How can co-op banks deal with the tough regulations that followed the global crash?

Representatives from the world’s co-operative banks held a session at the International Summit of Cooperatives to analyse the impact of regulation in the wake of the financial crisis. The crash of 2008...

Representatives from the world’s co-operative banks held a session at the International Summit of Cooperatives to analyse the impact of regulation in the wake of the financial crisis.

The crash of 2008 had lasting implications for the sector, summarised by Alain Fradin, chief executive officer of Crédit Mutuel, France. He said it had led regulators to take measures to prevent a repeat crisis – but they failed to take mutuals into account when drawing up new rules.

Gerhard Hofmann, president of the European Association of Co-operative Banks (EACB), based in Brussels, said the sector had to make the case with regulators for fairer treatment.

Co-operatives had neither caused nor worsened the financial crisis, he said, but were still affected by the regulations that followed it.

“We don’t ask for regulation discount,” he added. “We want to be treated as other banks but in a fair and proportional manner.”

He said co-operative banks needed to be successful and prove their worth when entering negotiations with regulators, and told them to focus on three key areas: communicating the specificity of co-operative banks; promoting the value of diversity in the banking sector; and taking impact analyses that look at the wider context, not just capital figures.

“Regulation is not a goal in itself. It has to serve societies so I hope more regulators and academics look at what specific regulations mean not just for banks, but societies overall,” he added.

Franco Taisch, member of the board and the audit and risk committee at Raiffeisen, Switzerland, agreed that the sector needed a different approach from regulators and said a “one-size-fits-all” treatment could lead to a less diverse banking system.

“If you do not acknowledge diversity as regulator you build concentration of risks,” he warned. “You hinder innovation as well.”

Mr Taisch was also critical of how regulators dealt with the governance of co-op banks, making it difficult for them to find leaders.

“I suggest regulators create room for entrepreneurial thinking,” he said. “Without taking risks we will not have entrepreneurial success.”

Klaus Buchleitner, chief executive, Raiffeisenlandesbank Niederösterreich-Wien AG, Austria, warned regulation could affect quality of service.

He said his bank had been forced to sell some profitable parts of the business to increase capital, and the loss of these could leave some parts of the market underserved.

“We need some political visibility of what co-op banks do for the economy, for society,” he added. “It needs to be made clear to politicians and media that our business model is different from the style of global banking.

“Regulation, over-regulation and differentiated requirements are an obstacle for future growth in co-op banks,” he added.

A different perspective was offered by Yasuhiro Hayasaki, counsellor on global strategy at the Norinchukin Bank of Japan, who looked back on the aftermath of the Japanese financial crisis of the 1990s, “the Lost Decade”.

“Japan is 10 years ahead of what’s happening in Europe,” he said, looking back on the new banking regulations that followed the crisis. Domestic banks, many of which are co-ops, have a minimum capital requirement of 4%; Mr Hayasaki said that in Japan the regulator understood the situation of co-operative banks and was sensitive to their needs.

Mr Hofmann said: “Co-op banking will be what we make of it – not an outside destiny we can’t influence. We have to argue with regulators, and take on market challenges, but in the end, we have good chance that co-op banking will not just survive but thrive in the future.”

He also argued that co-operative banks did not have to change their governance structure in order to raise capital.

“If a bank is stable, profitable, growing, and well managed, it can attract new members and accumulate enough profit and capital,” he said. “If you are not successful, whether joint stock or co-op, you have the same issues to deal with.”

He also called on academics to take more research of the co-operative banking sector. Some research already taken was presented at another session on the efficiency of the co-operative banking model, when three academics presented their work.

Eric Lamarque, professor in management and governance of financial co-operatives at the Sorbonne Graduate Business School, France, looked at how co-operative banks were adapting to regulation and found that defining capital could be an issue.

The regulators’ approach, he said, was that if a bank posed more risks, it was required to have more capital.

“What is the good balance between risk, rentability and capital?” he asked.

Hans Groeneveld, professor of co-operative financial services and associate director at Rabobank, Netherlands, carried out a study of the efficiency of co-operative banks. Looking at the economic environment, monetary policy, political environment and technological developments, he found that that commercial banks had performed better before the crisis but co-op banks perform better during the crisis.

Rym Ayadi, professor and director, Alphonse and Dorimène Desjardins International Institute for Cooperatives, said it was important to adapt regulation to specificities of co-op banks.

“Where co-ops exist they contribute positively to recovery and accumulate much less risk than other banks,” she said, adding this was the case for the USA, Canada, Brazil and Europe.

“These stats are important because these elements can be presented when negotiating with regulators,” said Hervé Guider, EACB general manager.

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