Cooperative Banks vs. Traditional Banks: Two Models, Two Visions of Finance
Members versus shareholders. Democratic and decentralized governance versus hierarchical governance. International financing versus regional financing. While bylaws do not automatically guarantee virtue, cooperative banks represent an alternative model to traditional banks. What are the realities? What are the contradictions? And what safeguards are in place?
Christine Marsal, University of Montpellier
Which group of French companies can boast of having nearly 200 million customers, generating nearly half of its sector’s revenue, and counting among its members three institutions ranked in the top 10 in terms of assets under management in Europe? The answer is France’s cooperative banks, such as Crédit Agricole, Banque Populaire, and Crédit Coopératif. This is a truly unique position and a distinctly French phenomenon, with no equivalent in other countries.
The question of whether cooperative banks are just like any other bank is a nagging one, and the lack of differentiation in their product offerings adds to the confusion. How can we tell the difference between cooperative banks and “capitalist” banks?
Institutions created to address financial exclusion
Cooperative banks have a long history and were established to address financial exclusion at a time when small farmers could not obtain financing. In the agricultural sector, the movement began in 1864 in the Rhineland (Prussia) under the leadership of Pastor Friedrich Wilhelm Raiffeisen, who is recognized as the founder of the mutualist movement in eastern France. Loans are granted only to members of the credit union, which is financed through the issuance of membership shares. Members elect volunteer directors who oversee the credit union’s operations. The geographic area served is intentionally limited to facilitate oversight.
Crédit Agricole, meanwhile, was founded in the Jura region. The first Caisse d’épargne was established 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 founded in Angers in 1878 to support the growth of merchants and artisans. Subsequent legal changes then enabled all these institutions to expand and offer a wide range of products and services to their entire customer base across larger regions. https://www.youtube.com/embed/5-My2L65Dik?wmode=transparent&start=0
What are the specific differences between cooperative banks and capitalist banks?
The first difference concerns the governance of cooperative institutions, which is based on participatory democracy—a concept that has evolved significantly since these institutions were founded. The cooperative principle is based on the idea that every person has one vote. Members elect representatives within their local credit union, who in turn elect representatives to the higher-level governing body. This interlocking structure culminates in the participation of a “core group” of directors on the group’s board of directors.
Furthermore, because member-owners hold the shares, these institutions cannot be the target of a hostile takeover bid on the stock market, unlike capitalist banks.
The second difference concerns the role of directors. The Crédit Agricole Group has nearly 27,634 directors, while the Crédit Mutuel Group has 20,000 volunteer directors.
The directors are the guardians of certain values (solidarity, democracy, community involvement) that guide the strategic, tactical, and operational decisions of senior management. The so-called “inverted pyramid” model tends to exclude “front-line” board members (from local and regional credit unions) from the group’s strategic decision-making process, and as a result, there is still very little academic research devoted to them. Yet these board members undoubtedly represent the last bastion of the “mutualist spirit.”
The involvement of elected officials in the affairs 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 branch publicly expressed the disagreement of its elected officials and members. Although it cannot be said for certain that this stance prevented the banking group from splitting, it highlights the intensity of the ongoing debates. 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. Leaders stepped up their contacts and exchanges with elected representatives on the ground to reassure them, but also to make sense of the situation the bank was facing. This demonstrates just how much the cooperative model relies on consensus.
Cooperative Banks and the 2008 Crisis
Several studies have highlighted the dynamism and ability of cooperative banks to compete with capitalist banks. Pressure from rating agencies regarding profitability and changes in regulation have led them to expand into international markets (Crédit Agricole) or into areas far removed from their traditional business of lending and savings (the BPCE Group’s subsidiary Natixis, in the investment sector).
During the 2008 financial crisis, cooperative banks suffered losses just like their counterparts, partly due to their diversification. However, this 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 on the ground and maintaining an active hiring policy, while prioritizing a very conservative risk management approach. The BPCE Group is reducing its workforce and the number of its branches.
Financial institutions also took drastic measures, and executives were held accountable: the chairman of the Caisse d’Épargne Group was forced to resign, and the CEO of Crédit Agricole saw his room to maneuver reduced. In 2015, the group initiated a change in its governance structure by giving more power to the regional banks. Most groups subsequently revised their governance structures to make them less dependent on financial markets.
A different model—one that is more socially oriented and a pioneer in corporate social responsibility
The business models of cooperative banks differ from those of capitalist banks in several ways: fewer financial market-related activities, a strong cooperative core, higher wages for employees (who are also more productive), and lower profitability. In a study conducted among branch managers, cooperative banks delegated more authority and offered higher profit-sharing and employee stock ownership plans than capitalist banks, which tended to favor individual bonuses.
With regard to 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, the other cooperative banks tend to be less polluting than capitalist banks. They are also banks that have very few, if any, subsidiaries in tax havens and are major players in solidarity-based finance (providing guaranteed microloans).
Cooperative banks also stand out for their support of the nonprofit sector: Crédit Mutuel reports having 300,000 nonprofit clients. The Crédit Agricole Group, through its regional banks, has established several foundations and is expanding its philanthropic efforts in the areas of the environment, heritage preservation, and social inclusion. The Villages By CA aim to foster innovation in local communities.
More than ever, these institutions remain deeply rooted in their local communities. But their future is uncertain: regulatory changes regarding capital requirements could undermine the balance they have managed to strike between financial constraints and upholding a meaningful cooperative identity.
Christine Marsal, Associate Professor (HDR), Management Accounting, Banking Governance, University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Readthe original article.