First established in Germany in the mid-19th century to help poor farmers, cooperative financial institutions have grown to include about 250 million members, most of them in the developed economies. There are two main types of cooperative financial institutions: credit unions and cooperative banks. Both are owned democratically by their members, as opposed to investor-owned banks owned by shareholders.
Credit unions are distinct from cooperative banks mainly in two ways: they only accept members as customers and limit their membership to those sharing a “common bond”, such as profession. For example, the Navy Federal Credit Union membership consists of current and former US Navy personnel. Credit unions are more common in North America, while cooperative banks are more common in Europe.
Other major cooperative financial institutions include building societies such as Nationwide, that specialise in home mortgages. Co-operative banks offer a real alternative to the private run banking sector we have today, and as well as being democratically run they offer a number of economic advantages over private banks.
Firstly, co-operative banks are more resilient to banking crises. Even before the 2008 Global financial crisis, the cooperative banks in Europe were more cost effective than other banks, with better loan quality as a consequence of low risk lending policies. The credit unions in North America were expanding as well, with the reserves growing from 80 to 100 billion between 2005 and 2007. However, the financial crisis of 2008 truly revealed the advantages of cooperative banking. The failure rate of US credit unions between 2008 – 2010 was around 0.3%, compared to 1.5% of commercial banks. In Europe, the co-operative banking sector went into the crisis better prepared than its competitors with profits being added to the reserves instead of going to the shareholders, creating a stronger capital base to buffer difficulties. With stronger focus on retail banking instead of more speculative endeavours, their share of write-downs and losses (7%) was nearly three times smaller than their market share (20%). Without the massive government welfare check to save the big banks, the cooperative banking sector would’ve grown substantially in market share. For example in Netherlands, the cooperative Rabobank was the only major bank that didn’t need a bailout.
In all European countries, co-operative banks are over-represented in lending to small and medium sized businesses. For example in Germany the cooperative banks share of all loans in Germany is 17%, but the share of loans to SMEs stands at 28%. Research shows that SMEs perform better in countries with large cooperative banking sector and suggests that they loan to SMEs with lower costs. During the crisis the cooperative banks were more likely to continue or increase lending to SMEs than their competitors. In the US, startups are six times less likely to be dissatisfied with credit unions than they are with big banks. Loans to small companies are more likely to be used for growth whereas many loans to large companies are used to buyback stock.
Cooperative banks are better taxpayers: for every one billion in assets, German co-operative banks pay 2.5 million in taxes, compared to big private banks that pay only 0.5 million. A bank run by the people are more than willing to see their profits go back into society. They also engage more in other socially beneficial activities. For example, the Nationwide Building Society gives out community grants to projects submitted and selected by the members on one-member-one-vote basis.
Without shareholders pressuring for maximising immediate returns, cooperative banks have a more long-term focus. Numerous studies have shown that they are more likely to establish long-term relationship with their clients, especially with Small and medium enterprises. This, along with profits going to reserves instead of shareholders, manifests itself in less volatile return on equity. A stronger focus on relationship banking also leads to stronger local ties and networks. This can lead to co-operative banks having more sustainable growth.
Overall we can see that added to the appeal of banks run democratically for its members is not only appealing, but extremely beneficial to our economy. Co-operative banks, banks for the many, should have our support.
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