Organizational Form and Financial Stability: Lessons from Cooperative Banks in the US and UK

Banking and Finance Law Review, July 2016, Forthcoming

36 Pages Posted: 5 Feb 2016 Last revised: 2 Apr 2016

See all articles by Michael Marin

Michael Marin

University of New Brunswick, Faculty of Law

Date Written: February 4, 2016

Abstract

One of the important lessons of the Global Financial Crisis is that cooperative banks proved considerably more resilient than corporate ones. Many observers have noted that cooperative banks were less prone to the risky practices that led to the Crisis, and attributed this to their organizational structure, which seemingly creates less incentive for profit-maximization. This paper investigates these observations from a legal perspective. It analyzes the governing laws of cooperative banks in the US and UK in order to explain how they may influence financial stability. In doing so, the paper points out that many of the post-Crisis reforms are already embedded in the governance structure of cooperative banks. Specifically, cooperative banks in both countries face internal limits on growth and investment. More importantly, the cooperative model includes various disciplinary mechanisms to ensure that management acts in the best interests of the firm’s customers, who have little interest in profits. These include clear statutory purposes, democratic governance, fiduciary duties, strict conflict of interest rules, independent oversight committees, and restrictions on compensation. Most of these features go much further and address the profit motive more directly than the post-Crisis reforms.

Keywords: Banking, Cooperatives, Credit Unions, Financial Crisis, Financial Stability

Suggested Citation

Marin, Michael, Organizational Form and Financial Stability: Lessons from Cooperative Banks in the US and UK (February 4, 2016). Banking and Finance Law Review, July 2016, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2728106

Michael Marin (Contact Author)

University of New Brunswick, Faculty of Law ( email )

P.O. Box 4400
Fredericton, New Brunswick E3B 5A3
Canada

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