Credit Cooperatives: Challenges and Opportunities in the Global Scenario
Maria Assunta Free University
March 15, 2012
Euricse Working Paper No. 31/12
The future scenario highlights a Western leadership challenged while the geo-economy seems to be moving back to a pre-Industrial Revolution setup. Against this possible background, we outline various considerations along which that scenario will increase the need for credit cooperatives to shape a more sustainable economy.
Next, we selectively review the literature on credit cooperatives – presenting their strengths and weaknesses – and argue that, even more so before the crisis, the conventional wisdom shaping the approach of regulators and supervisors was one in which credit cooperatives were seen as odd guys, with rare attempts at understanding their intrinsic nature and a more usual neglect. Overall, we find that judgment neither justified by available theories of banking intermediation nor supported by the available evidence. Specifically, we conclude that the coexistence of cooperative banks – and, more generally, stakeholder banks – along with purely profit maximizing commercial banks does not depend only on legal restrictions but it stems also from the different pros and cons of the organizational structure of the two types of banks. Namely, with respect to the shareholder value maximizing model (the typical Plc or joint stocks banks), the (stakeholder oriented) cooperative model may under some conditions be more effective at managing the conflict of interests between depositors and bank owners and, at the same time, offer some additional instruments to screen and monitor borrowers as well. Accordingly, following this relative advantage they have, it is to be expected that cooperative banks specialize in traditional – information intensive – business modalities. Regarding the lessons we can draw from the global instability, the impact of the crisis as to the sustainability of the two types of financial intermediaries seems to favor the stakeholder model. Indeed, the relationship banking business model – typical, though not exclusive, of cooperative banks – seems the true winner in the crisis. In addition, the type of financial innovation reshaping financial intermediaries in the last twenty years hinged on the transformation of the banking model from the traditional 'originate to hold' (OTH) to the new 'originate to distribute' (OTD) – with originated loans immediately securitized on the financial market. Unfortunately, this kind of financial innovation induced the generalized loss of responsible behavior on the part of the banks, since the banks knew ex ante they would sell those loans. Thus, the OTD banking model seems to be unsustainable in the long run. Since the stakeholder value financial intermediaries kept their roots in the traditional intermediation while the shareholder value financial intermediaries were more eager to the transformation, the crisis suggests the former model is more sustainable than the latter. This is at odds with the prejudice against credit cooperatives, often described before the crisis as outdated and inefficient.
Finally, we take up three main challenges we identify for the credit cooperatives and discuss them in some detail. Namely, as a first task, credit cooperatives need to find ways – at both their network and individual levels – to secure they don’t lose their essence. Those intrinsic values allowed the credit cooperatives to survive and expand in the unfriendly environment of the past. But adequate action has to be taken to preserve those values while rejuvenating them. Second, the credit cooperatives must find appropriate ways to shoulder the transition. In general, the credit cooperatives were asked to step in providing increased support to their clients and communities while the commercial banks were retrenching. That has made the credit cooperatives themselves more exposed to the enlarged credit risks of the ongoing recession. Third, credit cooperatives should manage to raise the awareness of the regulatory bodies and of the legislators on the great perils of three main faults exemplified, e.g., in Basel 3: damaging SMEs; failing to recognize the pro-stability importance of a traditional/retail bank business model; disregarding that the increasing cost of regulatory compliance may interfere with safeguarding biodiversity in banking.
Number of Pages in PDF File: 21
Keywords: cooperative banks, shareholder value banks, financial crisis, sustainability of finance, regulation
JEL Classification: G01, G21, G34, P13, Q01
Date posted: April 25, 2012