Extract from ICA Digest 64 on "Co-ops and the financial crisis". Interview with Jean-Louis Bancel, ICBA Chairman.

How can financial cooperatives help us face the crisis ?

How are co-operatives surviving the worldwide financial crisis? How have they been negatively impacted or have they seen a surge of confidence due to the crisis? What advantages does the co-op model offer over for-profit shareholder companies as a buffer to market meltdown?

Global representatives

• Jean-Louis Bancel, ICBA
• Pete Crear, WOCCU
• Shaun Tarbuck, ICMIF

Interview questions

1. Have co-op institutions fared better in the present financial market than their non-co-op counterparts? What has been the response of co-ops to the financial crisis? Is there a difference because of the investment strategies and ethical banking practices peculiar to co-ops?

In this financial crisis, the co-operative banking business model, relying on democratic governance, members' participation, proximity and the satisfaction of its members and clients interests, showed its benefits as a factor of stability and financial security for millions of people. Indeed, co-operative banks have a long term view and don't rely on the financial market to raise their capital: their first aim is not to maximise profit for the benefit of their shareholders but to provide the best possible products and services to their members. The recent financial crisis proves that the co-operative banking business model is, more than ever, appropriate and relevant.

In many countries, co-operative institutions fared better in the present financial crisis as their main banking activities take place in the real economy, at a local or regional level. Nevertheless, in our globalized word where all the economies are connected, even co-operative banks with no financial activity abroad will eventually be impacted by this crisis, at least by its economic consequences.

In Europe, some co-operative banks have developped a common response to the financial crisis by lending money to each other when other banks stopped all their interbanking loans.

We can also note that the investment strategies of co-operative banks can be different from other banks, as they are not listed on the financial market. As a consequence, they don't have an obligation to maximise short term profit to distribute it to their shareholders but can have a long term and more stable investment strategy.

2. For those large financial institutions that did invest in risky financial instruments - and there appears that there are a number - what has been the impact, and has this been a reminder that the co-op principles must be applied to all co-op transactions?

Indeed, some large financial co-operative institutions did invest in risky financial instruments. It must be reminded that these financial instruments were not seen as risky when they were bought and had an excellent financial rating: some co-operative institutions have certainly been lured by these ratings which presented very risky financial instruments as safe and secured financial debt. You must also remember that due to regulatory constraints all banks, cooperative banks included, are compelled to diversify their financial assets within high quality ratings.

It must also be noted that some financial instruments, which are not risky at all in themselves, could generate important losses for many co-operative banks: it is notably the case of Lehman bonds, or the bonds of Icelandic banks, which were seen before the crisis as very healthy and stable financial institutions.

The impact of these investments are variable from a co-operative bank to another, depending of the financial strategy and exposure of each bank.

It is certain that a better application of the co-operative principles to all the co-operative transactions could have prevented some of these investements, but it is also clear that a large financial institution with an international investment strategy cannot have completely avoided the impacts of this crisis, which was extremely strong and unexpected.

3. We often cite 'sustainability' as a core driver of co-operative structure. What makes co-operatives more sustainable? How might they capitalise on this to take greater share of the marketplace? How does co-operative structure strengthen them in the long term?

Co-operatives are more sustainable because, according to the 3rd co-operative principle, their members affect a part of their capital as a common property of the co-operative and allocate a part of the annual surplus for the co-operative development, possibly by setting up indivisible reserves. These reserves ensure the intergenerational solidarity between the former members of the co-operative and the futur ones.

Furthermore, as they are not listed, co-operatives don't have to generate an unsustainable level of profit to remunerate their shareholders and can have a long term development strategy.

4. Co-op institutions may have been seen as low risk takers and thus not places for high gains. Have co-ops seen a change in consumer attitudes? Is the idea that co-ops have low rates of return a myth in light of the fact that they have lower cost of funding due to their strong deposit base?

Co-operative members rarely subscribe member shares to speculate or make high gains: the main reason to become a member of their co-operative is to have a full access to the co-operative products and services and to participate to its governance. When financial gains can be made on co-operative member shares, they are usually limited, as co-operative member shares are usually bought and sold at their nominal value.

It does not mean that co-operatives necessarily have low rates of return: many academic studies have shown that it was not the case and that co-operative banks had similar, and sometimes better rates of return than the non cooperative banks. The main difference is in the way co-operative members constitute reserves to invest and develop the activities of their co-operative rather than getting their share of the annual benefit, which means that a significant amount of the annual benefit remains within the co-operative.

5. Is there a case for a co-ordinated effort to promote the advantages of co-operative institutions and ensure that in the financial fixes that the co-op model is not marginalised or regulated out? How can we publicise the advantages of co-op institutions? (For example - member information, political lobbying, cross-sectoral strategies, public awareness campaigns).

The need of a co-ordinated effort at the ICA level to promote the advantages of co-operative institutions and defend the co-operative model is evident: this effort should be undertaken by each ICA organisation, at the central, regional and sectoral level. ICA sectoral organisations have a specific role in this field, as each sectoral organization has a specific expertise and legitimacy on its own sector.

Public campaigns, like the Global 300 initiative and the national and sectoral pride lists, are a good way to promote the co-operative image and give a better vision of the economic significance of co-operatives at an international level.

An active lobbying strategy should also be undertaken, not only at the political level but also in the numerous standard setting institutions (IASB, FASB, Basel Committee, ...) which have a huge influence on regulation and could, if they are not familiarized enough with the co-operative model, have the capacity to marginalise it by adopting inappropriate rules or standards. It has been decided in our last annual meetings that ICBA has to be in the forefront in 2009 on these topics.

6. What about the link between salary/bonuses and irresponsible risk-taking? Does this happen in co-ops or not - can you comment?

It is certain that the indexation of some salaries or bonuses in the financial sector on short term profits is a strong incentive to excessive risk taking: the financial crisis shows that this model should be amended, even if it is not easy to introduce long term objectives in salaries when people only spend 3 or 4 years in the same company. Anyway, some solutions have to be found to reduce this negative incentive which certainly contributed to increase the effects of the financial crisis.

It must be noted that a huge majority of co-operative banks have a local or regional activity and are not directly involved in financial activities at an international level, where salaries and risks are very high.

This problem can nevertheless be found in some co-operative banks which are present on the financial market at an international level. The difference is that most co-operative banks don't give stock options to their employees, as their shares are not listed, which reduces in some way the incentive to generate short term profit by excessive risk taking.

You are right to address this question, I believe it is upmost important in coops, especially banks, to cope with the matter of good governance and transparency towards members which our bond to our pledge for democracy.