This report builds on a previous ILO report from 2009, "Resilience of the cooperative business model in time of crisis", which highlighted the ways co-operative enterprises have shown resilience to the crisis across sectors around the world.
In an interview with the ILO NEWS, the author of the report, Professor Johnston Birchall, explained how before the crisis, economists said financial co-operatives were bound to be less efficient than investor-owned banks because they did not reward their managers with shares. However, the crisis has proved that financial co-operatives were less likely to risk as much as PLC banks, particularly because their managers did not receive a share of the profits.
“Stability and the aversion to risk are built into the DNA of financial co-operatives. They make surpluses and they need to, otherwise they wouldn’t be businesses. But what they do with those surpluses is put them into the reserves, which means they are very strong financially and they don’t tend to have problems with the capital requirements of the regulators.
“In credit unions in other parts of the world you can see that they didn’t even face a drop in 2008. They didn’t notice the banking crisis; they just kept on growing slowly, regularly, not dramatically.”
Johnston Birchall also explained that although they do not have the same ups as other banks, financial co-operatives do not have the same downs either, thus they are more sustainable businesses.
Co-op bank assets grew by 10 precent between 2007 and 2010 and co-op bank customers grew by 14 percent.
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.
The report concludes that financial co-operatives were not severely affected by the crisis, although losses were made by central banks in several countries. According to the report, countries where the co-op banking model is strong have proved to be less affected by the crisis than countries where the model is absent.
The report also explains what are the advantages and disadvantages of financial co-operatives. Financial co-operatives invest in local economies, lend to SMEs, provide people with low incomes with banking services they would otherwise not be able to access and bring diversity to the banking industry.
According to the report, financial co-ops help to prevent the danger of monopolistic supply by money lenders, thus correcting market failure.
Financial co-operatives also prevent conflict of interests between owners and customers, since the owners and the customers are the same people. Profit is necessary, but it is not the only goal for financial co-ops. They also produce strong local ties and networks.
The report notes that financial co-operatives provide an efficient, low cost model of banking because they do not have to pay external shareholders. For this reason, they can reduce the margin between the interest rates they charge to borrowers and pay to savers and can also decide to sell products below market price.
Furthermore, they provide no incentives to risk-taking because they are not under pressure to maximise profits.
On the other hand, financial co-operatives have difficulty in raising capital during crisis and conflict of interest that can sometimes appear between members and managers.
In the light of Basel III Agreement, the report expresses concerns over a threat of too much regulation or “inappropriate regulation by governments that do not understand the ‘co-operative difference.’ ”
The report reads: “In addition to a well-crafted regulatory system, financial co-operatives need a sympathetic environment if they are to reach their potential”.
In this article
- Business models
- Consumer cooperative
- Cooperative banking
- Economic bubbles
- Economic history
- Financial crises
- Financial crisis
- Housing cooperative
- Human Interest
- Johnston Birchall
- Late-2000s financial crisis
- Person Career
- Social Issues
- Stirling University
- The Co-operative Group
- the ILO NEWS