Financial co-operatives: A safe bet in a crisis

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During the global financial crisis, financial co-operatives out-performed traditional investor-owned banks, according to the International Labour Organization.

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

Written by co-operative author Johnston Birchall, professor of Social Policy at the School of Applied Social Science at the University of Stirling in Scotland, the report highlights the difference between investor-owned and customer-owned banks.

Said Mr Birchall: “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.”

In the years leading up to the crisis, the co-operative 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.

After the banking crisis, nearly all co-operative 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 co-operative 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 co-operative banks was ‘substantially higher’ than the investor-owned banks in 2007, the report says.

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” co-operative 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 co-operatives 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’.”

Co-operative banks in Europe have come out of the crisis without being severely affected. According to the report, seven of them are in the top 50 safest banks in the world, and across Europe, they exceed the minimum legal capital ratio requirement of eight percent, with an average ratio of about nine percent.

In Germany and Austria co-op banks remained faithful to a conservative business model of just serving their members, thus the crisis had little effect of them.

In France Crédit Agricole, Crédit Mutuel and Banques populaires received loans of from the government in October 2008. However, by early 2010 Crédit Mutuel and Crédit Agricole had repaid their loans, and all three groups are now growing again.

In the Netherlands, Rabobank was the only large bank that did not need government support.

Co-operative banks across Spain and Italy have been damaged more by the wider economic crisis that was triggered by the banking crisis.

According to the ILO report, the banking crisis had a severe impact on Africa. Nevertheless, between 2007 and 2010 savings grew by 34 percent, and loans by 37 percent.

In North America credit unions recorded an increase of 23 percent in terms of saving, between 2008 and 2010, with customers choosing co-operative banks rather than PLC banks. Saving have also increased in Latin America and Asia.

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

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

José Manuel Salazar-Xirinachs, Assistant Director-General for Policy at the ILO, said: “This report provides a timely contribution to the global discussion on alternative approaches to promoting sustainable development goals in the aftermath of the global economic crisis.

“It shows how the success of financial co-operatives during the global financial crisis can provide a credible alternative to the investment-owned banking system. We hope that it will be of interest to policy makers in partnering with financial co-operatives for enterprise development, insurance against poverty, and decent work.”

• View the report below, or download from the ILO.

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