1. An Overview of Cooperative Banking in Europe

Raiffeisen’s cooperative movement has religious and Christian roots, while Schulze-Delitzsch is a liberal figure who sees in credit cooperation a means to provide workers equality of opportunities rather than equality itself.

For a comparative presentation of European cooperative systems, which includes also credit cooperatives and credit unions, see Karafolas (2016).

According to the International Co-operative Alliance (ICA), a cooperative bank is “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. Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others”.

For an overview of the role of cooperative banks and other smaller institution in financing SMEs and small midcaps in Europe, see Lang et al. (2016).

While in the past membership was necessary to be able to request a loan, nowadays cooperative banks serve also non-members. This, in addition to the heterogeneity of clients, challenges the functioning of the cooperative banks’ governance.

Moreover, in case of groups, the level of integration influences whether the entities which compose the group report either consolidated or individual report or figures (e.g. local and central German institutions report separately while in Finland and in Netherland consolidated figures are reported for the whole group) (Ayadi 2017).

This classification is the one usually proposed by the European Association of Co-operative Banks (EACB). From a theoretical perspective, other main classifications of cooperative networks are described in the literature. Di Salvo (2002) distinguishes among networks centralised at national level, centralised at regional level, decentralised but legally integrated and decentralised but integrated on a voluntary base. According to the level of integration and decentralisation, Desrochers and Fischer (2005) identify the three categories of atomised systems, consensual networks and strategic networks.

IPS is defined in the Capital Requirements Regulation (CRR) as “a contractual or statutory liability arrangement which protects those institutions and in particular ensures their liquidity and solvency to avoid bankruptcy where necessary”. Even if from an accounting point of view IPSs cannot be considered banking groups, they have been defined “flexible groups” given that they are allowed by regulators to apply prudential requirements similar to those applied by members belonging to consolidate groups. The main difference between IPSs and consolidated groups is that in the former banks have a higher level of independence and are not under the control of a single entity. For an overview of IPS in the euro area, please see Choulet (2016).

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

Becchetti et al. (2016) document that over the period 1998–2010, cooperative banks display a lower proportion of derivatives over total assets, lower earnings volatility and higher loans/total assets ratios than commercial banks.

The overview is released by TIAS School for Business and Society with the support of the EACB.

Key statistics and financial indicators are made available by the EACB on a yearly basis and are openly accessible via the association’s website. Last data consulted refers to the “Key statistics – Financial indicators 2016” factsheet.

Dezelna Banka Slovenije d.d. (SI), Volksbanken (AT), Central Cooperative Bank (BG), Banque Raiffeisen (LU), SZHISZ (HU), LCCU Group (LT), Association of Cooperative Banks of Greece (GR), Cooperative Central Bank (CY), Nykredit (DK), Credito Agricola (PT), Creditcoop (RO), KZBS (PL), BCC (IT), BCC (ES), UNACC (ES), Raiffeisenbanken (AT), OP Financial Group (FI), Raiffeisen Schweiz (CH), Rabobank (NL), Crédit Mutuel (FR), BPCE (FR), Crédit Agricole (FR), Volks-Raiffeisenbanken (DE), Building Societies (UK).

In this respect, member base appears even more relevant if expressed as member-to-population ratio, which equalled 19.2 per cent in 2015 with member growth that exceeds population growth (Groeneveld 2017). In addition, the number of members has even grown from the beginning of the crisis.

Only cooperative banking groups whose number of members is more than one million are considered. The following groups are not represented: Dezelna Banka Slovenije d.d. (SI), Volksbanken (AT), Central Cooperative Bank (BG), Banque Raiffeisen (LU), SZHISZ (HU), LCCU Group (LT), Association of Cooperative Banks of Greece (GR), Cooperative Central Bank (CY), Nykredit (DK), Credito Agricola (PT), Creditcoop (RO), KZBS (PL).

These figures include both retail and business clients.

This huge difference is driven by the fact that Credicoop role in Romanian banking system is minor, for several reasons such as the high competition with commercial banks, the reputational problem of credit cooperative organisations and the perceptions of the communist system influence (Pirvu and Banica 2016).

In terms of corporate governance, belonging to large financial integrated conglomerates has positive and negative effects. On one side, governance complexity increases and the efficacy of managers and board members’ control on the central institutions become controversial, with a risk of misalignments of interests. On the other side, some corporate governance mechanisms work better when institutions belong to networks since the monitoring role was played by the apex organisation and the pressure exerted by the peers within the network.

In this respect, Fig. 1.3 shows the total assets for all the Volks-Raiffeisenbanken in Germany, which are organised in the form of a network with an IPS and do not consolidate. For this reason, they cannot be mentioned among the largest banks in Europe.

When considering major cooperative banking groups only, data reveals that over the years 2011–2015, deposit and loan market shares improved by 0.5 and 1.1 per cent to 21.9 and 22.3 per cent, respectively (Groeneveld 2017).

This section largely draws on Cornée (2014). We gratefully thank Journal of Entrepreneurial and Organizational Diversity for authorising the use of excerpts from the original article.

In many instances, banking institutions that follow the same organisational pattern (i.e. a decentralised decision-making) may exhibit quite a similar behaviour in their lending practices (e.g. DeYoung et al. 2004; Scott 2004). This is especially the case for other stakeholder-oriented banks, such as community banks and savings banks. This justifies why the studies reviewed in this section are not specifically conducted on cooperative banks. There exists very little research comparing cooperative banks with their commercial counterparts, the studies being generally carried out on the banking industry as a whole.

Examples of transaction lending technologies are financial statement lending, asset-based lending and small business credit scoring.

There exist many empirical works highlighting the benefits associated with relationship lending in terms of credit availability. Methodologically speaking, the strength of lending relationships is generally measured via three indicators: its duration (defined as the number of years the bank has offered loans, deposits or other financial services to the firm), its scope (proxied by the quantity of financial services contracted by the firm) and its exclusivity (evaluated in terms of the bank being the firm’s sole debt provider).

A possible distinctive role of cooperative banks in helping SMEs to access finance and even to indirectly reach the financial markets is discussed by Migliorelli and Dessertine (2017) in the framework of the introduction of new market-oriented financing instruments in the EU agriculture to finance environmentally friendly practices.

Orléan (1999) provides an in-depth theoretical analysis explaining how the microstructural features of financial markets lead to short-term profit maximisation.

Even though cooperatives may not face short-term market constraints, they need to attain a certain level of profitability in the medium or long term to be competitive in the industry. On the whole, cooperatives’ profitability constraint is not dictated by short-term pressure exerted by stock markets but rather by medium or long-term product market (Gianfaldoni and Richez-Battesti 2005). The medium or long-term profitability constraint is more in line with the temporality of relationship lending. Financing young or de novo small borrowing firms is seldom fully profitable in the short-term. When a bank finances small businesses via relationship lending, it makes a substantial investment in the first interactions, which is then amortised over several periods, through repeated interactions with the businesses. In other words, lenders subsidise borrowers in early periods and get reimbursed for this subsidy thereafter (Petersen and Rajan 1995). Such a long-term strategy may be feasible for cooperative banks, but rather incompatible with their commercial counterparts that may be subject to short-term shareholder maximisation. Similarly, a fiercely competitive credit market may be destructive to the formation of mutually beneficial relationships between lenders and borrowers. Lenders are reluctant to assist informationally opaque borrowers and consequently accept lower returns upfront if they fear that the future benefits associated with this early assistance may be reaped by competitors (Petersen and Rajan 1995).

To mitigate this “hold-up” problem, SMEs increasingly favour multiple sources of capital. By trading with several banks and by pitting one against the other, borrowers can reduce the cost of their debt. Nonetheless, multi-banking strategies affect the cost of capital in various ways. As explained in the rest of this section, the quality of debt supply (i.e. capital availability and reduced collateral requirement) deteriorates along with the number of financiers, thereby incurring indirect financing costs that will eventually be embedded in the interest rate.

In any case, empirical evidence regarding the hold-up hypothesis is still somehow contradictory. For instance, D’Auria et al. (1999), Degryse and Van Cayseele (2000), and Degryse and Ongena (2005) report that longer relationships result in a higher interest rate charged to borrowers. Berger and Udell (1995), Uzzi (1999), as well as Berger et al. (2007) reach an opposite conclusion. Moreover, many studies (e.g. Elsas and Krahnen 1998; Machauer and Weber 1998; Lehmann and Neuberger 2001) show no significant effect.

Nonetheless, the current developments of microfinance practices in Europe imply that cooperative banks have somehow drifted away from their original goal of facilitating access to credit to non-bankable.

Yet, some evidence suggests that cooperative banks also charge lower interest rate in non-crisis times (e.g. Cornée et al. 2017).

The earliest savings banks were established in late eighteenth century, but they became more common at the turn of the nineteenth century as welfare institutions. Savings banks were typically set up by groups of socially minded, wealthy individuals or public authorities. They were accordingly organised either as a public law regime or as foundations or associations with a non-profit mission. They were mandated to foster the spirit of thriftiness among underprivileged people, by providing them safe savings facilities. The resources were invested in safe, liquid assets, such as government securities. Precautionary savings for life events and retirement render were intended as a means of addressing vulnerability and reducing dependence on charitable aid. Later, their mission was extended to delivering, at reasonable terms, credit and ancillary services for those who were rationed out, such as low-income households, SMEs, and local public investment projects (Ayadi et al. 2009).

Private ownership is predominant in Scandinavian and Italian savings banks. In contrast, in Germany and Austria, savings banks are publicly owned and represent alongside cooperative and commercial banks an essential component of the so-called three-pillar system (Bülbül et al. 2013). In Germany, they total up to 50 million customers (ESBG 2013). In Spain, privately owned savings banks historically constituted a major component in the banking sector, but their market share drastically shrank after the last financial crisis.