Cooperative Banks

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Marjorie Kelly:

"Bain Capital is a great proxy for extractive enterprise in general. The way it and other private equity firms function is straightforward. They buy up companies, load them with debt, cut expenses (read: wages and jobs) then sell the companies off -- all the while, extracting enormous fees for the owners, people like Mitt. This is extractive finance.

To see a financial enterprise that's generative in its intent, I turned to the bank down the street in Salem, Mass., Beverly Cooperative Bank, where I do my own banking. This is a bank with $300 million in assets and four locations, all of which I could reach in a single afternoon on my bike. It's a bank, in other words, rooted in a single community. It's a mutual bank, a cooperative bank. That means its owners are not a handful of wealthy Wall Street types, but the customers it serves. The purpose of this bank is to serve its community. (Why else do we even allow financial firms to exist?)

Cooperative banks are found all over the world, and in Europe they hold 20 percent of all deposits. These banks avoided the shenanigans of the big banks. But these and other generative banks -- like the nation's 7,600 small, locally owned community banks -- are now under siege because of the misdeeds of the big banks.

Bill Howard, president of Beverly Cooperative Bank, told me recently that new banking regulations designed to make up for the misbehavior of the big banks are inadvertently crushing small banks. "There are 8,000 banks in this country today," he told me. "In the next five to 10 years, we'll have maybe 5,000 left."

At one time Beverly Cooperative Bank paid $26,000 a year to the FDIC (Federal Deposit Insurance Corporation). But after the fund was depleted by rescues of reckless banks, Beverly Cooperative had to pony up $1.15 million in a single year. That's a big check to write. Going forward, Beverly Cooperative will pay around $200,000 a year. That's despite the fact it had few mortgages go bad: fewer than five in the last three years, out of 800 loans.

As the president of Beverly Cooperative, Bill Howard could have done what a lot of similar small-bank presidents have done: sell their companies to the big Wall Street banks, and pocket a load of cash for themselves in the process. He chose not to do that. "The culture of a bank is different if it's a mutual," he told me. Instead of having to worry about stock analysts demanding higher returns, he can focus on his mission of serving the community.

His philosophy is summed up by the Robert Fulghum poem he keeps framed on his desk, "All I Ever Needed to Know I Learned in Kindergarten." "Play fair," it says. "Clean up your own mess. Don't take things that aren't yours." And "no matter how old you are, when you go out into the world, it is best to hold hands and stick together." That's the spirit of generative enterprise."



"For example during the 2008 banking crisis, cooperative banks proved to be more resilient than their capitalist competitors. Far from being unable to compete with the big banks, it has been the big banks that have had to rely on bailouts from the government to save themselves from extinction. Not a single one of the 51,000 credit unions around the world received government recapitalisation during the crisis. Across the US, Europe and Japan cooperative banks consistently proved to outperform their competitors using a range of various indicators. During the crisis, they had a lower risk of bankruptcy, and they continued or even increased lending to small and medium sized businesses in a moment of need (Birchall, 2013). In some countries the outperformance has been dramatic - the only major bank in the Netherlands that did not need a bailout to survive was the cooperative Rabobank (Deutsch, et al. 2012). In Greece cooperative banks account for almost a fifth of all lending to small and medium sized, although they account for only around 1% of loans and deposits overall in the banking sector (EACB, 2020).

Although in some countries cooperative banks have exemptions and restrictions that differ from conventional banks, this outperformance cannot be, at least not fully, explained by favourable legislation such as reduced tax burden. For example, cooperative banks in Germany pay 2 million euros in taxes for every £1 billion in assets, compared to only 300,000 euros for large banks (Bundesbank, 2020). Despite this, half of all banks in the country are cooperatives, their market share is growing, and not a single one has gone bust or needed a government bailout in over 90 years (BVR, 2021).

Typically investment in cooperatives does not give the investor voting power, which has been thought to put them at disadvantage compared to other firms. However, investors who use index funds, the most recommended and popular investment strategy, do not receive voting rights in the businesses they invest in either, but rather give those rights to the asset manager.

This means that from the perspective of an individual investor, cooperatives are at no disadvantage compared to index funds when it comes to investors voting rights - and as index funds continue to grow in importance, this disadvantage is reduced in importance. In fact, as investors are increasingly concerned about concentration of corporate voting power, many might prefer to grant their voting rights to be shared equally between cooperative members rather than give it to asset managers who already hold concerning amounts of voting power."