## _wp07159 ## Source details **Canonical URL:** [_wp07159](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07159.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07159.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07159.pdf.json) --- ### I. INTRODUCTION AND SUMMARY - Cooperative banks have been an important feature of the European banking landscape since the 19th century and, on present trends, are likely to remain so at least well into the 21st century. - Core thesis: the success of cooperative banks reflects evolving comparative advantages: - Initially: overcoming asymmetric information in favor of borrowers. - More recently: comparative advantage in overcoming asymmetric information in favor of banks (consumer-owned institutions gain customers' trust). - Institutional design and economic implication: - Members’ ownership rights typically limited to nominal paid-up membership shares (and any capitalized dividends); the cooperative’s net economic value constitutes an intergenerational endowment without final owners, with managers as custodians. - Governance tension and risks: - Owner-less endowment reduces members’ incentives to exert oversight while increasing oversight needs. - Two main risks when governance fails: - Managers may use the endowment for purposes other than members’ best interests, including empire-building. - Attempts to appropriate (part of) the endowment may succeed (demutualization or stealth appropriation). - Financial-stability and competitive dynamics: - Low-cost/abundant capital and absence of strict profit-maximization can enable expansion that pressures other institutions. - If prudential authorities require cooperatives to match commercial bank ROE, cooperatives may expand into risky activities they cannot adequately control. - Features limiting crisis resilience: limited ability to raise capital quickly; concentrated credit exposures; inflexible cost bases (branch networks, employee-member protections). - High-level policy direction: - Give cooperatives more scope to manage capital (raise and shed capital). - Improve governance: strengthened disclosure; member involvement; independent and qualified board members; mechanisms enabling members to challenge management; specific prudential oversight; separation between external and internal governance in networks. - Devise financially sound and equitable mechanisms for winding down or transforming cooperatives into joint-stock corporations when members wish to do so. - Ensure competition across bank ownership types occurs on as level a playing field as possible. ### II. THE COOPERATIVE LIFECYCLE, COMPARATIVE ADVANTAGES, AND MARKET POSITION - Cooperative ownership features (ICA definition; European Commission summary): - (i) free association and withdrawal; (ii) non-transferability of membership; (iii) democratic structure (one member, one vote); (iv) often restricted profit distribution; (v) ownership rights limited to nominal cooperative capital; (vi) pursuit of member interests rather than profit maximization. - Lifecycle stages and evolution: - Birth: heavy reliance on member commitment; governance salient. - Adolescence: professional management, consolidation, network formation; governance challenges transform. - Maturity/survival: competitiveness, management, and member relations key; surviving cooperatives often adopt investor-owned managerial procedures. - Erosion and emergence of comparative advantages: - Loss: ability to discipline opportunistic borrowers declines with scale and deposit insurance presence. - Persistence/emergence: cooperative advantage in trust and identifying target-segment needs persists where cooperatives retain high market shares in those segments. - Lower cost of capital mechanism: - Cooperatives remunerate only the part of equity represented by member shares (“cooperative capital”), not the larger intergenerational endowment, enabling below-market pricing or lower ROE requirements. - Policy/institutional change noted: Basel II introduced in the EU by the Capital Requirements Directive on January 1, 2007 reduces capital needed for retail operations, weakening cost-of-capital advantages in retail finance (Mercer Oliver Wyman, 2003). ### III. NETWORK ORGANIZATION, APEX FUNCTIONS, AND MARKET PRESENCE - Networks and integration as defining sector features: - Networks range from atomized systems to highly integrated centralized systems; Di Salvo classification examples: centralized national (Netherlands, Portugal, Finland), regional (France), legally integrated decentralized (Germany, Austria), decentralized voluntary (Spain, Italy). - Apex organizations: - Roles: IT, product development, marketing, central liquidity management, consolidated ALM, acting as holding for joint-stock subsidiaries (insurance, asset management, investment banking). - Delegated supervisory roles vary by country (e.g., France: delegated supervision by apex alongside Commission Bancaire). - Mutual support and deposit-insurance arrangements: - Many networks organize internal support or legally-binding liability among member banks; degree of solidarity varies. - Sector concentration among largest euro-area banking groups (December 2005, in millions of euros) - Crédit Agricole — Equity 52,205; Assets 1,170,349 - Rabobank Group — Equity 24,257; Assets 506,234 - Groupe Caisses d’Epargne — Equity 20,181; Assets 594,132 - (Three cooperative-based groups appear among the ten biggest euro-area banking groups by equity; source: Fitch) ### IV. FINANCIAL PERFORMANCE, BUSINESS MODEL, AND SELECTED STATISTICS - Business-model characteristics: - Resource-intensive retail models: high branch density, human-capital intensity, relatively inflexible cost base; can deliver high returns on assets at relatively low leverage. - Lower cost of capital provides scope for non-profit objectives; potential misuse if governance weak (X-inefficiencies, above-market remuneration, allocation to non-members). - Empirical assessments (selected findings): - No systematic efficiency deficit across cooperatives in France, Germany, Italy, Spain (Brunner et al., 2004); mixed and country-specific results exist. - Evidence of cooperatives’ relative stability: Čihák and Hesse (2007) find cooperative banks are more stable than commercial banks in aggregate. - OECD/IMF statistics (selected table values preserved) - Branch-network market shares (Table 1, branches of cooperative banks, percent of total bank branches) - Austria: 1997 49.8; 2000 50.7; 2003 52.6 - France 1/: 1994 57.5; 1997 60.8; 2000 60.3; 2003 59.7 - Germany: 1994 39.1; 1997 39.4; 2000 39.6; 2003 39.9 - Italy: 1997 27.8; 2000 27.5; 2003 22.3 - Netherlands: 1997 25.9; 2000 40.5; 2003 40.3 - Loan-to-deposit ratios and interbank positions (Table 2, unconsolidated basis, percent; data as of end-2004 for France and November-2005 for Germany) - Large French commercial banks: Loans/deposits 64.8; Interbank lending/interbank borrowing 124.1 - Caisses d’Epargne: Loans/deposits 164.1; Interbank 60.9 - German cooperative banks (excluding central banks): Loans/deposits 196.1; Interbank 84.3 - Market shares by assets (Table 4, percent) - Austria: 1997 29.5; 2000 35.6 - France 1/: 1994 28.4; 1997 27.9; 2000 28.1; 2003 24.1 - Germany: 1994 14.3; 1997 12.4; 2000 9.8; 2003 10.3 - Netherlands: 1997 21.2; 2000 29.0; 2003 26.7 - Assets per branch (Table 5, percent of banking system assets per branch) - France 1/: 1994 52.2; 1997 47.0; 2000 46.5; 2003 40.4 - Germany: 1994 36.5; 1997 31.4; 2000 24.9; 2003 25.8 - Italy: 1997 61.3; 2000 61.2; 2003 67.1 - Net interest income (Table 6, percent of total assets) - Finland: 1994 3.41; 1997 3.10; 2000 3.47; 2003 2.58 - Spain: 1994 4.57; 1997 3.88; 2000 3.37; 2003 3.00 - Share of net interest income in total income (Table 7, percent) - Germany: 1994 81.73; 1997 79.76; 2000 74.64; 2003 73.46 - Spain: 1994 92.27; 1997 88.46; 2000 81.78; 2003 80.33 - Returns on assets (Table 8, percent) - France 1/: 1994 0.22; 1997 0.29; 2000 0.36; 2003 0.60 - Spain: 1994 1.10; 1997 1.22; 2000 1.06; 2003 0.82 - Efficiency ratios (Operating costs/income, Table 9, percent) - Finland: 1994 123.12; 1997 82.69; 2000 60.94; 2003 68.44 - France 1/: 1994 67.73; 1997 66.11; 2000 67.24; 2003 63.96 - Net provisions (Table 11, percent of total assets) - Germany: 1994 0.61; 1997 0.43; 2000 0.50; 2003 0.59 - France 1/: 1994 0.49; 1997 0.30; 2000 0.21; 2003 0.21 - Italy (Averages 2002–04, Table 10, percent) - Non-performing loans/total loans: Banking system 6.6; Banche Popolari 5.5; Banche di Credito Cooperativo 6.5 - Return on equity: Banking system 7.9; Banche Popolari 7.6; Banche di Credito Cooperativo 6.7 - Solvency ratio: Banking system 11.4; Banche Popolari 10.1; Banche di Credito Cooperativo 17.8 ### V. CORPORATE GOVERNANCE: STRUCTURAL CHALLENGES AND MECHANISMS - Fundamental governance structure: - Two dimensions: external (separation of ownership and control) and internal (ensuring staff implement management’s decisions). - Cooperative-specific governance gap: managers as custodians of an owner-less intergenerational endowment; members typically entitled only to nominal value of member shares on withdrawal. - Incentive asymmetries: - Members typically bear little risk (buffered by the endowment) and thus have weak incentives to monitor; managerial incentives to exploit governance weaknesses increase with large retained endowments. - Member participation in governance tends to be low: representative figures reported include member participation in UK consumer cooperatives below 1 percent in most cases (Spear, 2004); typical participation rates for European cooperative banks are cited in the five to eight percent range (representatives of sector). - Board and oversight weaknesses: - Common deficiencies: boards rarely sufficiently independent; elections often uncontested; management proposes candidates; lay boards may lack business experience. - Market discipline channels limited: non-transferability of shares prevents hostile takeovers; stock-based compensation is generally infeasible; delegated monitoring is constrained unless parts of groups accept market exposure. - Networks and governance: - Networks and apex organizations can reduce governance risks via delegated monitoring and peer pressure, and can create an internal market for corporate control (underperformers encouraged to merge). - But networks introduce complex governance challenges: potential conflicts between apex and member-banks, career dependencies, reduced willingness to challenge apex, and hybridization risks when groups use listed subsidiaries. ### VI. CAPITAL DYNAMICS, PAY-OUT BEHAVIOR, AND VULNERABILITIES - Key capital-growth identity: - ΔCapital = ROE * (1 – POR), where POR = pay-out ratio. - Numerical illustration from source: - Example: If a cooperative has a pay-out ratio of 10 percent and a commercial bank pays out 35 percent, the cooperative needs to achieve 72.2 percent of the commercial bank’s profitability (ROE) to equal the commercial bank’s organic capital growth rate. - Observed pay-out behavior (Table 12, pay-out ratios, percent) - Finland: 1994 0.00; 1997 7.25; 2000 5.33; 2003 11.29 - France 1/: 1994 31.82; 1997 31.03; 2000 25.00; 2003 3.33 - Germany: 1994 67.74; 1997 73.08; 2000 110.53; 2003 69.23 - Spain: 1994 30.91; 1997 25.41; 2000 27.36; 2003 28.05 - Selected cooperative-group capital dynamics (Table 13, percent; observation periods noted) - Crédit Agricole: CAR 10.4; ROE 8.6; Average Capital Growth Rate 7.5; Average Pay-out Ratio 23.8 (Obs. period capital growth rate 2001-2004; pay-out ratio 2001-2004) - Rabobank: CAR 11.4; ROE 8.1; Average Capital Growth Rate 11.5; Average Pay-out Ratio 4.6 (Obs. period 1997-2004) - OP Bank Group: CAR 15.8; ROE 10.8; Average Capital Growth Rate 21.2; Average Pay-out Ratio 17.4 (Obs. periods listed) - Capital-friction mechanisms and consequences: - Perpetual accumulation of reserves is often rational given variable cooperative capital and potential run risk from membership withdrawals. - Constraints on raising capital quickly: members reluctant to invest more, legal limits, limited attractiveness of equity-like instruments; cooperatives sometimes issue non-voting equity, equity-like debt, hybrid securities, or list subsidiaries. - Fundamental vulnerability: inability to shed excess capital, limited ability to rely on cooperative capital in crisis, difficulty raising equity rapidly. - Risks from excess capital accumulation: - Encourages empire-building and forced expansion into unfamiliar or risky activities; dividends and share repurchases can mitigate overinvestment but are often low in cooperatives. - Demutualization considerations: demutualization typically redistributes intergenerational endowment value to current members, can be biased in favor of older members, and tends to increase managerial remuneration. ### VII. PRUDENTIAL, STABILITY, AND POLICY-ORIENTED IMPLICATIONS - Cooperative-specific prudential considerations: - Cooperatives tend to be net lenders in interbank markets due to large retail deposit bases and high deposit-to-loan ratios; liquidity withdrawal by cooperatives in stress can propagate liquidity shocks. - Concentrated credit exposures and reliance on interest margin increase vulnerability to correlated shocks and interest-rate movements. - Lower reliance on market-discipline mechanisms (Basel II third pillar limitations) reduces effectiveness of disclosure-based discipline: third pillar less effective for cooperatives due to weaker disclosure and fewer market exposures. - Political economy: large membership, retail orientation, deposit/branch market shares, and community links can generate public sympathy and political pressure that complicate strict supervisory measures or resolution. - FSAP country findings (selected) - Germany: cooperative pillar consolidation, exit via mergers, smaller cooperative banks more sensitive to interest-rate risk; recommendation: change institutional protection scheme and explore transformation to regular companies to mobilize capital (IMF Country Report No. 03/343). - France: mutual groups key in consolidation; mechanisms keeping disbursement low complicate control; suggested reconsideration of legal impediments to demutualization and removal of obstacles to higher remuneration of members (IMF Country Report No. 04/344). - Switzerland: Raiffeisen banks performed particularly well in early-1990s real estate crisis; challenges include achieving economies of scale and reducing mortgage concentration (IMF Country Report 02/108). - Prudential policy priorities and suggested supervisory stance: - Attach relatively low weights to ROE when assessing cooperative banks, but ensure any slack benefits members/stakeholders in transparent ways and does not threaten system stability. - Enhance supervisors’ awareness of cooperative-specific risks: governance weaknesses related to the endowment, capital structure idiosyncrasies, sectoral concentration risks, and network solidarity arrangements. - Consider supervisory reliance on apex organizations carefully; delegated supervision requires robust standards to avoid lowering supervisory rigor. ### VIII. POLICY RECOMMENDATIONS AND GOVERNANCE REFORMS (TENTATIVE AGENDA) - Improve cooperatives’ capital management and flexibility: - Provide mechanisms to shed excess capital (higher pay-out ratios; donations/transfers to other cooperatives or charitable uses), while resolving who chooses recipients and ensuring transparency. - Improve ability to raise capital quickly in crises (network mechanisms, access to market instruments, clarity on permissible hybrid instruments). - Strengthen governance and disclosure: - Raise transparency and disclosure standards at least to levels required of listed companies where networks are significantly integrated; consolidated reporting for integrated networks. - Separate external and internal governance mechanisms in networks to reduce interference and conflicts of interest (parallel structures suggested). - Facilitate continuous dialogue between managers and members; ensure members can organize independently and challenge management (including making “game-ending” or downsizing decisions without management approval). - Increase members’ minimum investments or introduce limited liability exposure for members to strengthen monitoring incentives. - Encourage co-option of competent independent directors; use election committees and independent vetting carefully to preserve democratic functioning. - Provide training and support for board members and members to reduce information asymmetries. - Increase exposure to price mechanisms and market signals (public debt issuance, ratings, listing of subsidiaries) to elicit delegated monitoring, while managing hybridization risks. - Address demutualization and wind-down equitably: - Devise mechanisms to allow winding down or transforming cooperatives into joint-stock companies in equitable ways if a majority of members wish to do so and subject to independent oversight. - Options include windfall taxes, distribution rules based on length of membership or business volume, pre-demutualization closure to new membership, or donation of reserves to foundations with constraints on control and distribution. - Ensure level playing field: - Remove legal/regulatory prerogatives that grant artificial advantages to any ownership form; most such prerogatives have been removed since the 1980s, but vigilance is needed. - Supervisory and legislative attention: - Prudential authorities should account for cooperative-specific features in supervisory assessments and resolution planning. - Consider cooperative-specific supervisory measures and reporting requirements, and ensure delegated supervision to apex bodies is subject to robust oversight. - Managerial incentives and hybrid group risks: - Design tailored incentive structures linking management compensation to specific, measurable cooperative objectives. - Monitor hybrid cooperative/joint-stock groups for “stuck in the middle” governance problems where group compromises reduce effectiveness of either ownership form. ### IX. MEASURING COOPERATIVE IMPORTANCE AND AREAS FOR FURTHER RESEARCH - Measuring importance: - Asset-based measures understate cooperatives’ importance in domestic retail markets because cooperatives tend to be less active in financial/interbank markets and have higher branch/deposit/credit shares. - Deposit market-share estimates (consolidated basis, percent, IMF Staff estimates, as of end-2004 examples): - 50-100 percent: France - 20-50 percent: Netherlands, Austria, Finland, Italy - 5-20 percent: Germany, Luxembourg, Switzerland, Ireland, Portugal, Spain, U.K. - 0-5 percent: Denmark, Greece, Belgium, Sweden - Suggested research agenda (explicitly listed): - Theoretical, policy, and managerial aspects of dynamics of cooperatives’ intergenerational endowments and resulting incentives. - Competition between ownership forms in banking and financial-stability implications. - Organization of independent oversight for cooperatives without creating undue bureaucracy or restrictions. - Governance and managerial dynamics in hybrid cooperative/joint-stock groups. - Governance issues within cooperative networks. - Further analysis of basic corporate governance mechanisms in cooperatives and possible improvements. *Source: IMF staff working paper content unit _wp07159.* ### References.............................................................................................................. ### _wp07159 - References.............................................................................................................. ### I. INTRODUCTION AND SUMMARY - Cooperative banks have been an important feature of the European banking landscape since the 19th century and, on present trends, are likely to remain so at least well into the 21st century. - The paper argues the success of cooperative banks reflects evolving comparative advantages: - Originally devised to overcome problems of asymmetric information in favor of borrowers. - More recently, success is driven to a significant extent by problems of asymmetric information in favor of banks; as consumer-owned institutions, cooperatives have a comparative advantage in gaining customers' trust. - Institutional design: Most cooperatives were designed to perpetually accumulate capital by limiting disbursement of profits and defining members’ ownership rights as applying only to the notional value represented by paid-up membership shares (and any capitalized dividends). - The economic value of a cooperative, net of debts and the nominal value of member shares, constitutes an intergenerational endowment without final owners; managers act as custodians of this endowment. - Governance challenge: The owner-less endowment reduces members’ incentives to exert effective oversight while increasing the need for oversight. Governance systems originally designed for small community institutions are being applied, with little fundamental change, to large, complex financial conglomerates. - Two important risks when governance fails: - Managers may use the intergenerational endowment for purposes other than members’ best interests, including empire-building. - Attempts to appropriate (part of) the endowment may succeed. - Financial stability and competitive dynamics: - Cooperatives’ low-cost and often abundant capital and the absence of a profit maximization constraint can enable expansion that exerts competitive pressure on other financial institutions. - If prudential authorities push cooperatives to achieve similar returns on equity as commercial banks, cooperatives may expand into risky activities they cannot adequately control. - Concerns also arise regarding cooperatives’ potentially limited ability to raise capital and features of their business model that may impair crisis resilience. - Within networks, internal solidarity mechanisms, peer pressure, and apex supervision can limit small shocks but may lead to insufficient market exit, governance problems, and complex power balances within networks. - Overall conclusion and policy direction: - Cooperatives need more scope to manage their capital, allowing better raising and shedding of capital according to needs. - Improvements in governance are needed, including strengthened disclosure requirements; measures to increase member involvement; mechanisms for members to organize and challenge management on fundamental questions of future and size; increased minimum investment levels for members; deliberate exposure to market mechanisms; addition of independent and well-qualified board members; specific prudential oversight; and clear separation between external and internal governance systems in networks. - For cooperatives whose members wish to wind down or transform into joint stock corporations, financially sound and equitable mechanisms need to be devised. - Policymakers should ensure competition between different types of banks takes place on as level a playing field as possible, avoiding policies that create artificial advantages for a specific ownership form. - Scope and caveats: - The paper does not pass overall judgment on cooperative ownership versus alternatives; all governance forms have problems and comparative advantages. - The cooperative sector is very diverse; the paper focuses mostly on the “generic” cooperative and does not study the full diversity. ### II. THE COOPERATIVE BANKING MOVEMENT—FROM SMALL-SCALE SELF-HELP TO LARGE, COMPLEX FINANCIAL CONGLOMERATES - The section frames the sector through evolving comparative advantages and introduces the cooperative ownership concept. #### A. The Cooperative Ownership Form - ICA (1995) definition: “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise”. - Main features (as summarized in the source, e.g., European Commission, 2001): - (i) free association (of qualifying persons) and withdrawal, resulting in a variable cooperative capital base; - (ii) the non-transferability of membership, implying the absence of a market for member shares; - (iii) a democratic structure usually giving each member one vote regardless of his or her investment; - (iv) profit distribution that is often restricted and is not necessarily proportional to members’ shareholdings; - (v) ownership rights that are in effect limited to the nominal cooperative capital represented by member shares (and therefore do not extend to the reserves and the total economic value of the cooperative); - (vi) the pursuit of specific member interests rather than profit maximization. - Coverage of the paper includes European banks broadly in line with the ICA definition: cooperative banks, credit unions, building societies, and Italian banche popolari (which in some shareholder rights resemble joint-stock companies). - The discussion generally excludes savings banks (except the French Caisses d’Epargne since their conversion to cooperatives). #### B. The Lifecycle of a Cooperative - Typical lifecycle stages: - Birth: Emerges during periods when markets and existing institutions fail to meet needs; initial reliance on member commitment (volunteer work and financial resources) makes early governance and management problems prominent. - Adolescence: Distance between cooperative and members increases; professional management emerges; quest for scale economies drives consolidation and network formation; governance challenges transform as staff and managers become distinct stakeholders. - Maturity and survival conditions: Success depends on competitiveness, management, and member relations. Emotional loyalty is only partially transmitted across generations; member fidelity depends on offering competitive products and meaningful financial involvement. - Surviving cooperatives tend to adopt de facto managerial procedures and policies analogous to investor-owned corporations and evolve into hierarchical structures or loose market-based cooperation. #### C. Historical Roots - European cooperative banking originated largely in the 19th and early 20th centuries in response to poverty, lack of access to credit, and market failures. - Continental cooperatives trace to Hermann Schulze (1808–83) and Friedrich Wilhelm Raiffeisen (1818–88) in mid-19th century; Schulze targeted urban small business owners and artisans, Raiffeisen targeted the rural poor. - British Isles: building societies date to the 18th century and are linked to a revivalist Christian movement; UK and Irish credit unions appeared in the second half of the 20th century, based on US credit unions, which were inspired by Canadian adaptations of the German model. - Many cooperative banking developments were supported or initiated by governments or social movements (examples given in the source: France, Finland, Portugal, Italy, Belgium, France). - Cooperative banks addressed market imperfections that left poorer population segments underserved by commercial banks; cooperatives overcame problems of imperfect and asymmetric information and unenforceability of small-scale contracts. *Source: Excerpt from _wp07159 - References..............................................................................................................* ### 19. Cooperative banks could overcome these problems because member-consumers ### _wp07159 - 19. Cooperative banks could overcome these problems because member-consumers ### Cooperative banks’ historical strengths and mechanisms - Member-consumers financed the institution and were involved in its decision-making processes. - Within small communities, intimate knowledge of each other’s credit- and trustworthiness ensured loans were provided mainly to borrowers who could be expected to repay them. - Financial incentives for members to monitor each other, a relatively small and homogenous membership base, and peer pressure provided enforcement incentives consistent with Stiglitz (1990). - Social relations among members also contributed to the success of cooperatives. ### Evolving comparative advantages (section summary) - Hansmann (1996) argument: in the long run the ownership form that satisfies consumers’ needs most efficiently (at lowest cost) is likely to prevail. - The comparative advantages that ensured early success of cooperative banks have in many respects been eroded, but new comparative advantages have emerged. ### Loss of comparative advantage in overcoming opportunistic borrower behavior - Consumer ownership is less efficient when information asymmetries work in favor of consumers due to incentives for opportunistic behavior by numerous consumers. - It was involvement of members, close relationships among them, and members’ financial exposure that gave cooperatives informational and enforcement advantages. - These factors have largely disappeared as cooperatives have gained scale and distance between them and members has increased; deposit insurance now limits members’ potential losses. - Legal and judicial frameworks and greater availability of verifiable borrower information have neutralized many comparative disadvantages commercial banks once faced. ### Comparative advantage in identifying and serving consumer needs - The one-member one-vote system tends to lead cooperatives to satisfy preferences of the median patron, closer to the average patron than the marginal patron (Hansmann). - Hart and Moore (1998): cooperative ownership becomes less advantageous the more competitive a market is and the more uniform the membership base is. - Theoretical benefits presume decisions are made by full membership or a representative sample; reality differs (see corporate governance section). - Cooperatives’ clients being also members involved in decision-making should provide an informational advantage over commercial banks. - Size and distance between members and management likely reduce this advantage, but high market shares in targeted segments (e.g., farmers in France) indicate the advantage persists to a significant extent. ### Lower cost of capital for cooperatives - Cooperatives only need to remunerate the part of their equity represented by member shares (referred to as the “cooperative capital”), not the larger intergenerational endowment (partly as reserves in accounting terms). - Cooperatives do not remunerate member shares very generously; members typically do not acquire shares for investment purposes. - Lower cost of capital enables cooperatives to sell products at below-market prices or incorporate profits into products. - Pressure has increased for cooperatives to raise profitability to market levels. - Basel II (introduced in the EU by the Capital Requirements Directive, on January 1, 2007) reduces capital needed for retail operations, making cost of capital a less important factor in retail financial services (see Mercer Oliver Wyman, 2003). ### Market position, customer and employee loyalty - Cooperatives typically have strong retail market positions, especially in target segments; customer-members are expected to be more loyal than commercial bank customers. - Retail competition means members may still shop around for best deals on individual products. - Many cooperatives are restricted by statute or law to specific market segments (e.g., region or profession); democratic nature and historical focus may make reaching other segments difficult. - Cooperatives’ fate can be linked deterministically to the fate of their historic market segment; commercial banks have more flexibility to target high value customers. - Employees who are members tend to be relatively loyal, invest in firm-specific human capital, and are close to customers; cooperatives may pay lower salaries in return for involvement, job security, profit sharing, and local careers. - Greater focus on retail and flatter pay scales can make it harder to attract top talent for sophisticated financial market activities; some cooperative groups use separate joint-stock entities for such activities. ### Branch networks and retail liquidity advantages - Cooperatives often have disproportionately large branch networks contributing to entrenched retail market positions. - Rationalizations have occurred but less drastically than in commercial banks; some cooperatives continue to expand branch networks. - Branch network market share has increased in many countries (see Table 1). - Cooperatives’ branches are often located differently (e.g., countryside vs. cities in France). - Extensive branch networks constitute large fixed costs, not easily reduced during lean times, especially under continental European labor laws and with employee-membership. - Physical presence is becoming less relevant; branches provide less comparative advantage than before (Black and Dugger, 1981). - Table 1. Cooperative Banks—Market Shares of Branch Networks (branches of cooperative banks, in percent of total bank branches) - 1994 / 1997 / 2000 / 2003 - Austria: ... / 49.8 / 50.7 / 52.6 - Finland: 37.5 / 41.0 / 41.4 / 40.0 - France 1/: 57.5 / 60.8 / 60.3 / 59.7 - Germany: 39.1 / 39.4 / 39.6 / 39.9 - Greece: ... / 0.9 / 1.6 / 2.4 - Italy: ... / 27.8 / 27.5 / 22.3 - Netherlands: ... / 25.9 / 40.5 / 40.3 - Portugal: ... / 10.8 / 11.5 / 12.8 - Spain: 8.7 / 9.2 / 10.0 / 11.3 - Sources: OECD – Bank profitability report; and IMF staff calculations - 1/ Including savings banks, before and after their conversion to cooperative banks in 2000. ### Deposits, liquidity, and interbank positions - Cooperatives typically have a disproportionate share of retail deposits, resulting in comfortable liquidity, high deposit-to-loan ratios, and a tendency to be net lenders in interbank markets. - Table 2 illustrates loan-to-deposit ratios and interbank positions for French and German banks (unconsolidated basis). - Table 2. France and Germany: Loan-to-Deposit Ratios and Interbank Positions (In percent, unconsolidated basis 1/) - Loans/deposits / Interbank lending/interbank borrowing - Large French commercial banks: 64.8 / 124.1 - Caisses d’Epargne: 164.1 / 60.9 - Banques Populaires: 83.4 / 113.8 - Crédit Mutuel: 134.5 / 100.3 - Crédit Agricole: 100.6 / 101.6 - All German banks: 141.6 / 122.8 - Large German commercial banks: 103.3 / 131.5 - German cooperative banks (excluding central banks): 196.1 / 84.3 - Sources: Commission Bancaire – Analyses Comparatives, Deutsche Bundesbank - Monatsbericht, and staff calculations. - 1/ Data are as of end-2004 for France and November-2005 for Germany. ### Access to financial markets and capital constraints - Cooperatives often face challenges raising capital and borrowing in financial markets due to lack of expertise, scale, and suitability of retail lending for securitization, syndication, or central bank refinancing. - Toporowski (2002): UK building societies were marginalized by constraints on raising capital and by commercial banks’ ability to generate higher loan growth through debt issuance. - Comparative disadvantage appears to be lessening: legal restrictions on financial market activities have mostly disappeared; cooperative networks and apex bodies or specialized subsidiaries have built scale; markets for securitization of retail loans are developing rapidly. - Securitization reduces the comparative advantage of deposits by increasing refinancing options. ### Comparative advantage in overcoming opportunistic behavior by banks and establishing trust - Consumer ownership can be efficient where problems of “lock-in”, long-term contracting risks, information asymmetries in favor of the firm, or ex-post market power exist (Hansmann). - Financial products’ complexity and institutions’ resource advantages create information asymmetries and ex-post market power; consumers may value trustworthiness and be willing to pay a premium for cooperative-provided products. - Cooperatives’ ownership by clients and public statements that they do not seek to maximize profits help portray trustworthiness; many market this difference. - John Kay: cooperatives have a competitive advantage in establishing trust (Kay, 2006). - Trust is easy to lose; when mutual financial institutions become large and pursue growth and diversification, they tend to lose their trust advantage as they start to act as commercial institutions. ### Outlook and sector evolution - From a lifecycle perspective, most European cooperative banks have reached an advanced level of maturity; original market-failure-bridging rationale has reduced relevance due to improved legal and institutional frameworks and commercial banks catering to a universal clientele. - Distance between management and members has increased due to professionalization, mergers, networks, and central decision-making; many networks have become large, complex financial conglomerates differing from small self-help origins. - Debate exists on the sector’s future direction; in some countries (Denmark, Sweden, U.K., Belgium) cooperatives have transformed into commercial banks, but most cooperatives prefer to retain cooperative status and argue they continue to provide value (EACB, 2004). - A European Cooperative Society (SCE) statute became applicable on August 18, 2006, providing an optional regime that will make transnational cooperatives possible. - Entrenched market positions and comparative advantages do not guarantee continued success in rapidly evolving, more contestable markets; branch networks may lose relevance and targeted market segments may decline. - Challenges: adapting while retaining comparative advantages; large fixed branch costs and traditions of employee involvement and job security could impede adaptation. - Further consolidation and integration are seen as necessary by many to improve ability to adopt new technologies, but consolidation risks losing key comparative advantages, notably closeness to customers. *Source: _wp07159 - 19. Cooperative banks could overcome these problems because member-consumers* ### 32. The most important features of the European cooperative banking sector as it is now ### 32. The most important features of the European cooperative banking sector as it is now ### A. Integrating Networks - Key features - The sector’s organization in networks and the increasing integration of these networks are the most important features. - Networks range from loose associations to cohesive groups and can be organized as relatively flat organizations or as multi-leveled structures including (an) in-between level(s) of regional groups or associations. - Benefits of forming networks - Realize economies of scale and scope. - Provide a safety net or mutual support mechanism to compensate for risk concentration faced by individual cooperatives with homogenous member bases. - Reduce procurement costs and economize in bounded rationality when integration is deeper. - Risks and organizational trade-offs - Lateral contracts among cooperatives create appropriability hazard (AH): higher AH increases the need for cooperative adaptation mechanisms and hierarchical features to control opportunistic behavior. - Integrating to control AH (including merging) increases the risk of expense preferences (organizational costs such as expense preferences, sub-goal pursuit, and bounded rationality). - Deeply integrated hub-like organizations have high running costs but can operate at lower costs than less integrated systems by economizing bounded rationality. - Classification of networks (Desrochers and Fischer, 2005) - Atomized systems - Consensual networks - Strategic networks - Findings: (i) integration tends to reduce the volatility of efficiency and performance; (ii) integration appears to help control measures of managers’ expense preferences; and (iii) highly integrated systems economize in bounded rationality and operate at lower costs despite high hub costs. - Di Salvo’s four models of cooperative network organization (Di Salvo, 2005) - Centralized/concentrated systems at the national level: the Netherlands, Portugal and Finland. - Centralized/concentrated systems at the regional level: France. - Legally integrated but decentralized systems: Germany and Austria. - Decentralized systems with voluntary integration: Spain and Italy. - Role and functions of apex organizations - Quest for scale economies has led to ceding functions and production processes to higher-level organizations, concentrating decision-making in the apex. - Apex roles vary: limited services (advice, education, representation) to acting as a “central bank” for member cooperatives (centralizing excess liquidity, redistributing funds, placing surpluses in financial markets, running consolidated Asset-Liability Management for the group). - Provide IT, product development, marketing, and act as holding companies for joint-stock subsidiaries (insurance, asset management, investment banking, IT). - Figure 1 (stylized two-level cooperative network) shows MEMBERS → APEX (Investment bank, Insurance company, IT company) → LOCAL BANKs. - Mutual support and deposit insurance arrangements - Many networks organize internal support and/or deposit insurance schemes, committing members to varying degrees of solidarity. - In highly integrated groups, member banks may have legally binding liability for each other’s debts. - In Germany, solidarity is institution-based, taking the form of financial support to troubled banks. - Loosely integrated networks may limit internal solidarity to common deposit insurance schemes or a central fund for liquidity support. - Depending on national legislation, network internal support mechanisms can substitute for or complement national deposit insurance schemes. - Supervisory roles and delegated authority - Apex organizations often supervise member cooperative banks and sometimes support national supervisors; delegation modalities differ by country. - In France, delegated supervision by apex organizations is conducted alongside supervision by the Commission Bancaire. - Delegation reflects recognition that small cooperative banks may not require the same supervisory attention as large complex banking groups. - Some networks are so deeply integrated that supervisors consider them as a single banking group for prudential purposes. - Evolution into large financial conglomerates - Many networks have evolved into large, complex financial conglomerates; some apex organizations resemble managerial tops of integrated groups promoting consolidation, expansion into new activities, or acquisitions. - Three cooperative-based groups are among the ten biggest banking groups in the euro area by equity (see Table 3). - Ongoing trends: the German cooperative sector is planning further integration into what may become Germany’s largest banking group; in November 2006, two French cooperative groups merged investment banking and financial market activities to form one of the euro area’s largest banking groups. - Cooperative groups have become more cross-border active: one Austrian group is among the largest in central and eastern Europe; a Dutch group aims to become the world’s leading provider of agriculture and food-related banking services. - Table 3: Euro Area: Largest Banking Groups by equity, December 2005 (In millions of euros–cooperative groups marked in bold) - Crédit Agricole — Equity 52,205; Assets 1,170,349 - Banco Santander Central Hispano — Equity 42,556; Assets 809,107 - BNP Paribas — Equity 39,745; Assets 1,258,079 - UniCredito Italiano — Equity 39,275; Assets 787,000 - Deutsche Bank — Equity 29,927; Assets 992,161 - ABN AMRO — Equity 24,947; Assets 880,804 - Société Générale — Equity 24,855; Assets 848,417 - Rabobank Group — Equity 24,257; Assets 506,234 - ING Bank — Equity 20,736; Assets 834,035 - Groupe Caisses d’Epargne — Equity 20,181; Assets 594,132 - Source: Fitch ### B. Financial Performance - Measurement challenges and objectives - Comparing efficiency between cooperative and commercial banks is difficult because of differing objectives: commercial banks maximize profits, cooperatives aim to maximize members’ consumer surplus and may pursue additional stakeholder objectives (e.g., employees). - These cooperative objectives are difficult to measure and quantify; much literature nonetheless directly compares financial performance. - Business model differences - Financial performance measures are influenced by business models (Vittas, 1991). - Some models use high leverage to achieve high returns on equity from low returns on assets; others combine high returns on assets with low leverage. - Cooperative banks’ business model is resource-intensive, requiring significant investment in retail infrastructure and human resources, leading to a relatively high and inflexible cost base. - These investments allow cooperatives to achieve high returns on assets and be profitable at relatively low leverage ratios. - To judge cooperatives’ financial performance, comparisons should be with peers pursuing similar retail-focused business models. - Lower cost of capital and scope for non-profit objectives - Cooperatives’ lower cost of capital gives scope to pursue objectives other than profit maximization, including providing goods and services at below-market prices or maintaining services in remote areas. - Potential misuse of this scope, if governance is weak, includes allowing X-inefficiencies, above-market remuneration for management/employees, allocating surpluses to non-members, or maintaining unnecessarily high equity. - Available evidence does not support the claim that cooperatives remunerate their managers at above-market rates; egalitarian cooperative culture serves as a counterweight. - Evidence from the US mutual-to-investor conversions - Conversions of many Savings and Loans Associations (S&Ls) from mutual to investor-owned status in the 1970s–1980s provide insights. - Akella and Greenbaum (1988): mutuals tend to expand deposits and loans beyond profit-maximizing levels. - Mester (1991): evidence of diseconomies of scope at mutual S&Ls. - Mester (1993): allowing for different production technologies, investor-owned S&Ls are less efficient than mutual S&Ls. - Smith, Cargill and Meyer (1980) and Smith (1984): credit unions can have borrower or saver orientations that determine loan and dividend rates and measured financial performance. - Overall US literature does not indicate overwhelming inefficiencies or agency problems at consumer-owned financial institutions. - Empirical findings for European cooperatives - Brunner, Decressin, Hardy and Kudela (2004): no compelling evidence that cooperative banks in France, Germany, Italy and Spain are less effective at managing revenues and costs than commercial banks; they find poor revenue mobilization at Spanish cooperatives and a mild degree of underperformance among German cooperatives, but better cost control among Spanish and Italian cooperatives than among commercial peers. - Gurtner, Jaeger and Ory (2002): French cooperative banks (except former savings banks) have better efficiency ratios than commercial peers, though commercial banks cut costs more in the 1990s; lower labor productivity at French cooperatives matched by lower salaries and higher employee profit shares. - Kotz and Nagel (2002): increased competition led German cooperative banks to lose market share and see profitability and efficiency decline, yet they still have high interest margins and returns on assets relative to other German banks. - Altunbas, Evans and Molyneux (2001): little evidence that investor-owned banks in Germany are more efficient than cooperative and public-sector counterparts; cooperative and public banks show slight cost and profit advantages possibly due to lower cost of funds. - Valnek (1999): mutual building societies in the U.K. have higher returns and risk-adjusted returns on assets and lower reserves for loan losses than other banks. - Overall assessment - Evidence supports that cooperatives have a business model that uses a relatively low overall level of assets intensively to achieve high rates of return on those assets. - The literature does not indicate a systematic “efficiency deficit” at cooperative banks. *Source: _wp07159 - 32. The most important features of the European cooperative banking sector as it is now* ### 44. OECD data generally confirm the existence of a specific cooperative business ### _wp07159 - 44. OECD data generally confirm the existence of a specific cooperative business model ### OECD data and measurement issues - Coverage and definitions of the OECD bank profitability data vary between countries, and the data are mostly on an unconsolidated basis. - A commercial bank subsidiary of a cooperative bank is typically classified under commercial banks while its cooperative parent company is classified under cooperative banks; this is especially relevant for France. - Cooperative bank market shares, as measured by assets, are significant but below their market shares on other indicators, such as branches. - Market shares by assets do not show a clear trend—declining in some countries and rising in others. - Cooperative banks exhibit a lower ratio of assets to bank branches than the banking system as a whole, implying more intensive use of branches and related resources. - Cooperative banks tend to have significantly higher net interest margins on assets but are more dependent on interest income for profitability. - Even when including non-interest income, cooperative banks tend to achieve higher returns on assets than other banks, though this is less universally observed. - With the exception of France, efficiency ratios tend to be somewhat higher for cooperatives, indicating lower efficiency; differences are typically low and not consistent across countries and time. ### Market shares of assets (Table 4) - Austria: 1994 ...29.4 1997 29.5 2000 35.6 - Finland: 1994 18.5 1997 17.5 2000 16.2 2003 15.9 - France 1/: 1994 28.4 1997 27.9 2000 28.1 2003 24.1 - Germany: 1994 14.3 1997 12.4 2000 9.8 2003 10.3 - Greece: 1994 ... 1997 0.2 2000 0.3 2003 0.6 - Italy: 1994 ... 1997 17.0 2000 16.8 2003 14.9 - Netherlands: 1994 ... 1997 21.2 2000 29.0 2003 26.7 - Portugal: 1994 ... 1997 3.5 2000 3.4 2003 3.5 - Spain: 1994 3.0 1997 3.5 2000 3.7 2003 3.9 ### Assets per branch (Table 5) — (In percent of banking system assets per branch) - Austria: 1994 ... 1997 58.9 2000 58.1 2003 67.5 - Finland: 1994 49.2 1997 42.7 2000 39.1 2003 39.8 - France 1/: 1994 52.2 1997 47.0 2000 46.5 2003 40.4 - Germany: 1994 36.5 1997 31.4 2000 24.9 2003 25.8 - Greece: 1994 ... 1997 23.9 2000 19.4 2003 26.7 - Italy: 1994 ... 1997 61.3 2000 61.2 2003 67.1 - Netherlands: 1994 ... 1997 81.7 2000 71.6 2003 66.2 - Portugal: 1994 ... 1997 32.4 2000 29.8 2003 27.1 - Spain: 1994 34.7 1997 38.2 2000 36.8 2003 34.3 ### Net interest income (Table 6) — (In percent of total assets) - Finland: 1994 3.41 1997 3.10 2000 3.47 2003 2.58 - France 1/: 1994 1.86 1997 1.31 2000 1.26 2003 1.62 - Germany: 1994 3.16 1997 2.77 2000 2.45 2003 2.53 - Spain: 1994 4.57 1997 3.88 2000 3.37 2003 3.00 - Differences with banking system total: - Finland: 1994 1.77 1997 1.32 2000 1.56 2003 1.19 - France: 1994 0.58 1997 0.46 2000 0.27 2003 0.72 - Germany: 1994 0.98 1997 1.04 2000 1.14 2003 1.19 - Spain: 1994 1.51 1997 1.36 2000 1.19 2003 0.89 ### Share of net interest income in total income (Table 7) — (In percent) - Finland: 1994 67.77 1997 55.38 2000 63.19 2003 67.65 - France 1/: 1994 71.47 1997 55.52 2000 54.14 2003 56.61 - Germany: 1994 81.73 1997 79.76 2000 74.64 2003 73.46 - Spain: 1994 92.27 1997 88.46 2000 81.78 2003 80.33 - Differences with banking system total: - Finland: 1994 14.62 1997 20.95 2000 6.38 2003 26.23 - France: 1994 9.12 1997 8.68 2000 15.03 2003 13.35 - Germany: 1994 0.95 1997 3.34 2000 10.49 2003 0.53 - Spain: 1994 13.73 1997 17.70 2000 17.54 2003 10.66 ### Returns on assets (Table 8) — (In percent) - Finland: 1994 -1.27 1997 0.69 2000 1.50 2003 0.62 - France 1/: 1994 0.22 1997 0.29 2000 0.36 2003 0.60 - Germany: 1994 0.31 1997 0.26 2000 0.19 2003 0.26 - Spain: 1994 1.10 1997 1.22 2000 1.06 2003 0.82 - Differences with banking system total: - Finland: 1994 -0.05 1997 -0.05 2000 0.50 2003 -0.99 - France: 1994 0.28 1997 0.10 2000 -0.18 2003 0.14 - Germany: 1994 0.04 1997 0.03 2000 -0.01 2003 0.36 - Spain: 1994 0.50 1997 0.47 2000 0.25 2003 0.13 ### Efficiency ratios (Table 9) — (Operating costs/income, in percent) - Finland: 1994 123.12 1997 82.69 2000 60.94 2003 68.44 - France 1/: 1994 67.73 1997 66.11 2000 67.24 2003 63.96 - Germany: 1994 65.92 1997 68.69 2000 72.67 2003 67.72 - Spain: 1994 61.12 1997 61.62 2000 58.79 2003 60.56 - Differences with banking system total: - Finland: 1994 -16.77 1997 9.33 2000 4.04 2003 18.36 - France: 1994 -3.55 1997 -2.67 2000 1.23 2003 -0.04 - Germany: 1994 5.12 1997 4.59 2000 3.97 2003 -4.84 - Spain: 1994 1.41 1997 0.18 2000 -2.23 2003 6.26 ### Italy: selected bank performance indicators (Averages 2002–04, in percent) (Table 10) - Banking system / Banche Popolari / Banche di Credito Cooperativo - Non-performing loans/total loans: 6.6 / 5.5 / 6.5 - Bad debts/total loans: 4.6 / 3.7 / 3.0 - Net interest income / total assets: 2.2 / 2.5 / 3.2 - Gross income / total assets: 3.5 / 3.8 / 4.1 - Share of non-interest income in total income: 38.2 / 35.8 / 21.8 - Operating expenses / Gross income: 59.4 / 59.4 / 67.8 - Loan losses / total assets: 0.48 / 0.44 / 0.25 - Return on equity: 7.9 / 7.6 / 6.7 - Solvency ratio: 11.4 / 10.1 / 17.8 - Note: The figures exclude a number of banks which do not report income statement data. ### Cost structure and staffing dynamics - Evidence suggests cooperative banks may be less aggressive in cutting costs than commercial peers. - Demutualized building societies in the U.K. significantly decrease their costs-to-assets ratios two years after demutualization compared to two years before, though this may reflect faster balance sheet growth rather than improved efficiency. - Over the past ten years (relative to the period discussed), French commercial banks reduced their staff by about 5 percent, while cooperative networks (excluding affiliated commercial banks) increased theirs by almost 15 percent. - Cooperative banks’ average cost per employee is lower. - One cooperative group in France increased its branch network by more than 50 percent between 1984 and 2004. ### Risk profile, provisions, and stability - Evidence indicates cooperatives engage in less risky activities and leverage their ability to overcome asymmetric information in credit provision. - Čihák and Hesse (2007) find cooperative banks are more stable than commercial banks. - Swiss Raiffeisen banks withstood the early-1990s real estate crisis better than other banks; French cooperative banks suffered less than commercial banks during banking stress in the 1980s and 1990s; Italian credit cooperatives have suffered lower loan losses than other Italian banks in recent years. - As a percentage of total assets, provisions tend to be somewhat higher at many cooperatives, but this is typically more than explained by the higher ratio of loans to assets. ### Net provisions (Table 11) — (In percent of total assets) - Finland: 1994 0.01 1997 0.01 2000 0.26 2003 0.35 - France 1/: 1994 0.49 1997 0.30 2000 0.21 2003 0.21 - Germany: 1994 0.61 1997 0.43 2000 0.50 2003 0.59 - Spain: 1994 0.63 1997 0.23 2000 0.45 2003 0.51 - Differences with banking system total: - Finland: 1994 0.04 1997 0.00 2000 0.16 2003 0.22 - France: 1994 -0.08 1997 0.01 2000 0.02 2003 0.02 - Germany: 1994 0.07 1997 0.09 2000 0.18 2003 0.08 - Spain: 1994 -0.16 1997 -0.20 2000 0.09 2003 -0.02 ### Governance: overview and basic challenges - Modern cooperative banks face two dimensions of the corporate governance challenge: - External: separation between ownership and control (Berle and Means, 1932). - Internal: ensuring staff implement management’s decisions and act in the firm’s best interest. - Corporate governance in cooperatives is relatively undertheorized compared with commercial enterprises. - International standards and policy work (OECD Principles of Corporate Governance; Basel Committee for Banking Supervision) focus mainly on publicly-traded companies or internal governance in banks and do not pay specific attention to cooperatives; supervisors of cooperative banks may therefore overlook potential governance risks. - In cooperatives, managers are custodians of an intergenerational endowment without owners: members are typically entitled only to the nominal value of their member shares when they withdraw or upon liquidation; any remaining funds are typically passed on to another cooperative or used for charitable purposes. - The cooperative’s net economic value has no final owners beyond the cooperative itself and functions as an owner-less intergenerational endowment that current members are expected to grow and pass on to future members; managers have direct control over this endowment and can be seen as its custodians. *Source: IMF staff summary of content unit: _wp07159 - 44. OECD data generally confirm the existence of a specific cooperative business model* ### 51. Managers need to look after the interests of various constituencies of ### Managers need to look after the interests of various constituencies of stakeholders ### Stakeholder structure and governance implications - Cooperatives combine characteristics of companies and foundations; founding intent went beyond maximizing “current member value” to achieving social objectives and benefiting an entire class of people. - Cooperative ownership limits members’ ownership rights and is based on a “stakeholder” view: managers, as agents, must reconcile the interests of various constituencies of principals. - Two important complications arise: - Significant overlap between constituencies: members can simultaneously be owners, clients, depositors, borrowers, and often employees. - Some stakeholders are absent or hard to involve: potential future members (intergenerational endowment) defined by a “common bond” may be stakeholders but are not represented in governance. ### Scale, market forces, and information asymmetries - Original cooperative governance mechanisms were designed for small, close-knit communities; applying them to large conglomerates creates collective action and applicability challenges. - Market-discipline channels are weaker for cooperatives than for joint-stock corporations: - Market for managerial talent is less active and less money-driven. - Membership typically involves little financial risk and members’ relationships are broader than a simple investment, reducing the effectiveness of withdrawals as a disciplining mechanism. - Members who are also clients or employees tend to be more loyal and less subject to market discipline. - Larger cooperative groups can seek market exposure to obtain disciplining effects: - Issuing publicly-traded debt securities, borrowing in interbank markets, or listing shares of joint-stock subsidiaries can subject parts of the group to market discipline. - Many large cooperative banking groups in Europe have issued publicly-traded securities, are active in interbank markets, and have obtained ratings from rating agencies. - Lower financial reporting and disclosure standards for unlisted cooperatives can exacerbate information asymmetries in favor of managers; parts of groups that access financial markets may face stricter disclosure, but consolidated group information often remains difficult to obtain. - Prudential authorities are important stakeholders and can compensate for governance deficiencies, but reliance on supervisors risks circularity with owners becoming complacent while supervisors rely on market discipline. The third pillar under Basel II formalizes reliance on market discipline. ### Basic governance mechanism: elected board of directors — functioning and weaknesses Findings on board-based governance in cooperatives: - Common deficiencies: boards rarely sufficiently independent from management; problem of “who monitors the monitor” and risk of collusion between agent and delegated monitor. - Democratic legitimacy and biases: - Boards are elected on a one-member/one-vote basis; in large/mature cooperatives members often have few incentives to vote. - Members with special or disproportionate interests (e.g., member-employees, (large) borrowers, local politicians, ideological groups) may exert disproportionate influence through attendance and voting. - Member participation statistics and variability: - Spear (2004): member participation in board elections of UK consumer cooperatives was below one percent in most cases and between one and five percent overall. - McKillop et al. (2002): average member participation of two percent in the annual meetings of Irish credit unions. - Representatives of the cooperative banking sector: typical participation rates for European cooperative banks are in the five to eight percent range. - Constraints on effective member influence: - Information asymmetries, procedures, and practical difficulties inhibit members’ ability to challenge management; proxy votes tend to be given overwhelmingly to the chairperson, and uncontested board elections are often the norm. - Management often proposes candidates; members may simply vote on proposals put forward by management. - Competence and composition challenges: - Lay board members may lack the business experience and networks common among boards of commercial companies, making boards passive and management-driven. - Constraints on board member selection (typically from within membership) reduce the cooperative’s scope to create external links; some boards mitigate this by co-opting external members. - Measuring and attracting management: - Management performance is harder to measure because cooperatives pursue diverse goals and must balance multiple constituencies. - Smaller cooperatives may struggle to attract professional managerial talent; inability to offer stock-based compensation and cultural resistance to large monetary incentives can be handicaps. - Cooperatives often offer training and education to managers as mitigation. ### Specific governance mechanisms: effectiveness in cooperatives - Market for corporate control: - Cannot function for cooperatives due to non-transferability of cooperative shares; hostile takeovers are precluded. - Joint-stock subsidiaries in practice are typically protected by cooperative parent(s) holding majority stakes. - Blockholders: - Do not exist in typical cooperative structures; the dominant blockholder mechanism in commercial companies is absent. - Delegated monitoring: - Possible in principle but often absent: cooperatives may not borrow from third parties frequently and membership bases lack institutional investors. - Some European cooperatives that sought market exposure accepted delegated monitoring (ratings, market scrutiny). - Executive compensation contracts: - Stock-based compensation plans are generally not possible; cooperative culture resists large monetary incentives. - The breadth and diversity of “member interests” and measurement challenges complicate contract design. - Nonetheless, compensation contracts can include variable compensation tied to success in realizing well-defined and measurable objectives crucial for the cooperative. - Member lawsuits: - Unlikely to serve as an effective disciplining mechanism in cooperatives, especially in Europe, due to collective action problems and limited financial stakes for typical members; only members with special interests may pursue litigation and may not act in the general interest. *Source: IMF staff paper excerpt* ### 73. Membership of a network may significantly reduce corporate governance risks ### 73. Membership of a network may significantly reduce corporate governance risks ### Network effects on individual cooperative governance - Membership of a network can significantly reduce corporate governance risks at the level of individual cooperatives. - Within a network, two kinds of delegated monitors support governance: - The apex organization often has explicit responsibility and significant powers to monitor member cooperatives. - Peer pressure within networks helps ensure good practices in the management of individual cooperatives. - Networks can create an internal market for corporate control: poorly performing cooperatives are likely to be “encouraged” to merge with better performing ones, leaving management of the latter in charge. - Important downside: such mergers may weaken the strong performers. - Empirical evidence: Desrochers and Fischer (2005) find evidence of a reduction in governance costs as a result of integration in networks. ### Complex corporate governance challenges for cooperative networks as a whole - Managers and board members of local and regional banks in hierarchical networks face conflicting forces: - As shareholders of the apex entities, they are supposed to ensure apex actions are in the best interest of the membership base (i.e., make external governance work). - Depending on the degree of integration, they also operate within the group’s internal governance mechanisms, which place the apex at the top. - Resulting tensions: - Future career prospects and the degree to which a bank can prosper may depend on maintaining a good relationship with apex managers. - (Delegated) supervisory functions the apex performs over regional and local banks may reduce willingness of mid- and lower-level managers/board members to challenge the apex. - Mid- and lower-level actors simultaneously occupy roles as employees within a hierarchical organization, as bankers facing prudential supervision from the apex, and as shareholders of the apex—creating conflicts that may deprioritize the shareholder role. - The interference between top-down and bottom-up governance can affect coherence and stability of hierarchical groups: - Ability of managers and board members to exert effective shareholder control over the apex is questionable. - Apex organizations may have a reduced degree of control over middle and local levels compared with hierarchical commercial organizations. - Parts of the group may retain significant independence and act in ways that affect group stability and performance. - This risk is likely higher in networks characterized by large differences in size between member banks; large members may resist autonomy concessions optimal for the network and small banks. - Conflicting interests and priorities may increase with distance between management and the member base and with the number of relevant stakeholders. - Possible mitigation: direct consultation mechanisms between the member base and central management. - Institutional conflict highlighted: retail side (local cooperatives) versus production side (center); retail seeks high quality and low prices, production seeks profitable volume. In some networks, retail banks may sell competing products to clients rather than or alongside those produced by central institutions. - Hybridization risk: placing a significant part of a cooperative group’s activities in a listed subsidiary may fundamentally change group behavior and nature: - Involvement of outside (non-user) investors risks subverting cooperative nature by giving undue participation and influence to external elements at the expense of user-members’ general interest. - May increase managers’ and administrators’ powers through alliances with outside investors. - Pressure of daily share-price variations and certain performance-based pay schemes make such outcomes more likely. - Kaplan de Drimer (1997) raises these concerns. ### A cost-benefit perspective on governance (overview) - Governance can be assessed through incentives facing different actors, especially principals overseeing agents; this section applies a cost-benefit analysis from members’ perspective. - Hansmann (1996) identifies three broad categories of ownership/governance costs: - Agency costs: costs related to monitoring management and costs of managerial opportunism. - Costs of collective decision-making. - Costs of risk-bearing. - The analysis regroups these under two headings: - Costs of making governance mechanisms work effectively (monitoring management; collective decision-making). - Costs that may materialize when they do not work effectively (managerial opportunism; risk-bearing). - Discussion explicitly considers some negative costs (benefits). ### Costs and benefits related to effective governance mechanisms - Monitoring costs: - Dispersed ownership in cooperatives increases monitoring costs, reducing incentives for members to engage in effective monitoring. - For a given level of effectiveness, monitoring costs increase due to duplication compared with commercial companies with more concentrated ownership. - Individual monitoring efforts are public goods; effectiveness of one member’s efforts is limited, making it rational for members of large cooperatives to refrain from thorough monitoring. - Costs and benefits of collective decision-making: - Hansmann defines costs of collective decision-making as those resulting from heterogeneity of owners’ interests, identifying four forms: - Costly decisions: inefficient decisions that do not maximize welfare of members as a group. Example: in a cooperative where 60 percent of members are depositors and 40 percent are borrowers, depositors could systematically vote for policies maximizing their gains rather than combined gains of both depositors and borrowers. - Costly process: time and effort required from owners to make decisions and the possibility of voting cycles; opportunity costs from lengthy processes (lost business opportunities or unaddressed damaging problems). In cooperatives, costs may be substantial, especially when the annual meeting takes place only once per year. Delegation to board and management can contain process costs; in large networks, processes may be even more costly. - Resolving conflicts: resolution of conflicts among different constituencies can take a long time or be impossible without very specific rules. - (Fourth form implied by Hansmann’s framework is present in the discussion of costly decisions and minority control risks.) - Benefits of participation: - Collective decision-making can produce better informed decisions implemented with greater zeal. - Consumer participation ensures policies and products stay in tune with members’ evolving needs. - Involvement of member-employees in decision-making provides significant benefits. ### Costs that may materialize when governance is not effective - Costs of managerial opportunism: - Arise from failure to monitor managers with perfect effectiveness; range from outright theft to foregone benefits from more competent management. - Cooperatives face specific risks due to their nature and owner-less endowment: - Managers could pursue interests other than the general interest of members (particular constituencies, public policy interests, or outside parties connected to managers). In hybrid groups, managers may favor listed subsidiaries over the group as a whole. - Growing endowment tempts management to engage in empire-building. One form is excessive retention of earnings encouraged by managers’ desire to retain or build their empire. Most cooperatives tend to retain the bulk of their earnings; managers lack incentives to change this and may expand the cooperative into ventures undesirably risky from members’ point of view. - Managers may seek or fail to prevent appropriation of (part of) the cooperative’s intergenerational endowment. Enjolras (2000) notes inefficiency in non-profits often stems from private appropriation of collective resources by a minority of stakeholders. In hybrid groups, endowment may be disproportionately at the disposal of outside investors. Managers may also seek or support demutualization regardless of members’ best interest. - Demutualization: - Defined: converting a cooperative to an investor-owned for-profit company, usually a listed joint-stock company. - Can be value-creating if it allows faster growth and higher profitability, but typically amounts primarily to redistribution of wealth, mainly at the expense of past and future generations of members. - Key points: - In most cases, demutualization amounts to appropriation of a cooperative’s intergenerational endowment by members at time of operation. Converting cooperative shares to joint-stock company shares extends ownership rights from nominal cooperative share value to full market value of net assets. - Members lose future benefits the cooperative would have provided as members and consumers. Davis (2001) argues demutualization is more favorable to older members than younger members because future benefits are higher for younger members; survivability of a cooperative under democratic voting depends on a majority of members being below the “preference switching” age. Conditions conducive to survival: a large competitive advantage, a long membership tenure, and a low growth rate of reserves. Davis also notes high capital adequacy requirements may encourage demutualization by increasing size of retained reserves. - For managers, demutualization typically implies an upward trend break in remuneration and wealth. Managers at listed joint-stock companies are usually significantly better paid than those at cooperatives of similar size and profitability. At demutualization, managers typically receive new remuneration schemes and often grants of shares and/or stock options. Weaker cooperative governance tends to produce more generous packages. Shiwakoti (2005) finds demutualization of building societies in the U.K. appears to have led to faster growth in management compensation without commensurate improvement in management performance. - Demutualization attracts speculators. In UK building societies, membership could require only opening an account and maintaining a token minimum balance; during 1990s demutualizations thousands of speculators opened accounts in societies likely to demutualize, often tilting the balance in favor of demutualization. - Governance bias: - Future generations of members—the constituency that loses most—are not involved in the decision-making process, creating a bias in favor of demutualization unless managers and current members altruistically defend future members’ interests. - Government intervention: - Governments have acted to defend future shareholders, often through restrictive legal frameworks that make demutualization difficult. Examples cited in the source: - U.K.: backlash from “carpetbagging” led to amendments to the Building Societies Act and societies’ statutes, making demutualization more difficult and less profitable for recent members. - France and the new SCE statute: require that in case of demutualization a cooperative’s reserves be transferred to another cooperative or used for general-interest purposes; new SCE legislation does not contain provisions allowing direct conversion to a for-profit company, only mechanisms for winding up an SCE or converting it into a cooperative under national legislation of a member state. - Evidence of consumer benefit from demutualization is mixed: - Drake and Simper (2003) find demutualization improves efficiency, financial performance and technological innovation, but find the UK banking market became less rather than more competitive since demutualization. - Ashton and Letza (2003) find mutual building societies provide savers higher rates of return than proprietary firms and demutualized former building societies. - Marshall et al. (1997) find demutualization led to branch closures in poorer areas. - Stealth demutualization: - Cooperatives can place activities in a joint-stock subsidiary and sell shares or merge it, potentially becoming minority shareholders in their former business. - Problems: persistent governance issues, difficulty justifying cooperative holding company’s continued existence and retaining members, underutilized managers, and possible investor resentment at cooperative’s retained powers as a large or dominant shareholder. - Institutional reforms: - Chaddad and Cook (2004) conclude future demutualization waves could be prevented if institutional innovation addresses two main structural weaknesses of cooperatives: governance and access to capital. *Source: _wp07159 - 73. Membership of a network may significantly reduce corporate governance risks* ### 89. Members of a cooperative typically bear little risk, which has upsides and ### _wp07159 - 89. Members of a cooperative typically bear little risk, which has upsides and ### Governance incentives and member risk-bearing - Members of cooperatives "typically bear little risk" because risks are "borne in the first instance by the cooperative’s intergenerational endowment." - Members often "do not receive high rates of remuneration on their investment, as profits are in part added to the endowment." - Result: "Members do not face much risk—downside or upside—because of the buffer function provided by the endowment." - In some jurisdictions members carry additional legal exposure: - "In Switzerland and Germany, members of cooperative banks are personally liable for losses, subject to a limit that exceeds the value of their member shares." - Uncertainty over enforceability: "It is not clear, though, that this liability can be called upon in practice." ### Balance of governance considerations - Asymmetric incentives: - "Incentives for management to take advantage of governance weaknesses do not seem matched by incentives for members to make governance mechanisms work." - Members: low incentives to "undertake costly efforts to participate in governance mechanisms" due to lack of ownership rights over the endowment and low risk-bearing costs. - Managers: presence of an endowment "provides incentives to exploit corporate governance weaknesses in order to build empires or appropriate part of the endowment." - Competitive markets: - "The more competitive a market is, the less consumer surplus there is likely to be gained from participating in the governance mechanisms of a cooperative." - In many banking markets "there is not enough to be gained for a member of a cooperative from seeking active involvement in its governance." - Outcomes: - "Governance challenges have led to the demise of quite a few cooperatives, although many others have prospered." - Non-monetary managerial motivations can mitigate governance weaknesses: "pride and moral suasion provide important motivation to managers," and "social standing and an elevated feeling of utility" are part of managers’ remuneration package. - Importance of manager selection: preference for "Social Economy Managers" versus "Business School Managers." ### Cooperatives and financial stability — specific risks - Prudential oversight implication: "Prudential authorities need to be conscious of the specific risks cooperative banks face, as well as of the potential impact they may have on the banking system as a whole." - Key risk drivers: "the combination of the governance challenges and the constraints cooperatives face in managing their capital." A. Experience to date - Lower risk-taking tendency: - Cooperative banks "generally have lower incentives to take on risks" due to lack of profit-maximization pressure and longer managerial horizons. - Historical evidence: "During the US savings and loans crisis, investor-owned S&Ls fared much worse than mutual S&Ls." - Findings: "Cooperative banks in France and Switzerland fared generally better than commercial banks during the banking problems of the early 1990s." - Vulnerabilities: - Concentrated credit risk: cooperatives' loan books are "correlated with each other due to cooperatives’ focus on a usually in at least some ways homogenous member base." - Revenue concentration: reliance on "the interest margin" increases vulnerability to "interest rate developments." - Historical episodes of stress: Spanish cooperative sector "suffered a significant shake-out and the demise of its central institution during the banking crisis of the 1980s"; Swedish cooperatives "suffered significant losses during the banking crisis of the early-1990s"; Portuguese cooperatives have "persistent problems with nonperforming loans." - Risk management improvements: "increased opportunities to hedge against interest rate risk and securitize loan portfolios" can help cooperatives reduce/manage risks. B. Adjustment and decision-making constraints - Adjustment difficulties: - Cooperatives "may have more difficulties adjusting to adverse circumstances and changing risks." - Example: Swedish cooperatives "did not survive the crisis of the early 1990s in a cooperative form" and demutualized to restore capital. - Fixed cost base and employee involvement make rapid cost-cutting difficult, though employee loyalty can be a stabilizing force. - Strategic risks: technological change and ventures into unfamiliar markets (e.g., derivatives) can create material risks. - Democratic decision-making tradeoffs: "Democratic decision-making may come at the expense of the speed and quality of decision-making," potentially causing "indecisiveness, conflict, slow adaptability, and an inability to jump on business opportunities." ### Capital and growth dynamics — mechanisms and constraints - Endowment accumulation: - "Most cooperatives are designed to perpetually accumulate capital, thus building an ever-larger intergenerational endowment." - Capital accumulation mechanisms established when cooperatives faced capital shortages often remain in place long after shortages abate. - Key constraints and characteristics: - Variability and potential run risk: members can withdraw membership and request share reimbursement, so "cooperative capital ... is variable and cooperatives could theoretically face a 'run on capital'." In practice, this has not been a pervasive issue given endowment buffers and withdrawal mechanisms. - Accounting treatment: IAS32 reclassified cooperative capital "in principle as debt rather than equity" but IASB clarification (IFRIC 2) specifies conditions for equity classification when redemption is unconditionally refused or unconditionally prohibited. - Pay-out restrictions and practices: - Legal/statutory limits on shareholder remuneration exist in many cooperatives (examples given: Swiss Raiffeisen, some French cooperatives, Rabobanks, Italian credit cooperatives). - "Cooperatives are not at risk of seeing their share price traded at a discount because of dissatisfaction with their pay-out policies." - Capital raising frictions: - Cooperatives can raise capital by increasing membership or asking members for more shares, issuing securities, or mobilizing network capital, but each has drawbacks (low member incentives to buy more shares, members themselves may lack resources, legal limits on share holdings, higher cost of alternative securities, cumbersome decision procedures). - Expansion financing constraints: - Acquisitions not structured as mergers with another cooperative "cannot be financed through the issuance of new equity" and must be funded by debt or liquid assets, worsening solvency/liquidity. Some cooperatives "have resorted to listing joint-stock subsidiaries" to finance growth. - Behavioral equilibrium: "it is rational for cooperatives to accumulate large reserves by retaining earnings" because of the fickle nature of cooperative capital and the need for significant reserve buffers. ### Empirical evidence on pay-out behavior and capital dynamics (selected figures preserved) - Table 12. Cooperative Banks—Pay-out Ratios (In percent) - Finland: 1994 0.00 1997 7.25 2000 5.33 2003 11.29 - France 1/: 1994 31.82 1997 31.03 2000 25.00 2003 3.33 - Germany: 1994 67.74 1997 73.08 2000 110.53 2003 69.23 - Spain: 1994 30.91 1997 25.41 2000 27.36 2003 28.05 - Differences with banking system total 2/ (selected): - France: 1997 -42.65 2000 -23.15 2003 -46.67 - Spain: 1994 -22.42 1997 -21.26 2000 -22.02 2003 -22.68 - Notes: n.m. = comparison not meaningful due to banking system losses resulting in a negative pay-out ratio for the banking system as a whole; 1/ Excluding savings banks before 2000. - Table 13. Selected European Cooperative Banking Groups—Capital Dynamics (In percent) - Crédit Agricole: CAR 10.4, ROE 8.6, Average Capital Growth Rate 7.5, Average Pay-out Ratio 23.8, Observation period for capital growth rate 2001-2004, for pay-out ratio 2001-2004 - Banques Populaire: CAR 11.7, ROE 10.1, Average Capital Growth Rate 16.8, Average Pay-out Ratio 12.8, Observation period for capital growth rate 1999-2004, for pay-out ratio 1999-2000 - Rabobank: CAR 11.4, ROE 8.1, Average Capital Growth Rate 11.5, Average Pay-out Ratio 4.6, Observation period for capital growth rate 1997-2004, for pay-out ratio 1997-2004 - OP Bank Group: CAR 15.8, ROE 10.8, Average Capital Growth Rate 21.2, Average Pay-out Ratio 17.4, Observation period for capital growth rate 1997-2004, for pay-out ratio 2002-2004 - (Other group figures and observation-period notes preserved in source.) - Table 14. France: Pay-out Ratios of Banks (Consolidated basis, In percent) - Commercial banks (overall / share of minority interests / period covered): - Société Générale: 34.7 / 32.6 / 1997-2003 - BNP Paribas: 32.8 / 30.2 / 1996-2002 - Crédit Lyonnais: 35.2 / 29.3 / 1997-2002 - CCF: 55.1 / 53.2 / 1997-2001 - Cooperative banks: - Crédit Agricole: 12.3 / 10.6 / 1999-2002 - Caisses d’Epargne 1/: n.a. / 7.6 / 2001-2002 - Crédit Mutuel 2/: 12.9 / 10.2 / 2001 - Banques Populaires: 17.1 / 9.1 / 2000-2001 - Notes: 1/ Observation period for Caisses d’Epargne limited to 2001-2002; 2/ Crédit Mutuel Centre Est Europe only. - Table 15. Italy: Bank Capital Dynamics (2002–04, in percent 1/) - Dividends / total assets: Banking system 0.21, Banche Popolari 0.23, Banche di Credito Cooperativo 0.04 - Allocations to supervisory capital / total assets: Banking system 0.26, Banche Popolari 0.24, Banche di Credito Cooperativo 0.78 - Return on equity: Banking system 7.9, Banche Popolari 7.6, Banche di Credito Cooperativo 6.7 - Solvency ratio: Banking system 11.4, Banche Popolari 10.1, Banche di Credito Cooperativo 17.8 - Growth in supervisory capital from 2002 to 2004: Banking system 11.0, Banche Popolari 15.3, Banche di Credito Cooperativo 15.2 - Note: 1/ Averages over 2002–04 period, except for growth in supervisory capital. The figures exclude a number of banks which do not report income statement data. ### Key policy-relevant observations (implicit in analysis) - Supervisory focus should account for cooperatives’: - Governance-related incentives for managerial appropriation of endowments. - Capital structure idiosyncrasies: variable cooperative capital, pay-out restrictions, and limited rapid access to new equity. - Concentration of credit and interest-rate risks due to business model and member base homogeneity. - Risk mitigation opportunities include leveraging market instruments ("hedge against interest rate risk and securitize loan portfolios") and monitoring expansion financing methods (use of listed subsidiaries, network support). *Source: _wp07159 - 89. Members of a cooperative typically bear little risk, which has upsides and downsides* ### 103. Low pay-out ratios mean that highly profitable cooperatives can enjoy rapid ### _wp07159 - 103. Low pay-out ratios mean that highly profitable cooperatives can enjoy rapid ### Capital growth, profitability, and pay-out ratios - Key relationship: ΔCapital = ROE * (1 – POR) - Where: ΔCapital = growth rate of capital; ROE = return on equity; POR = pay-out ratio. - Comparative growth condition for two banks (cooperative vs commercial): - ROE_coop / ROE_com = (1 – POR_com) / (1 – POR_coop) - Numerical example from source: - If a cooperative has a pay-out ratio of 10 percent and a commercial bank pays out 35 percent of its profits, the cooperative needs to achieve 72.2 percent of the profitability level of the commercial bank to realize the same organic growth rate. - Observation: Low pay-out ratios allow highly profitable cooperatives to enjoy rapid organic capital growth; capital has been expanding rapidly at some European cooperative banks and banking groups. ### Risks from excess capital accumulation and management incentives - Excess capital that cannot be shed may encourage: - Empire-building by management. - Forced or indiscriminate expansion even in absence of attractive opportunities. - Drivers and evidence: - Managers may face pressure to expand to fend off claims on excess capital (e.g., tax authorities, members) or to avoid showing low ROE. - Literature notes dividends and share repurchases can reduce potential overinvestment by management (Allen and Michaely (2002)); risks and costs of empire-building are higher with entrenched managers (Hughes et al. (2003)). - Potential consequences: - Ventures into unfamiliar businesses. - Taking on challenges unsuited to cooperative governance or structure. ### Capital-raising constraints and instruments - Many growing cooperatives still face capital shortages and have sought alternative capital sources. - Examples of measures used: - Issuance of non-voting equity (noted in many French cooperatives). - Experimentation with equity-like debt instruments and hybrid securities. - Caveat: Such instruments are described as not as attractive as cooperative capital, and not as attractive as reserves. ### Fundamental vulnerability - Cooperatives' inability to: - Shed excess capital, - Fully rely on existing capital in times of need, - Raise capital as needed, especially in crises, is identified as a fundamental vulnerability given banking’s capital dependence. ### Asymmetric consolidation between cooperative and commercial banks - Cooperation with commercial banks: - Mergers between cooperatives and commercial banks are possible only on a mutually agreed basis; hostile takeovers of cooperatives are impossible. - A common route: place commercial activities in a joint-stock subsidiary and merge that subsidiary, often leaving the cooperative as dominant shareholder (more akin to acquisition by the cooperative). - Typical pattern in Europe: - Consolidation most often takes the form of acquisitions of commercial banks by cooperatives. - Examples: each French cooperative group has acquired at least one commercial bank; banche popolari in Italy acquired many small commercial and former savings banks; Austrian cooperative banking groups acquired banks in CEE countries. - Obstacles to mergers: - Mergers between cooperatives in different networks face legal, operational, and integration difficulties (different laws/by-laws, integrated operations, brand/IT/management changes). - Cross-border mergers historically difficult, though the new European cooperative society (SCE) statute (from August 2006 onwards) allows full cross-border mergers by forming an SCE. - Competitive implications: - Cooperatives may increase market share in consolidation waves due to asymmetry in buy/sell capabilities, unless some cooperatives demutualize. - Cooperatives may be able to outbid commercial banks in acquisitions because members are not primarily focused on ROE; countervailing constraint is inability to pay with shares. ### Competition effects and systemic implications - Cooperative growth strategies: - Market share-based: sell at lower prices and accept lower profitability. - Capital-based: rely on high organic capital growth via retained profits (profits are main source of fresh capital for cooperatives). - Possible system-wide outcomes: - Overcapacity, macroeconomic inefficiency, waste, and prolonged adjustment periods. - Burden of adjustment may fall disproportionately on commercial banks (reduced profitability, restructuring and branch closure costs). - Empirical findings cited: - Higher government ownership associated with lower development and higher fragility (Barth, Caprio and Levine (1999)); presence of non-profit-maximizing entities may make systems more fragile (Goodhart (2004)). - Čihák and Hesse (2007): a high presence of cooperative banks makes weak commercial banks less stable, but overall cooperative presence yields a positive impact on overall banking system stability due to cooperatives’ inherent stability. ### Prudential challenges specific to cooperatives - Basel II third pillar limitations: - Third pillar (market discipline via disclosure) is less effective for cooperative banks due to often weaker disclosure practices and fewer market mechanisms to discipline them. - Cooperatives rarely rely on interbank markets or debt issuance; loyal, insured retail depositors may not provide timely disciplining signals. - Rating agencies play an increasing role, mostly at apex or network level rather than individual banks. - Contagion risks: - Cooperative-to-commercial contagion more likely via liquidity shocks: cooperatives are typically net lenders in interbank markets and may cut exposures in stress times, causing liquidity strains elsewhere. - Supervisory and political economy pressures: - Cooperatives’ not-for-profit statutes, large membership (e.g., 15.5 million in Germany), retail orientation, community links, and deposit/branch market shares can generate public sympathy and political support. - These factors may create pressure to “go soft” in regulation and supervisory enforcement and complicate resolution when cooperatives face difficulties. - Example: Irish League of Credit Unions obtained a specific regulatory and supervisory framework recognizing not-for-profit orientation and volunteer human resources. - Corporate governance mismatch: - Applying governance regulations designed for commercial banks to cooperatives may fail to address cooperative-specific risks. - Supervisory resource and delegation issues: - Large numbers of small cooperatives often lead supervisors to rely on apex organizations for supervision. - Risks: shifting balance of power towards the center; apex organizations may not exercise delegated supervisory tasks to the same standards as supervisors themselves. ### Current policy framework and attention to cooperatives - Basel II: - November 2005 update of the Basel II document contains no cooperative-specific discussion (searches for “cooperative” and “co-operative” returned no relevant results; “mutual” appears only followed by “fund”). - Basel Committee’s corporate governance publication (2005a) does not contain cooperative-specific discussion. - Corporate governance initiatives: - Recent reforms (e.g., Sarbanes-Oxley) have mostly indirect effects on cooperatives. - Lack of cooperative-specific crises (e.g., “absence, thus far, of a cooperative Enron”) contributes to limited attention. - FSAPs: - Cooperative banks have mostly escaped close attention in European FSAPs, except in some cases (notably France and Germany). - Cooperative-specific focus in FSAPs has centered on mutual support and deposit insurance mechanisms, efficiency, and consolidation issues; some FSAPs gently encouraged demutualization. ### Tentative agenda for reform and further research — corporate governance measures - Reform imperatives: - Need for change in corporate governance systems and capital management for cooperatives; the precise form of changes requires further research. - Proposed measures to improve governance (many require cooperative action; prudential authorities can encourage adoption): - Raise transparency and disclosure standards to be at least as demanding as for listed companies; networks with significant integration should report on a consolidated basis. - Consider separation of external and internal governance mechanisms in networks (e.g., parallel organizational structures) to minimize interference. - Establish mechanisms for continuous dialogue between managers and members/stakeholders to avoid disconnection as cooperatives grow. - Encourage voluntary self-regulation at higher levels within networks to supplement existing self-regulation. - Increase exposure to price mechanisms, market signals, and delegated monitoring to improve governance, visibility, and market access. - Increase members’ minimum investment or make members liable for part of losses to strengthen incentives for governance participation. - Ensure legislation and cooperative statutes allow members to organize independently from management and effectively challenge management at annual meetings, including possibilities to make game-ending and downsizing decisions even without management approval. - Board functioning improvements (examples already applied in some cooperatives): - Co-opt non-members or appoint independent directors to provide expertise and improve oversight. - Use election committees and independent vetting to improve candidate quality, taking care not to impede democratic functioning. - Provide training and support for board members and members to reduce information asymmetries and improve board decision-making. - Design tailored incentive structures for management linked to specific strategic or management objectives to better align interests with stakeholders. *Source: _wp07159 - 103. Low pay-out ratios mean that highly profitable cooperatives can enjoy rapid* ### 125. Some kind of independent external oversight may be needed to ensure that ### _wp07159 - 125. Some kind of independent external oversight may be needed to ensure that ### Independent external oversight and member interests - The existence of a sizable intertemporal endowment coupled with the inability to identify or involve all relevant stakeholders creates a fundamental risk that represented stakeholders will seek to appropriate the endowment, at the expense of the unrepresented ones. - Addressing this risk seems to warrant some kind of independent oversight, in particular with respect to fundamental decisions affecting the endowment. - Bebchuk et al. (2004) argue that the owners of a firm should be able to take fundamental decisions, such as “rule-of-the-game” decisions, “game ending” decisions, and “scaling down” decisions. This would reduce problems of empire building and free cash flow. ### Demutualization, winding down, and equitable treatment of members - Mechanisms could be devised to allow winding down operations of cooperatives or transforming them into joint-stock companies in an equitable way, if and when a majority of members wish to do so and subject to the independent oversight proposed above. - Options discussed include: - Imposing a windfall tax on members; - Distributing the shares in a demutualized company among members in proportion to their length of membership and/or the volume of business they have conducted with the cooperative; - Closing the cooperative for new membership in the run-up to demutualization; - Donating the equivalent of the cooperative’s reserves to a charitable foundation, in cash or in the form of securities that do not leave that foundation in control of the former cooperative (e.g., non-voting shares, profit-sharing subordinated perpetual debt, or shares that are to be sold in the market within an agreed timeframe). ### Addressing financial stability issues - Increase cooperatives’ ability to manage their capital: - To reduce risks of empire-building and “forced growth,” cooperatives need options to shed excess capital (examples: higher pay-out ratios; donations to other cooperatives or charitable purposes). - Equity and governance challenges (who chooses the recipients of any money?) must be addressed in designing such mechanisms. - Improve ability to raise capital quickly in crises: - Within networks of cooperatives, mechanisms to raise capital exist, but correlated risks and increasing integration raise the possibility that the network or sector as a whole might need an equity injection (example given: Sweden in the early 1990s). - Establish a level playing field between cooperative and commercial banks: - Any legal or regulatory prerogatives that one category enjoys over the other, such as exclusive distribution rights for certain financial products, should be removed. Since the 1980s, most such prerogatives have been removed. - Prudential authorities’ assessment weights: - Authorities may need to attach relatively low weights in their assessments to the profitability of cooperative banks, as measured in terms of return on equity. - Any slack in terms of profitability needs to be to the benefit of members or other stakeholders, in transparent ways, and should not pose a stability threat to the rest of the banking system. - Providing cooperatives with mechanisms and encouragement to shed excess capital might be the most effective solution. - Comparative disadvantages in certain risky activities: - Factors that could contribute to disadvantages include: less effective market discipline; information asymmetries in favor of management; potential difficulties attracting top talent; laymen exercising significant managerial or oversight functions; potentially slow democratic decision-making; lower flexibility; low incentives and possibilities for members to monitor management; a traditional retail orientation; and incentives produced by the presence of an owner-less endowment. - Cost base and inflexibility: - Cooperatives and their prudential supervisors need to pay attention to cost bases and the degree to which these are inflexible on the downside. - Branch-based expansion strategies may increase risks cooperatives could face during downturns. - Hybrid groups tension: - Hybrid cooperative/joint-stock groups risk being “stuck in the middle,” making compromises between stakeholders and failing to enjoy the advantages of either governance form. - Possible outcomes: benefits to members may be cut back to increase profits; cooperative joint-stock securities may be valued below equivalent purely commercial securities. - Outlook and responsibilities: - Cooperative banks have good reasons to count on continued success, provided the challenges outlined can be overcome. - Roles: sector, policymakers, prudential authorities, and researchers all play important roles. - Main challenge for public policymakers and prudential authorities: take into account the specific nature of cooperatives in their analysis and decision-making. ### Suggested areas for further research - Theoretical, policy, and managerial aspects of the dynamics of cooperatives’ intergenerational endowments and the incentive structures they generate; - Competition between various ownership forms in banking and the financial stability implications of this competition; - The organization of independent oversight of cooperatives in ways that do not create unnecessary bureaucracy, undue influence, or excessive restrictions on the management of cooperatives; - The governance and managerial challenges and dynamics presenting themselves in hybrid cooperative/joint-stock groups; - Governance issues within networks of cooperatives; and - Further analysis of basic corporate governance mechanisms in cooperatives and possible improvements to these mechanisms. ### Measuring the importance of cooperative banks - Factors leading to tendency to underestimate cooperatives: - Total asset measures understate cooperative importance in domestic retail markets because cooperatives are typically less active in financial and interbank markets and have less international activities; market shares measured by deposits, credit and branch networks tend to be higher than those based on total assets. - Examples: - The Swiss Raiffeisen group represents only about 4.3 percent of the country’s banking system in terms of assets, yet it has the biggest retail branch network in Switzerland, 12.4 percent of the domestic credit market, and 13 percent of domestic deposits. - The group Crédito Agrícola represents less than three percent of the Portuguese banking system’s assets, but it has almost six percent of the system’s deposits. - Cooperative banks in Spain held 3.8 percent of banking system assets at end-2004, but 4.9 percent of loans and 5.9 percent of deposits. - German cooperatives only held about nine percent of banking system assets as of end-2003, but their market share of domestic deposits was close to 19 percent. - Unconsolidated data understate cooperative group market share because commercial banks can be owned by cooperatives, but the reverse is not possible. - Examples: unconsolidated Italian banking market statistics understate banche popolari market share; French statistics on an unconsolidated basis do not reflect cooperative banking groups’ ownership of important commercial banks. - Some joint-stock institutions (The Cooperative Bank in the U.K., Landshypotek in Sweden, Arbejdernes Landsbank in Denmark) are set up as joint-stock entities but are owned by cooperative entities and/or act in practice as cooperatives. - Aggregate data do not reflect importance in specific market segments: - Many cooperative banks are disproportionately present in the countryside. - Examples: - The cajas rurales account for about five percent of the Spanish banking market on various measures, but they control about half the retail market in some rural provinces. - Almost 80 percent of bank branches in Paris belong to commercial banks, but in rural regions cooperative branches vastly outnumber commercial bank branches (by a ratio of more than 3 to 1 in regions such as Alsace, Auvergne, and Franche-Comté). - Crédit Agricole has a 90 percent market share in France’s agricultural banking market. - Cooperative structures remain, directly or indirectly, key shareholders in some commercial banks. - Example: In Belgium, two largest cooperative banking groups demutualized through mergers with commercial banks, but the cooperative groups behind them still exist and are the largest shareholders in both successor banking groups. - Table 16. Cooperative Banks—Estimated Deposit Market Shares (Consolidated basis, in percent) - 50-100 percent: France - 20-50 percent: Netherlands, Austria, Finland, Italy - 5-20 percent: Germany, Luxembourg, Switzerland, Ireland, Portugal, Spain, U.K. - 0-5 percent: Denmark, Greece, Belgium, Sweden - 0 percent: None - Source: IMF Staff estimates - Note: Figures as of end-2004 for certain examples. ### Coverage of cooperative banks in European FSAPs (selected country findings) - Germany: - FSSA noted (i) cooperative (and public) ownership had precluded cross-pillar consolidation; (ii) exit of troubled cooperative banks had been achieved exclusively through mergers, not liquidations; (iii) stress tests found smaller cooperative and savings banks were more sensitive to interest rate risk; (iv) cooperative pillar had consolidated wholesale back office and ancillary institutions; (v) considerable scope for efficiency gains expected via planned consolidation. - Report recommended changes to the institutional protection scheme for the cooperative pillar and suggested cooperative banks might explore transforming into regular companies to mobilize additional capital. (IMF Country Report No. 03/343) - France: - FSSA noted (i) mutual groups were a key driving force in banking sector consolidation; (ii) four of the six large banking groups were organized on a mutual basis, but some created joint-stock affiliates; (iii) capital accumulation strengthened resilience, but mechanisms keeping disbursement of profits low made this harder to control for mutual banks and could encourage expansion through expensive takeovers or risky new ventures; (iv) riskiness likely to increase as mutuals undertook lines of business removed from local retail banking; (v) top-down and bottom-up decision-making could raise governance issues, but outside scrutiny had increased as mutuals issued bonds and shares in subsidiaries. - Report recommended removal of obstacles to higher remuneration of members of mutual banks and reconsideration of legal impediments to demutualization. BCP assessment recommended authorities follow initiatives for expansion of large banking organizations, notably mutual groups. (IMF Country Report No. 04/344) - Switzerland: - FSSA noted (i) earnings performance in the Raiffeisen banks had been “particularly good”; (ii) Raiffeisen banks lost only 1 percent of loan volume in the 1991-96 real estate crisis against 8 percent for the banking system overall; (iii) Raiffeisen banks had not been included into stress tests due to data constraints; (iv) profitability and growth potential of many small Raiffeisen banks was limited. - Main challenges: achieve economies of scale and reduce portfolio concentration in mortgages; necessary investments in new technology and cost cutting likely to result in further cooperation and consolidation. (IMF Country Report 02/108) - Austria: - FSSA noted cooperative banking groups constituted two of the seven pillars and had formed multi-pillared integrated groups with apex banks and formalized cross-guarantees; sectoral support mechanisms discussed in detail. - Report pointed to high bank and branch density contributing to low domestic profitability and efficiency; cooperative nature may have played a role. (IMF Country Report 04/238) - Netherlands: - FSSA contained no specific recommendations, but noted large cooperative bank presence may have contributed to below-average operational efficiency despite high concentration. - AML/CFT assessment noted delegated fit and proper tests by Rabobank’s central organization on local cooperative banks were not as robust as those DNB undertook itself; recommended rectification. (IMF Country Report 04/312) - Finland: - FSSA contained no cooperative-specific findings or recommendations; noted retail orientation of the OP Bank group and role of mutual support systems. (IMF Country Report 01/214) - Italy: - FSSA contained no cooperative-specific findings except a brief discussion of the deposit insurance scheme for credit cooperatives, reported to have worked well. (IMF Country Report 06/112) - U.K.: - Authorities had conducted stress tests on aggregated data for building societies showing no vulnerabilities; otherwise no cooperative-specific findings or recommendations. (IMF Country Report 03/46) - Sweden, Luxembourg, Greece: - No cooperative-specific findings or recommendations. (IMF Country Reports 02/161, 02/116 and 06/6) *Source: Excerpt from IMF working paper _wp07159 (text provided).* ### REFERENCES ### _wp07159 - REFERENCES ### Corporate governance and ownership structure - Adams, Renée and Hamid Mehran, 2003, “Is Corporate Governance Different for Bank Holding Companies?” in: Federal Reserve Bank of New York Economic Policy Review, April, pp. 123-142. - Allen, Franklin and Roni Michaely, 2002, “Payout Policy,” Wharton Financial Institutions Center Working Paper, 146 p. - Arnott, Robert D., and Clifford S. Asness, 2003, “Surprise! Higher Dividends = Higher Earnings Growth,” in: Financial Analysts Journal 59, 1 (January/February), pp. 70-87. - Bebchuck, Lucian Arye, 2004, “The case for Increasing Shareholder Power,” draft working paper [check whether it was published in the Harvard Law Review]. - Bebchuck, Lucian Arye, Jesse M. Fried, and David J. Walker, 2001, “Executive compensation in America: Optimal Contracting or Extraction of Rents?” NBER Working Paper 8661, 92 p. - Becht, Marco, Patrick Bolton and Ailsa Röell, 2002, “Corporate Governance and Control,” European Corporate Governance Institute - Finance Working Paper No. 02/2002, 168 p. - Fama, Eugene F., 1980, “Agency Problems and the Theory of the Firm,” in: The Journal of Political Economy, Vol. 88, No. (April), pp. 288-307. - Hart, Oliver and John Moore, 1998, “Cooperatives versus Outside Ownership,” National Bureau of Economic Research Working Paper No. 6421, 52 p. - Hermalin, Benjamin E., 2005, “Trends in Corporate Governance,” in : The Journal of Finance, Vol. LX, No. 5, October, pp. 2351-2384. - Macey, Jonathan R., and Maureen O’Hara, 2003, “The Corporate Governance of Banks,” in: Federal Reserve Bank of New York Economic Policy Review, April, pp. 91-107. - Tirole, Jean, 1999, “Corporate Governance,” Center for Economic Policy Research Discussion Paper No. 2086, 48 p. - Williamson, Oliver E., 2002, “The Theory of the Firm as Governance Structure: From Choice to Contract,” in : Journal of Economic Perspectives, Vol. 16, No. 3, pp. 171-195. ### Cooperatives, mutuals, and member-based financial institutions - Anheier, Helmut and Avner Ben-Ner, 1997, “Shifting Boundaries – Long-term changes in the size of the for-profit, nonprofit, cooperative and government sectors,” in : Annals of Public and Cooperative Economics 68:3, pp. 335-353. - Bacchiega, Alberto, and Gianni de Fraja, 2004, “Constitutional Design and Investment in Cooperatives and Investor-Owned Enterprises,” in: Annals of Public and Cooperative Economics 75:2, pp. 265-293. - Béland, Claude, 1999, “Co-operative banks in a financial world in mutation,” in: International Co-operative Banking Association Journal, No. 11, pp. 64-70. - Brazda, Johann and Robert Schediwy, 2001, “Preconditions for Successful Co-operative Ventures in the Light of Historical Evidence,” in: Review of International Co-operation, Vol. 94, No.1, pp. 35-42. - Chaddad, Fabio R., and Michael L. Cook, 2004, “The Economics of Organization Structure Changes: A US Perspective on Demutualization,” in: Annals of Public and Cooperative Economics 75:4, pp. 575-594. - Cornforth, Chris, 2002, “Making Sense of Co-operative Governance: Competing Models and Tensions,” in: Review of International Co-operation, Vol. 95 No. 1, pp. 51-57. - Cornforth, Chris, 2004, “The Governance of Cooperatives and Mutual Associations: A Paradox Perspective,” in: Annals of Public and Cooperative Economics 75:1 2004, pp. 11-32. - Desrochers, Martin and Klaus P. Fischer, 2005, “The Power of Networks: Integration and Financial Cooperative Performance,” in : Annals of Public and Cooperative Economics 76:3, pp. 307-354. - Enjolras, Bernard, 2000, “Coordination failure, property rights and non-profit organizations,” in: Annals of Public and Cooperative Economics 71:3, pp. 347-374. - Gueslin, André, 2002, “Les Banques de l’Économie Sociale en France : Perspectives Historiques,” in: Revue d’Economie Financière, No. 67, pp. 21-44. - Hansmann, Henry, 1996, “The ownership of enterprise,” The Belknap Press of Harvard University Press, 372 p. - Kaplan de Drimer, Alicia, 1997, “Will cooperatives be able to preserve their nature and their members’ general interest in the face of structural changes?” in: Annals of Public and Cooperative Economics 68:3, pp. 469-483. - Lees, M., 1995, “Corporate Goverance in European co-operatives,” in: The World of Co-operative Enterprise 1995, Plunkett Foundation, Oxford. - Pedelty, Mervyn, 1999, “Capital, Democratisation and Governance,” in: International Co-operative Banking Association Journal, No. 11, pp. 5-18. - Pflimlin, Etienne, 1996, “Technical/Democratic Supervision in European Co-operative Banks,” in: Review of International Co-operation Vol. 89, No.4, pp. 27-33. - Spear, Roger, 2004, “Governance in Democratic Member-based Organisations,” in: Annals of Public and Cooperative Economics 75:1, pp. 33-59. - Tremblay, Benoît, 2001, “Cooperative banks and the mobilization of capital : to what end, with which partners and with what consequences for members?” in: International Co-operative Banking Association Journal No. 13, pp. 5-23. ### Cooperative, mutual and credit-union empirical studies and ratings - Akella, Srinivas R., and Stuart I. Greenbaum, 1988, “Savings and Loan Ownership Structure and Expense-Preference,” in: Journal of Banking and Finance 12, pp. 419-437. - Altunbas, Yener, Lynne Evans, and Philip Molyneux, 2001, “Bank Ownership and Efficiency,” in : Journal of Money, Credit and Banking, Vol. 33, No. 4, pp. 926-954. - Ashton, John K., and Stephen Letza, 2003, “The Differential Returns Offered by Mutually Owned and Proprietary UK Depository Institutions: 1993-2000,” in: Annals of Public and Cooperative Economics 74:2, pp. 183-204. - Crespi, Rafel, Miguel A. García-Cestona, and Vicente Salas, 2003, “Governance Mechanisms in Spanish Banks. Does Ownership Matter?” European Corporate Governance Institute, Finance Working Paper No. 19/2003, 38 p. - Fischer, Klaus P., and Ridha M. Mahfoudhi, 2002, “Corporate governance and rating: Do agencies rate mutual bank bonds fairly?” Centre de recherce en économie et finance appliquées (CREFA) Working Paper No. 01-12, 33 p. - Fitch, 2001, “The European Co-operative Banking Sector,” Financial Institutions Special Report, 12p. - Fitch, 2003a, “Update on European Co-operative Banking,” October 6, 11p. - Fitch, 2004a, “Spanish Rural Co-operatives: A Small but Respectable Place in Spanish Banking,” Special Report, April 30, 10 p. - Fitch, 2005a, “The Framework for Corporate Governance in Major European Banking Systems,” April 5, 18 p. - Gurtner, Emmanuelle, Mireille Jaeger and Jean-Noël Ory, 2002, “Le Statut de Coopérative est-il Source d’Efficacité dans le Secteur Bancaire?” in : Revue d’Economie Financière, No. 67, pp. 133-164. - Goddard, John, and John O.S. Wilson, 2005, “US Credit Unions: An Empirical Investigation of Size, Age and Growth,” in: Annals of Public and Cooperative Economics 76:3, pp. 375-406. - McKillop, Donal, and Charles Ferguson, 1998, “An Examination of Borrower Orientation and Scale Effects in UK Credit Unions,” in: Annals of Public and Cooperative Economics 69:2, pp. 219-242. - Mester, Loretta, J., 1991, “Agency Costs among Savings and Loans,” in: Journal of Financial Intermediation Vol 1, pp. 257-278. - Mester, Loretta J., 1993, “Efficiency in the Savings and Loan Industry,” in : Journal of Banking and Finance 17, pp. 267-286. - Valnek, Tomas, 1999, “The comparative performance of mutual building societies and stock retail banks,” in: Journal of Banking & Finance 23, pp. 925-938. - Vittas, Dimitri, 1991, “Measuring Commercial Bank Efficiency: Use and Misuse of Bank Operating Ratios,” World Bank, Policy Research Working Paper, No. WPS 806, 54 p. ### National and regional studies, policy, and regulatory perspectives - Allard, Céline, and Wim Fonteyne, 2004, “Public Intervention in Financial Markets: Obstacles to Monetary Transmission?” in France: Selected Issues, IMF Country Report No. 04/346 (Washington: International Monetary Fund). - Barth, James R., Gerard Caprio Jr., and Ross Levine, 1999, “Banking Systems Around the Globe: Do Regulation and Ownership Affect Performance and Stability?” World Bank Policy Research Working Paper No. 2325. - Basel Committee on Banking Supervision, 2005a, “Enhancing corporate governance for banking organisations,” Consultative Document, Bank for International Settlements, July, 21 p. (available at: http://www.bis.org/publ/bcbs117.pdf) - Basel Committee on Banking Supervision, 2005b, “International Convergence of Capital Measurements and Capital Standards – A revised framework,” Bank For International Settlements (updated November 2005), 272 p. (available at: http://www.bis.org/publ/bcbs118.pdf). - Brunner, Allan; Jörg Decressin; Daniel Hardy; and Beata Kudela, 2004, “Germany’s Three-Pillar Banking System – Cross-country Perspectives in Europe,” IMF Occasional Paper 233, 46 p. - Douère, Raymond, 1998, “Modernisation des Caisses d’Epargne,” Rapport de Mission and Présentation à la Presse, Ministère de l’Economie, des Finances et de l’Industrie (MINEFI), France. Available at : http://www.minefi.gouv.fr/ - European Association of Cooperative Banks, 2004, “Cooperative Banks in Europe: Values and Practices to Promote Development,” 13 p. Available at http://www.eurocoopbanks.coop/ - European Commission, 2001, “Co-operatives in enterprise Europe,” Draft consultation paper, Brussels, 33 p. (available at http://europa.eu.int) - European Commission, 2003, “Mutual Societies in an Enlarged Europe,” Consultation Document, October 3, 28 p. (available at http://europa.eu.int/comm/enterprise/entrepreneurship/coop/mutuals-consultation/doc/mutuals-consult-doc-en.pdf ) - OECD, 2004, “OECD Principles of Corporate Governance,” available at: http://www.oecd.org/dataoecd/32/18/31557724.pdf ### Banking behavior, incentives, and market dynamics - Bolton, Patrick, José Scheinkman, and Wei Xiong, 2003, “Executive Compensation and Short-termist Behavior in Speculative Markets,” mimeo, Princeton University. - Deshmukh, Sudhakar D., Stuart I. Greenbaum and Anjan V. Thakor, 1982, “Capital Accumulation and Deposit Pricing in Mutual Financial Institutions,” in: The Journal of Financial and Quantitative Analysis, Vol. 17, No. 5, pp. 705-725. - Hughes, Joseph P., William W. lang, Loretta J. Mester, Choon-Geol Moon, and Michael S. Pagano, 2003, “Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance,” in: Journal of Banking & Finance 27, pp. 417-447. - John, Kose and Yiming Qian, 2003, “Incentive Features in CEO Compensation in the Banking Industry,” in: Federal Reserve Bank of New York Economic Policy Review, April, pp. 109-121. - Rajan, Raghuram G., 1994, “Why Bank Credit Policies Fluctuate: A Theory and Some Evidence,” in: The Quarterly Journal of Economics, Vol. 109, No. 2 (May), pp. 399-441. - Stiglitz, Joseph E., 1990, “Peer monitoring and credit markets,” in: The World Bank Economic Review, Vol. 4, No. 3, pp. 351-366. - Hoff, Karla, and Joseph E. Stiglitz, 1990, “Imperfect Information and Rural Credit Markets – Puzzles and Policy Perspectives,” The World Bank Economic Review, Vol. 4, No. 3, pp 235-250. ### Sector-specific notes, case studies, and reviews - Belaisch, Agnès, Laura Kodres, Joaquim Levy and Angel Ubide, 2001, “Euro-Area Banking at the Crossroads,” IMF Working Paper WP/01/28, 74 p. - Dambrine, Patricia, 2003, “Groupe Banque Populaire,” Moody’s Investors Service Global Credit Research, November, 16 p. - Dawson-Kropf, Michael, 2003, “DZ Bank Deutsche Zentral-Genossenschaftsbank AG,” Moody’s Investors Service Global Credit Research – Analysis, 12 p. - Lepreux, Jean-Luc, 2000, “French Mutual Banking Groups – Rating Methodology,” Moody’s Investors Service Global Credit Research, August 2000, 13 p. - Theodore, Samuel S., 2003, “Rating Outlook for European Banks 2003,” Moody’s Investors Service Global Credit Research – Special Comment, January, 13 p. - Merc er Oliver Wyman, 2003, “Mutuality Matters,” Perspectives – Retail practice, June, 7 p. *Reference list extracted from _wp07159 - REFERENCES* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07159.pdf_