Monique Leroux on co-ops and regulation

Before her election as the new President of the International Co-operative Alliance, Monique Leroux talked to Co-operative News about the state of the co-operative banking sector after her appointment on the Alliance’s International Accounting and Regulatory Affairs Committee.

How can co-operatives engage with regulators? Could you tell us more about your role on the International Accounting and Regulatory Affairs Committee?

Monique Leroux: From the outset, I think we need to recognise the progress achieved since the launch of the International Year of Cooperatives in 2012. However, we need to continue to work with our cooperative organisations in the following areas.

First, co-operatives should better align key messages when possible; this alignment gives more credibility and helps regulators understand our messages. Second, co-operatives should continue to explain the co-operative model, which is not necessarily well understood (we are making progress but work still needs to be done). Third, co-operatives should continue to showcase their social and economic impacts (job creation, education, etc.), and raise awareness about their overall impact and greater resilience. Finally, co-operatives should communicate their understanding of the regulatory requirements and principles but that adaptation to the cooperative model is still a challenge.

The International Accounting Standards Board role is to develop International Financial Reporting Standards (IFRS) that bring transparency, accountability and efficiency to financial markets around the world. Accounting standards are very important to provide a comparable framework for reporting. The Alliance International Accounting and Regulatory Affairs Committee (IARAC) was created to bring together representatives of the co-operative movement from all regions of the world, and from all co-operative sectors, to work together on common international accounting and regulatory issues, exchange information and coordinate actions and positions that should be promoted by co-operatives in the world.

The question of the distinction between liability and equity is particularly important because it could have significant impacts on the regulatory side, especially for co-operative financial groups. We are closely following the work done by the IASB on the revision of the Conceptual Framework for Financial Reporting. Mr Hoogervorst, chairman of the IASB, agreed to meet with us at the beginning of the year and he encouraged the Alliance to submit comments, which we are doing. 

How can co-operatives prevent governments and world leaders from adopting a “one size fits all” approach to regulation? What would help make the case for co-operatives as a different enterprise model? Are there particular sectors more likely to be negatively impacted by excessive regulation?

Monique Leroux: We should continue to explain our co-operative business model to ensure it is better understood, and we should continue to demonstrate our proven real impact on the economy, both locally and globally. We have strong democratic governance. We abide by and promote values of social commitment, solidarity, sound financing, entrepreneurship and self-empowerment. We contribute to the plurality and diversification of the economy. We could help governments deliver services to their population in areas where they struggle, for instance in health in countries with ageing populations.

These are the messages we need to bring to governments and regulators around the world. To do so, co-operatives have to be proactive and engage in dialogues on a regular basis with governments at the national, regional, and international levels through apex bodies. Coordinating efforts to speak of concerted voices will maximise impact and increase chances of success. The International Summit of Cooperatives, for example, constitutes a wonderful forum for the co-operative movement to come together and demonstrate its power. Our presence to the B20/B7 meetings is also critical to promote our distinctive model.

The 2008 financial crisis has triggered the adoption of stricter regulations particularly affecting financial institutions. Designed to fit the shareholder banking model, these regulations are not always adapted to the co-operative model. The main challenge is that despite its importance, the co-operative model, which is a stakeholder model, is still often seen as an alternative to the mainstream business model. However, efforts are starting to pay off as more and more regulators take into consideration the particularities of financial cooperative groups and recognise their importance in the financial landscape.

You are also the head of EACB’s High Level Contact Group. Is the EU looking at new regulatory requirements for co-operative banks? Are there any changes that co-operative banks should be aware of?

Monique Leroux: The High Level Contact Group, set up by the European Association of Cooperative Banks ( EACB) has a mandate to examine and voice the concerns of co-operative banks on the new regulation, supervisory and resolution regimes that are being rolled out at the international level, and to promote their specificities. We will be having our first meeting in the coming weeks. We will be talking about the Financial Stability Board’s agenda and working plan in the context of the G20 agenda. We intend to act proactively to meet regulators and key decision-makers.

Research conducted by the ILO showed that co-operatives have performed better in the financial crisis. Last year the largest European banks had to take a stress test and an asset quality review. How did co-operative banks perform in this test? Were there any weaknesses identified? Do they have what it takes to withstand future shocks?

Monique Leroux: Stress tests have become key exercises for all financial institutions, including co-operatives. The objective is to encourage proactive thinking through the evaluation of anticipated outcomes of stressed economic conditions, accompanied by a thorough reflection of the pertinence and adequacy of potential mitigation measures that could be, in some cases, more difficult to implement for co-operatives. Current economic conditions support the need for increased vigilance with respect to enterprise wide risks.

As a co-operator, I am pleased to see that many large European Co-operative Banking groups did well in providing regulators with stress tests which were quite exhaustive and rigorous. As for stress testing in general, we at Desjardins fully support this initiative by regulatory bodies across the world. We believe that a safe banking environment around the world rests on institutions (co-operative or non-cooperative) that are solid and that do not put the system at risk. As for co-operative groups, we believe that our mission of being at the service of our members comes with a responsibility to protect their savings. A strong capital base and sound risk management practices and profile are ways of fulfilling that mission.

A number of regulatory changes have been introduced following the financial crisis, not only at EU level, but also at global level with the Basel III agreement. Have reforms have brought changes to co-operative banks, particularly in terms of capital levels and liquidity?

Monique Leroux: Post-financial crisis, the Basel Committee announced its new Basel III framework, which included a number of changes that would need to be implemented over time such as a higher minimum capital requirements, new capital conservation and countercyclical buffers, revised risk based capital measures and a new leverage ratio. Also, the quality of the capital base was raised and, in addition to minimal ratios for Tier 1 and Tier 2 capital, institutions have to comply with new ratio based on Common Equity Tier 1 (CET1). The financial industry is also more aware of the importance of maintaining a large portfolio of high quality liquid assets.

In a way, the rules under Basel III have been reinforced in terms of stronger levels of capital and liquidity. Since our capital base is essentially generated by accumulating surpluses in our reserves, co-operatives financial groups have to manage carefully productivity and overall performance in order to maintain their financial solidity and competitiveness.

Co-operative banks are very diverse, from small financial institutions to big players like Desjardins. How are smaller co-op banks responding to the burden of legislation and regulation?

Monique Leroux: When it comes to regulation, size does matter. For small and medium sized co-operative banks, as for other SME’s in general, the burden of legislation and regulation is one that weighs heavily on their shoulders. With limited resources available to them, it becomes very difficult for small co-operative banks to comply. This is one of the reasons why we have been seeing an important trend of consolidation. Although this phenomenon is hardly avoidable, we encourage regulators to minimise the impact of smaller businesses by applying, where possible, the proportionality principle. I consider that regulations shall be neutral on the business model and the ownership structure.