Cooperative banks versus traditional banks: two models, two visions of finance
Members versus shareholders. Democratic and decentralized governance versus pyramid-style governance. International financing versus regional financing. While statutes do not automatically guarantee virtue, cooperative banks represent an alternative model to traditional banks. What are the realities? What are the contradictions? And what guarantees are there?
Christine Marsal, University of Montpellier
Which group of French companies can boast nearly 200 million customers, generate almost half of its sector's revenue, and count among its members three institutions in the top 10 in terms of assets under management in Europe? These are French cooperative banks, such as Crédit Agricole, Banque Populaire, and Crédit Coopératif. This is a very special position and is unique to France, with no equivalent in other countries.
The question of whether cooperative banks are banks like any other is a nagging one, and the lack of differentiation between their commercial offerings adds to the confusion. How can we tell the difference between cooperative banks and "capitalist" banks?
Institutions created to address banking exclusion
Cooperative banks are long-standing institutions that were created to address banking exclusion at a time when small farmers were unable to obtain financing. In the agricultural sector, the movement began in 1864 in the Rhineland (Prussia) under the leadership of Pastor Friedrich Wilhelm Raiffeisen, recognized as the founder of the mutualist movement in eastern France. Loans are only granted to members of the mutual fund, which is financed by the issuance of shares. Members elect volunteer administrators who oversee the fund's activities. The territory covered is deliberately small to facilitate oversight.
Crédit Agricole was founded in the Jura region. The first savings bank was created in Paris in 1818 to encourage workers to save so that they would not be left destitute in the event of illness or unemployment. The first Banque Populaire was established in Angers in 1878 to help support the development of merchants and artisans. Legal developments then enabled all these institutions to grow and offer a wide range of products and services to all customers across larger areas. https://www.youtube.com/embed/5-My2L65Dik?wmode=transparent&start=0
What are the concrete differences between cooperative banks and capitalist banks?
The first difference concerns the governance of cooperative institutions, based on respect for participatory democracy, the contours of which have evolved significantly since these institutions were created. The cooperative principle is based on the fact that each person has one vote. Members elect representatives within their local credit union, who in turn elect representatives at the higher level. The interlocking of mandates culminates in the participation of a "last square" of administrators on the group's board of directors.
Furthermore, the fact that member-customers hold shares means that these institutions cannot be subject to hostile takeover bids on the stock market, unlike capitalist banks.
The second difference concerns the role of directors. The Crédit Agricole group claims to have nearly 27,634 directors, while the Crédit Mutuel group has 20,000 volunteer directors.
Directors are responsible for upholding certain values (solidarity, democracy, proximity) that guide the strategic, tactical, and operational decisions of senior management. The inverted pyramid model tends to exclude "field" administrators (local and regional funds) from the group's strategic decision-making process, and as a result, there is still little academic research devoted to them. Yet they undoubtedly represent the last bastion of the "mutualist spirit."
The involvement of elected officials in the life of banking groups varies, but it is very real. For example, when the management of Crédit Mutuel de Bretagne considered leaving the Crédit Mutuel federation, the president of a local credit union publicly expressed the disagreement of its elected officials and members. Although it is not possible to say for certain that this stance prevented the banking group from splitting up, it does highlight the intensity of the debates that took place. These debates can only be observed from the inside, and there are few studies on how credit union board meetings are conducted. One (rare) study shows that during the 2008 financial crisis, the debates were heated. Managers increased their contacts and exchanges with local elected officials to reassure them, but also to make sense of the situation the bank was experiencing. This shows how much consensus is needed for cooperative functioning.
Cooperative banks facing the 2008 crisis
Several studies have highlighted the dynamism and ability of cooperative banks to compete with capitalist banks. The requirements of rating agencies in terms of profitability and changes in regulations have led them to develop activities internationally (Crédit Agricole) or in areas far removed from their traditional business of lending and collecting savings (the Natixis subsidiary of the BPCE group, in the investment sector).
During the 2008 financial crisis, cooperative banks suffered losses like their counterparts, partly because of their diversification. However, the crisis reinforced their original model: financing and supporting their local communities. Ten years after the crisis, the various groups are posting mixed results, reflecting very different strategies. Crédit Mutuel is strengthening its presence in the field and maintaining an active hiring policy, while favoring a very cautious risk policy. The BPCE group is reducing its workforce and number of branches.
Institutions also took drastic measures and executives were held accountable: the president of the Caisse d'Épargne Group was forced to resign, while the CEO of Crédit Agricole saw his room for maneuver reduced. In 2015, this group initiated a change in its governance model, giving more power to regional banks. Most groups then reviewed their governance model to make it less dependent on financial markets.
A different model, more social and pioneering in terms of corporate social responsibility
The business models of cooperative banks differ from those of capitalist banks in several respects: fewer financial market activities, a strong cooperative core, higher salaries for employees (who are also more productive), and lower profitability. In a study conducted among branch managers, cooperative banks delegated more authority and offered greater profit-sharing and incentive schemes than capitalist banks, which favored individual bonuses.
In terms of corporate social responsibility (CSR), several findings are emerging from ongoing research. Overall, banks' CSR practices are very similar, regardless of their legal status. However, we can note a few differences. With the exception of Crédit Agricole, other cooperative banks tend to be less polluting than capitalist banks. These banks also have very few or no subsidiaries in tax havens and are major players in solidarity-based finance (distribution of guaranteed microloans).
Cooperative banks also stand out for their support of community organizations: Crédit Mutuel claims to have 300,000 association clients. The Crédit Agricole group, through its regional banks, has created several foundations and develops sponsorship programs in the areas of the environment, heritage preservation, and social inclusion. Villages By CA aim to boost innovation in local areas.
More than ever, institutions remain rooted in their local areas. But their future is uncertain: regulatory changes in capital requirements could jeopardize the balance they have managed to strike between financial constraints and respect for a meaningful cooperative identity.
Christine Marsal, Senior Lecturer, Management Control, Bank Governance, University of Montpellier
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