What financial cooperatives can teach the big banks

The success of financial cooperatives during the global financial crisis shows there is a credible alternative to the investment-owned banking system – Published on International Labour Organization ILO, by Prof. Johnston Birchall, Nov. 5, 2012.

GENEVA (ILO News) – While many big banks struggled for survival during the global economic crisis, networks of financial cooperatives – customer owned banks – weathered the storm and came out strong.

Data presented to the ILO by Johnston Birchall, Professor of social policy at Stirling University (United Kingdom), show that this “alternative banking system” has been more stable and more efficient than many economists had predicted.   

“In Europe and North America, there was a slight dip in 2008 (in the cooperative banks) and then you see them coming back in 2009, 2010, 2011 – everything was improving,” he told ILO News.

“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.”

By contrast, several investor-owned banks had to be bailed out – or even crashed – at the height of a global financial crisis that many have blamed on risky bank activities.

Recently, the Swiss banking giant UBS – which had to be rescued by the Swiss authorities during the crisis – announced it was shedding 10,000 jobs and ditching most of its risky trading activities.

Democratic banking:

Financial cooperative” is an umbrella term for cooperative banks, credit unions and building societies, as well as banks that are owned by agricultural or consumer cooperatives. What they all have in common is that they are customer-owned banks.

Credit unions were set up originally to serve people with the lowest incomes, many in developing countries and in North America. The majority of cooperative banks are based in Europe and serve a range of customers … //

… Risk aversion:

The difference between financial cooperatives and the investor-owned banks, said Birchall, is that cooperatives do not take the same risks because they are not after huge profits.

“Stability and the aversion to risk are built into the DNA of financial cooperatives. 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.

“They already have decent reserves that make them stable and sustainable, but they also -in one way or another- return the profits back to the members, either with an annual dividend or by simply pricing their products low.”

Another factor that contributes to their stability is that they motivate managers differently. Most simply pay them the going rate, Birchall explained.

“Before the crisis, economists said financial cooperatives were bound to be less efficient than investor-owned banks because they did not reward their managers with shares. Now the thinking is, this is great, we shouldn’t be rewarding managers with shares because managers will then take high risk strategies, bail out five years later as multi-millionaires and leave the banks to go bankrupt.

“So all the things the experts used to think were wrong with financial cooperatives have now turned out to be their advantages,” he added. “Financial co-ops may not have the same ups as other banks, but neither do they have the same downs. As such they are more sustainable businesses than other banks.”
(full text).

Comments are closed.