Cooperative banks versus traditional banks: two models, two visions of finance
Members versus shareholders. Democratic, decentralized governance versus pyramid governance. International financing versus local financing. If statutes don't always make virtue, cooperative banks represent an alternative model to traditional banks. But what are their realities? What contradictions? And what guarantees?
Christine Marsal, University of Montpellier
What group of French companies can boast nearly 200 million customers, generate almost half of its sector's sales, and count among its members three institutions in the top 10 for 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 one that is unique to France, with no equivalent in other countries.
The question of whether cooperative banks are banks like any others 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?
Establishments created to compensate for banking exclusions
Cooperative banks go back a long way, and were created 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 impetus of Pastor Friedrich Wilhelm Raiffeisein, recognized as the founder of the mutualist movement in eastern France. Loans are granted only to members of the caisse mutuelle, which finances itself by issuing shares. Members elect volunteer administrators who oversee the caisse's activities. The territory concerned is deliberately small to facilitate supervision.
Crédit Agricole was founded in the Jura region. The first Caisse d'Epargne was created in Paris in 1818 to encourage workers to save so that they would not be destitute in the event of illness or unemployment. The first Banque Populaire was set up in Angers in 1878 to support the development of tradesmen and craftsmen. Subsequent legal developments have enabled all these establishments to expand and offer a wide range of products and services to all customers in wider territories. 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 establishments, based on respect for participatory democracy, the contours of which have evolved considerably since the establishment of these establishments. The cooperative principle is based on the fact that each person has one vote. Member-policyholders elect representatives to their local caisse, who in turn elect representatives to the higher body. The interweaving of mandates culminates in the participation of a "last square" of directors on the group's Board of Directors.
What's more, the fact that member-policyholders own their shares means that these establishments, unlike capitalist banks, cannot be subject to hostile takeover procedures on the stock market.
The second difference concerns the role of directors. The Crédit Agricole group boasts some 27,634 directors, while the Crédit Mutuel group has 20,000 volunteer directors.
Directors are the guarantors of certain values (solidarity, democracy, proximity) which are likely to guide the strategic, tactical and operational choices of management. This model, known as the inverted pyramid, tends to exclude "field" directors (local and regional mutuals) from the group's strategic decision-making process, and as a result, there is still little academic research devoted to them. Yet these directors are undoubtedly the last bastion of the "mutualist spirit".
The involvement of elected representatives in the life of banking groups is variable, but very real. For example, when the management of Crédit Mutuel de Bretagne was considering leaving the Crédit Mutuel federation, the president of a local caisse publicly voiced the disagreement of his elected representatives and members. While it's not possible to claim that this stance prevented the banking group from splitting up, it does highlight the vigour of existing debates. These debates can only be observed from the inside, and there are few studies of the proceedings of caisse board meetings. One (rare) study shows that during the 2008 financial crisis, debates were lively. Management stepped up their contacts and exchanges with elected representatives in the field, not only to reassure them, but also to make sense of the situation facing the bank. This just goes to show the extent to which cooperative operations need consensus.
Cooperative banks facing the 2008 crisis
Several studies have highlighted the dynamism and ability of cooperative banks to compete with capitalist banks. The demands of rating agencies in terms of profitability and changes in regulations have led them to develop activities abroad (Crédit Agricole) or in areas far removed from their traditional business of granting loans and collecting savings (Groupe BPCE's Natixis subsidiary, in the investment sector).
During the 2008 financial crisis, cooperative banks, like their peers, suffered losses, partly due to their diversification. However, the crisis reinforced their original business model: financing and supporting their local communities. Ten years on from the crisis, the performance of the various groups is mixed, reflecting very different strategies. Crédit Mutuel is strengthening its presence in the field and maintaining an active recruitment policy, while favouring a very cautious risk policy. The BPCE group is reducing its workforce and branches.
Establishments have also taken drastic measures, and senior managers have been held to account: the Chairman of Groupe Caisse d'Épargne has had to resign, while the CEO of Crédit Agricole has seen his room for manoeuvre reduced. In 2015, this group initiated a change in its mode of governance, giving more power to the regional caisses. Most groups have subsequently reviewed their governance structure to make it less dependent on financial markets.
A different model, more social and a forerunner in terms of corporate social responsibility
The business models of cooperative banks differ from those of capitalist banks in several respects: fewer activities linked to the financial market, a strong cooperative core, higher salaries for employees (who are also more productive), lower profitability. In a survey of branch managers, cooperative banks granted more delegation, and offered higher profit-sharing and incentive schemes than capitalist banks, the latter favoring individual bonuses.
On the subject of corporate social responsibility (CSR), a number of findings emerge from current research. On the whole, banks' CSR practices are very similar, whatever their legal status. There are, however, a few differences. With the exception of Crédit Agricole, other cooperative banks tend to pollute less than capitalist banks. They also have very few, if any, subsidiaries in tax havens, and are major players in social finance (distribution of guaranteed microloans).
Cooperative banks also stand out for their support of associations: Crédit Mutuel boasts 300,000 client associations. The Crédit Agricole Group, through its Regional Banks, has set up several foundations, and is developing sponsorship in the fields of the environment, heritage preservation and social inclusion. Visit Villages By CA aim to boost innovation in local areas.
More than ever, these establishments remain rooted in their local communities. But their future is uncertain: changes in capital adequacy regulations could jeopardize the balance they have managed to strike between financial constraints and respect for a significant cooperative identity.
Christine Marsal, HDR Senior Lecturer, Management control, bank governance, University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Read theoriginal article.