Brussels, 09/04/2010 (Agence Europe) - At the fourth European Association of Cooperative Banks (EACB) convention, held on Thursday 8 April, European cooperative banks stressed the unique nature of the cooperative banking model that has enabled them to weather the banking crisis unscathed. They are sceptical about the need to set up and contribute to emergency funds to bail out too-big-to-fail banks. They are keen for the specific nature of cooperative banks to be recognised by the legislator at EU and international level at this time of a turning of the legislative screw around banking.
EACB president Piet Moerland explained to this newsletter that cooperative banks had not caused the financial crisis and therefore should not be expected to pay to bail out banks operating from an aggressive commercial model. He said that cooperative banks had always operated using prudent business models with appropriate and large enough cushions of own resources and dynamic finances. Such a business model could probably prevent another financial crisis and the need to set up emergency funds, he added. Moerland, the chair of Dutch bank Rabobank, said that the new rules on increased capital requirements for banks (the Basel III directive currently under negotiation), like the capital ratio and liquidity rules, would themselves be able to solve more than half the issues that emergency funds are meant to deal with.
Unique business model. The unique nature of cooperative banks is due to their governance mode. Rather than being owned by shareholders, they are owned by their members (their clients, often small businesses) and are genuinely rooted in local life. EACB director Hervé Guider explained that a third of individuals and a third of small businesses are clients or members of Europe's 4,200 cooperative banks. Seeing that the crisis has led to a turning point in the way cooperative banks are viewed by the legislator, they are calling for their unique business model to be specifically recognised in legislation. Their first aim is to ensure that the members equity is recognised as Tier 1 banking capital, on a par with shares. The Basel financial supervision committee has published a document on capital definition based on shareholder equity that notes in a footnote that members equity of cooperative banks is an exception to the general rule. Cooperative banks prefer not to use capital provided by financial investors because they prefer to use members' capital, explained Rainer Borns of the Austrian cooperative banking network. Guider warned that if the €40 billion of cooperative bank members equity was not recognised as basic bank capital, then this would lead to €500 billion less in loans to small businesses.
The important thing is the facts and a footnote is part of that, responded the secretary general of the Basel Committee, Stefan Walter, pointing out that his committee had come a long way and now recognised the unique nature of cooperative banking. Of the 27 countries that belong to the Basel Committee, 14 do not recognise the cooperative banking model in their country. On behalf of the European Commission, David Wright tried to reassure EACB members that the important thing was not whether something was included in a footnote, but rather the contents of the future European Commission proposal. He mentioned the public consultation exercise currently underway on the measures of the upcoming Basel IV Directive. Believing that Europe was not trying to homogenise commercial models because diversity is a strength, Wright said that the EU Internal Market Commissioner, Michel Barnier, clearly understood the cooperative banking industry.
Cooperative banks point out that they are not prepared to be the victims of the new turning of the regulatory screw. EACB vice-president Gerhard Hofmann said it was important to avoid over-regulation that aimed to appease public opinion. Proportionate measures had to be taken, he said, explaining that capital requirements are not a panacea to reduce leverage debt. Instead, it would be better to ensure that supervisors are able to detect risk. Guider voiced cooperative banks' concerns over issues like how liquidity ratios would be defined, deposit guarantee systems and state aid for banking. He said detailed impact assessments were required for the measures under consideration at both macroeconomic and microeconomic level and fair rules were essential on either side of the Atlantic. He explained that the process was complicated by the fact that in the United States (unlike Europe), some 70% of company funding comes from the stock market and only 30% from banks.
Research. At the convention, the EACB unveiled research showing that cooperative banks had suffered less than commercial banks during the crisis due mainly to the cooperative banks' high capital levels. At the end of 2008, three banks (Raiffeisen of Switzerland, Rabobank of the Netherlands and Pohjola of Finland) had a Tier 1 capital ratio of over 12% (the minimum requirement is 8%). Cooperative banks argue that the new taste for old-fashioned values like high ethical standards, investing for the long-term and stable capital have always been fundamental to the cooperative banks' business model. Cooperative banking accounts for around 20% of the EU banking market and cooperative banks are now found in 23 member states, particularly Western European member states, with a market share of 60% in France, 30% in Austria, Italy and the Netherlands and 20% in Germany. The only retail bank in the world with the prime AAA rating, Rabobank recently issued innovative “contingent notes” worth €1.2 billion to cover the contingency of the Tier 1 ratio falling below 7%, to which the markets responded favourably. Cooperative banks are banned in Slovenia. (M.B./transl.fl)