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|
“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 crisisIn 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 crisisAfter 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|
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.”