Can co-operative banks drive Europe’s economic recovery and green transition?

The Convention on Co-operative Banking saw 250 participants join an online discussion

Every two years, representatives from European co-operative banks join bank supervisors, regulators and academics in Brussels to explore challenges and opportunities for the sector.

This year’s event – the Eighth Convention on Co-operative Banking – was held online with 250 participants, including European and international policy makers. Organised by the European Association of Cooperative Banks, it looked at how co-operative banks are dealing with the regulatory and supervisory developments arising from the Covid-19 crisis and the transition to a greener economy.

The general view was that co-operative banks had coped well with the Covid-19 crisis. Othmar Karas, vice-president of the European Parliament, said: “To deal with this crisis we need more solidarity and more co-operation – along with a common European response.”

Unlike in 2008, banks were not the cause of the crisis, he said, praising co-op banks in particular for serving customers and helping those with limited access to finance. 

Korbinian Ibel, general director of the European Commission’s Directorate General on Universal & Diversified Institutions (DG/UDI), said co-operative banks owed their resilience during the crisis to the build up of capital post 2008, which acted as a buffer. He thinks banks across Europe have been able to resist the Covid-19 shock on short-term but warned against long-term consequences. To prepare for this the sector should continue improvements to its efficiency and attain “even stronger capital ratios” so it has adequate buffers and can finance the economic recovery.

Martin Merlin, director of the Department for Financial Stability and Capital Markets (DG FISMA) at the European Commission, agreed. “We see now clearly that capital is not the enemy of lending,” he said, adding that it helps to give out loans – including at times of difficulty.

To help banks deal with the Covid-19 crisis the implementation date of the new Basel IV standards has been deferred by one year to 1 January 2023. But Mr Merlin thinks the implementation should not be postponed further and called on the EU to implement the new framework on time; a delay would not be good for the banking sector or the perception of the EU banks in the market, he warned.

Berry Marttin, board member of Rabobank and President of EACB

Berry Marttin, EACB president, said: “Like all other banks in Europe, co-operative banks have provided their clients with payment deferrals that were followed by public and sector wide moratoria. Now that these moratoria are coming to an end, the EACB is calling upon legislators and supervisors to take a pragmatic approach in the coming months as we can all see that the end of this health crisis and its financial implications is not yet in sight.

“In this respect we also believe that the implementation of Basel IV in the EU should be postponed and carefully reassessed in light of the new economic and social situation. Especially now, banks are expected to be able to provide companies extra credit to help them get through this difficult time. The capital requirements should accommodate this.”

Gerhard Hofmann, board member at the National Association of German Cooperative Banks, predicts a threefold impact of Covid-19 on the co-operative banking sector. The first hit was profound for many small or medium enterprises (SMEs), he said, but co-operative banks were there to support them. In many countries lending increased in the first quarter 4-5%.

The second phase will be characterised by a larger number of insolvencies in the SME sector. “We will see the impact of insolvencies in 2021-2022 but what I do not see is a new banking crisis,” he said.

The third phase will require co-operative banks to respond to the EU’s sustainable finance and digitalisation agendas, said Mr Hofmann. Co-op banks will have to support the real economy during the transition to a more sustainable and digital world and also take care of their own digitisation. While the Covid-19 crisis effects have big short-term and medium-term impacts, the pandemic will ultimately change the way co-op banks operate.

In September, the European Commission published a new action plan to boost the European Union’s Capital Markets Union (CMU) over the coming years. A key objective is integrating national capital markets into a EU-wide single market for capital. The Commission is keen to make progress on the project due to the UK, Europe’s largest capital market, leaving the EU.

Mr Hofmann warned that the promotion of the capital market union, which would involve encouraging companies to issue stocks and bonds to refund themselves, should not be to the detriment of banks. “We need both,” he said.

The Commission also plans to release a renewed Sustainable Finance Strategy towards the end of 2020 as part of its new Green Deal. What role can co-operative banks play in driving the transition to a greener economy?

Pierre-Edouard Batard, general director at Confédération Nationale du Crédit Mutuel, said co-op banks are ideal partners when it comes to greening the economy. Sustainable finance means banks must have stable shareholding, maintain long-term relations with customers and face less pressure in terms of profitability, he added – and these are all in the DNA of co-operative banks.

“Around 95% of credit decisions at Crédit Mutuel are taken at local level taking into account the specific needs of the territory,” he said, encouraging co-operative banks to “add a green duty to our historical social duty”.

Sanna Eriksson, managing director at OP Mortgage Bank, also believes sustainability runs in the DNA of co-op banks, which promote the long-term success of customers and their regions.

Marcel Haag, director, DG FISMA, said co-op banks can help to put clients at the forefront of the digital and green transformation, due to their long standing close relationships with their members. “They are not alone in this,” he said, adding that competition was needed in a capital markets union but that co-op banks should be allowed to “play to their strengths”.

The European Commission plans to put forward a strategy for a framework to facilitate sustainable investment in early 2021, said Marcel Haag, director at DG FISMA.

“We need this framework to be clear what we finance and what can be classified as green economy,” said Mr Batard.

According to Piers Haben, director of banking markets, innovation and products at the European Banking Authority, customers and investors are increasingly interested in knowing the environmental performance of banks. But co-operative banks can struggle with the cost of gathering this data – and smaller business clients may not have the resources to provide it.

Ms Eriksson suggested starting with information that is already available – such as energy performance certificates or open registers – which can be done in collaboration with governments.

Mr Marttin welcomed the increased focus on sustainability. He said: “The EACB fosters the transition of our economies to a green and sustainable future and welcomes the new European Sustainable Finance Strategy. However, coherence between the proposed measures is needed in terms of content and timelines. If the EU wants to unleash the full potential of the Sustainable Finance Framework it should also find solutions about ESG data sharing and reporting.”

The convention concluded with co-operative banks putting forward policy recommendations through a joint declaration. One of its recommendations takes in to account the specificities of co-operative banks, which, said the EACB, “are a factor of financial resilience”. The declaration also highlighted the need for regulatory stability and the importance of mutual guarantee and institutional protection mechanisms among co-operative banks as helping stabilising buffers for the sector.

The document argues the implementation in the EU of the remaining set of Basel III reforms (aka Basel IV) should be reassessed in light of the new economic and social situation emerging from the Covid-19 crisis and that the revision of the Non-financial Reporting Directive (NFRD). It also calls for the creation of a centralised EU Environmental, Social, and Corporate Governance data register to fill the companies’ data gap.

The EACB has also published a new report on co-operative banks’ engagement to sustainable finance. Based on a survey of EACB members, it provides an overview of commitments of the co-operative banks in the field of sustainability and climate, and their activities in this area. The report is available here.

This article has been amended. A quote had been wrongly attributed to Marcel Haag instead of Pierre-Edouard Batard.

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