credit rating, for presentation at the annual meetings of the IMF and World Bank in October, noted that co-operative banks did not need big bail-outs.

In Germany, for instance, co-operative banks collectively have some 30m customers, 16m members and hold just over €1 trillion in assets. The 1,200 local mutual banks that make up the sector in Germany have been given good grades by Standard & Poor’s (S&P), a ratings agency, mainly because of a mutual-protection scheme under which they all agree to bail out failing members. The safety net has ensured that in the 75 years since its establishment, no mutual banks have filed for bankruptcy, S&P notes.

A 2009 study by the Bundesbank, Germany’s central bank, into the connection between financial stability and bank ownership also found that co-operative banks were much less likely to fail than those owned by private shareholders. That fits with earlier work done by staff at the IMF in 2007, who argued in a working paper that co-operative banks were more stable than their commercial counterparts.

Neglect, benign and malign

Part of the reason may lie in their ownership and governance structures. The fact that members of co-operative banks do not behave like owners may be to their advantage, because there is less incentive for them to take big risks to maximise profits. Going into the crisis, co-operative banks had bigger capital cushions on average than privately owned ones, which are generally under pressure not to hold more capital than necessary.

But the crisis has also highlighted the downside of this structure. The co-operatives that have stumbled generally did so when expanding abroad or into new areas, such as investment banking or capital markets, that have little to do with their traditional retail franchises. Critics of mutual banking argue that this reveals fundamental weaknesses in a model which was meant to prize conservatism. Chief among the barbs is that co-operatives are not subject to proper oversight because their ownership is widely dispersed among people with no interest in their profitability or involvement in their governance.

It is certainly hard to see how some of these new initiatives could have served, say, the farmers whose ancestors founded many of Europe’s co-operatives and who remain core customers today. For the banks’ managers, on the other hand, a far-flung financial empire doubtless seemed much more fun to run than one based on lending against next year’s harvest. That they were allowed to get away with such adventures for so long should be the mutual sector’s real source of embarrassment.