Co-operative and mutual banks and not-for-profit savings banks have played an important role in the European financial system over the last century. Indeed, there remain several European co-operative banks that have a very strong presence in their domestic markets.
According to the latest figures published by the European Association of Co-operative Banks, the UK’s Co-operative Bank (not including the insurance division of Co-operative Financial Services) had total assets of €51.9bn as at the end of 2009. Yet this is much smaller than the biggest of Europe’s co-operative banks. The largest by total assets is France’s Credit Agricole (owned by 39 smaller co-operative banks), which holds €1,694bn of assets.
The second largest co-operative bank in Europe is Germany’s BVR/DZ Bank, also holding over €1trn of assets. Next come Netherland’s Rabobank (€608bn), France’s Credit Mutuel (€579bn), Italy’s Banco Populare (€462bn), BPCE of France (€349bn), Austria’s Raiffensbanken (€260bn), Italy’s Federcasse (€171bn) and Union Nacional de Cooperativas de Credito of Spain (€119bn).
In total, the European co-operative banking sector (at end of 2009) held around €5.5trn in assets, with over €2.8trn in deposits and €3.1trn in loans. Most of the banks also had strong tier 1 capital asset ratios — many above ten per cent (the level typically required to conform with the Basel III capital adequacy requirements).
Despite these impressive statistics, my enduring fear is that the sector is at serious risk — probably confronting a mere severe threat than the financial system as a whole faces, even at this time of perpetual financial crisis hanging over the future of the euro. There has already been a serious diminution of the sector, not merely from the demutualisation of British building societies and the privatisation of the Trustee Savings Bank by Margaret Thatcher.
There has been a parallel process in much of Europe, often driven by a different motivating factor. In some cases the conversion of mutuals into joint stock banks has been inspired by ambitious expansion plans that required significant equity investments.
Today the threat may be the need for mutual banks to increase their capital base, both to meet the needs of the new Basel III capital adequacy rules and to fix balance sheets damaged first by the mortgage securitisation collapse and associated liquidation of Lehman Brothers and now from the continuing ructions related to the euro.
Despite the latest ‘fix’ rescuing Greece’s government finances, there remains a real possibility that the eurozone will collapse and that Portugal, Ireland, Belgium, Spain and Italy — and perhaps some Central and Eastern European countries — will be unable to either repay their sovereign debts, or cover the losses of their national banks.
Despite the continuing (and often confused and sporadic) efforts by European political leaders to resolve the euro crisis, we still see many banks at risk of collapse. The latest stress test of 90 major European banks found nine to be at serious risk. The analysis covered only four UK banks — RBS, Barclays, Lloyds and HSBC — plus Santander, which has a substantial UK presence. None of these was found to be excessively exposed to sovereign debt risk, nor undercapitalised given current risk exposure. CFS was not required to participate in the stress test, but has volunteered the information that it holds no sovereign debt exposure in the at risk eurozone nations.
It is important to note, however, with regard to the largest UK and other assessed European banks, that capital adequacy is a matter of judgement and is related to current market risks. If the sovereign debt crisis worsens, with resulting government defaults, we are likely to need a new stress test to reconsider exposure to losses and risk.
The stress test result makes interesting reading, as does an analysis of the banks most exposed to potential losses arising from the Greek default. While RBS has €1bn at risk from loans to Greece (on top of the potential £7bn losses from Ireland), this is small beer compared to the national banks in Greece. The eight banks most at risk of collapse through exposure to Greek sovereign debt are all either Greek or Greek Cypriot. Given the state of Greek national finances, the Government would seem to be in no shape to rescue its banks that might now become insolvent.
Banks in France, Germany and the UK are most exposed to any consequential losses arising from a Greek banking collapse. Many of the banks at greatest risk, both through lending to the Greek government and to Greek banks, are German landesbanken. These are the regional banks owned by Germany’s regional state governments, that were established as savings banks, but which increasingly moved into higher risk investment activities on the back of strong credit ratings and consequent low interest charges because they are directly backed by German taxpayers. The potential losses likely to be incurred by German landesbanken is one of the main reasons the German government was reluctant to back a rescue of Greece that involved bondholders taking a hit, according to former foreign minister Joschka Fischer.
The good news is that the co-op and mutual banks have more limited direct exposure to sovereign debt likely default. None of them has excessive exposure to Greek sovereign debt, at least as a proportion of their overall capital basis. While Credit Agricole has an exposure of €57bn and BPCE €59bn to sovereign debt, both are mega banks with a large asset base outside of sovereign holdings and neither has particularly large exposure in the countries at greatest risk of collapse. The same is true for Italy’s Banco Populare, which has a €12bn holding of Italian sovereign debt.
The banks at most risk are the traditional savings institutions that have become over-exposed to the property sector. This is particularly the case in Spain, where many cajas — some based around municipal government and others originating within the co-operative sector — are in difficulty. Several of these are no longer viable, there are efforts to consolidate the institutions and some are doomed.
Of the nine European banks that failed the stress tests, four are Spanish cajas, one is a landesbank and four are joint stock banks. Three of the four joint stock banks are based in countries that themselves have severe economic crises. It is reasonable to conclude, then, that it is the traditional savings banks, especially those operating in crisis-hit economies, that are most at risk of collapse.
A threat to mutuals remains where they may need to raise capital and find there is no alternative to either full or partial demutualisation to raise funds on the stock exchanges.