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Financial cooperatives: A safe bet in a crisis

A new ILO book says that financial cooperatives fared better than the big investor-owned banks during the economic crisis.

Analysis | 12 April 2013

GENEVA (ILO News) – Financial cooperatives out-performed traditional investor-owned banks during the global financial crisis on almost every rating level, according to a new ILO book.

The study, titled Resilience in a downturn: The power of financial cooperatives, says customer-owned banks were much more stable and more efficient than the big traditional banks.

“Financial cooperative” is an umbrella term for cooperative banks, credit unions and building societies, as well as banks that are owned by agricultural or consumer cooperatives. What they all have in common is that they are customer-owned banks.

Financial co-ops global snapshot
  • 20 European countries have between them 24 systems of local co-op banks.
  • In France, co-op banks have 45% of the country’s market share of deposits, in the Netherlands 40%.
  • 3,874 local co-op banks in Europe with 181 million customers.
  • European co-ops have € 5,647 billion in assets, € 3,107 billion in deposits.
  • Credit unions operate in 100 countries worldwide with 51,000 unions and 200 million members.
  • Credit unions have $1,564 billions in assets, $1,223 billions in deposits and $1,016 billions in loans.
  • Co-op banks and credit unions reach the poorest people and have a substantial economic impact.
Credit unions were set up originally to serve people with the lowest incomes, many in developing countries and in North America. Most cooperative banks are based in Europe and serve a range of customers.

“Unlike many investor-owned banks, they maintained very good credit ratings, increased their assets and customer-base and the minority that suffered losses quickly bounced back and are growing again,” says report author Johnston Birchall.

This is because financial cooperatives and investor-owned banks follow different business models: the cooperatives are owned by members and are not driven by profits. Each member has a share, which entitles them to vote for the board of directors. Any surpluses they make are put into the reserves, which are eventually returned to members through annual dividends or cheaper financial products.

The investor-owned banks are driven by the need to maximise profits for the shareholders, which leads some of them to take much bigger investment risks – the scenario which triggered the 2007-2008 global banking crisis.

Before the crisis

In the years leading up to the crisis, the cooperative banks had a higher average stability rating, (known as Tier 1 ratios), than the investor-owned banks. They scored 9.2 per cent, compared to 8.4 per cent for the traditional banks. In France and the Netherlands, they were over 50 per cent more stable.

“They made better use of their smaller assets and still made profits because they concentrated on recycling savings into loans rather than depending on the money markets – yet they were at least as profitable, and in several countries more profitable, than the investor-owned banks,” Birchall explains.

Credit unions also went into the crisis in a position of strength, with 177 million members in 96 countries – all experiencing increased savings, loans and reserves in the years prior to 2007.

Resilience in the crisis

After the banking crisis, nearly all cooperative banks exceeded the 8 per cent Tier 1 stability threshold. Raiffeisen, Rabobank and OP-Pohjola Banks all had over 12 per cent Tier 1 ratios.

By April 2009, while many traditional banks were struggling, the ratings for cooperative banks were still at A and upward, with Rabobank maintaining its AAA rating.

And since they entered the crisis with larger buffers, the financial stability of cooperative banks was ‘substantially higher’ than the investor-owned banks in 2007, the report says.

Co-ops in the crisis
  • Co-op bank assets grew by 10% 2007 – 2010.
  • Co-op bank customers grew by 14%.
  • 7% European Co-op banks suffered losses during the crisis.
  • Credit Union reserves increased by over 14%.
  • Savings in credit unions increased by 1% in 2008, 15% in 2009 and 7.3% in 2010.
  • Credit union loans decreased slightly in 2008 then grew by 7.6% and 5.3% over the next two years.
  • Most of the financial co-op losses were made up within a year or two.
  • Nearly all indicators show they have bounced back and are growing again. 
Their profits improved in comparison with the traditional banks between 2003 and 2010, with average returns of 7.5 per cent, against 5.7 per cent for the investor-owned banks. Cooperative bank assets also grew between 2007 and 2010, as did their number of customers.

Globally, credit unions saw significant increases in savings, reserves and loans between 2007 and 2010, although there was an initial slowdown in the immediate aftermath of the financial crisis. The figures show that customers in several countries were choosing to put their savings in a safer place than the investor-owned banks.

Some “central” cooperative banks and credit unions – which head a federation of financial co-ops – made some losses but only a few had to accept government assistance.

“The banking crisis confirmed that financial cooperatives are stable and risk averse,” Birchall stresses.

“Most came through without needing government bailouts, without ceasing to lend to individuals and businesses and with the admiration of a growing number of people disillusioned with ‘casino capitalism’.”

Simel Esim, Chief of the ILO’s Cooperative Branch, says the importance of financial cooperatives to the banking sector – and to the economy – is often underestimated.

“The economic contribution of financial cooperatives, although substantial, is often undervalued, and sometimes completely ignored, yet some of the largest banks in the world are cooperatives. Cooperative credit keeps and creates businesses and jobs and ensures that enterprises stay afloat.”

Tags: cooperatives, banking

Regions and countries covered: Global

Unit responsible: Department of Communication (DCOMM)

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