Contemporary Trends in European Cooperative Banking: Sustainability, Governance, Digital Transformation, and Health Crisis Response 3030981932, 9783030981938

Table of contents :
Preface
References
Contents
Notes on Contributors
List of Figures
List of Tables
1 The Co-evolutionary Nature of European Cooperative Banks
1.1 Introduction
1.2 Cooperative Banks and Their Founding Principles
La Raison d’être of the First Cooperative Banks: A Historical Heritage
Cooperative Banks in Europe and Co-evolutionary Theory
Strategic Proactivity and Relaxing of Cooperative Founding Principles
1.3 The Macroeconomic Dimension of Cooperative Banks
1.4 Sustainability as Major Trend of Development for European Cooperative Banks
1.5 Conclusions
References
2 The Founding Role of Cooperative Banking Within the European Variety of Capitalism
2.1 Introduction
2.2 Cooperative Banks’ Institutional Place Within Europe’s Value System
Cooperative Banks, Asymmetric Information, and Market Failures
Cooperative Banks, Tacit Knowledge, and Learning by Doing
Cooperative Banks as Institutions
Cooperative Banks and the Theory of the Firm
2.3 Key Trends in the Evolution of European Cooperative Banks: A Review of the Literature
General Characteristics of European Cooperative Banks
European Cooperative Banking Groups (ECBG)
Cooperative Banks and Financial Crisis
Cooperative Banks at National Level in Europe
A Comparative Analysis of Cooperative Banks and Other Typologies of Banking Ownership in Europe
Digitalization of European Cooperative Banks
Institutions, Laws, and Cooperative Banks
2.4 Cooperative Banks and the Green Transition in Europe
2.5 Conclusions
References
3 Cooperative Banks and EU Regulation: A General Assessment
3.1 Introduction
3.2 Peculiarities of Cooperative Banks and Implications for an Optimal Regulation
3.3 Financial Regulation as a Collective Good: Considerations for Cooperative Banks
3.4 Bank Re-regulation as a Response to the 2007–2009 Crisis
3.5 Top-Down Regulation (and the Lack of Self-Regulation)
3.6 Proportionality in the Application of Single Supervisory Mechanism: What Does It Mean?
3.7 Practical Concerns and Discussion
References
4 How Can Members Contribute More to Cooperative Life and Decision Processes?
4.1 Introduction
4.2 Diversity of the Members and Diversity of Commitment
Nature of Benefits Offered to Members
Upgrading Member Contributions
4.3 For a More Effective Contribution of Board and Members to Strategic Decisions
Board Members’ Level of Contribution
Independence of Boards and Board Members in CBs: Myth and Reality
4.4 Conclusion
References
5 Decentralization of Decisions and Governance of Risk in Cooperative Contexts
5.1 Introduction
5.2 Governance of Risks and Decentralization: A Literature Review
The Specificities of Cooperative Bank Governance Effects on Risk Setting
The Importance of Soft Privileged Information for Managing Credit Risks
The Importance of Employee Selection and Socialization to Cooperative Values to Manage Risks
5.3 Case Study of CB Bank: Data Collection and Context
5.4 Case Study of CB Bank Findings: Strong Relationships Between Values, Decentralization Practices and Risk Management
Soft Information Use as an Expression of Cooperative Values
Empowerment, Trust and Risk Sharing as Powerful Socialization Practices Mitigating Risks
The Role of Values in Handling Credit Risks: Perceived Specificity of Cooperative Banks
5.5 Discussion and Conclusion
Appendix: Data description—Interviews
References
6 When Cooperative Banks Are Dealing with One Cooperative Fintech Firm: What Can We Learn from the Sociology of Markets?
6.1 Introduction
6.2 When Social and Strategic Action Fields Intertwine in Finance
Markets as Fields of Social Action
Finance as a Strategic Action Field
6.3 A Research Based on a Qualitative Approach
6.4 Birth, Growth, and Transformation of France Barter (FB): A Cooperative Fintech Firm
The Origin of the Project
The Governance of FB
Business-Oriented Platform
Facilitating a Business Ecosystem
A Business Project with Human and Territorial Dimensions
Sources of Income and Value Creation
The Collaboration Project with Cooperative Banks
The End of FB as a Cooperative
6.5 When Sharing Cooperative Values Is Not Enough
6.6 Conclusion
Appendix: Table of individual interviews
Bibliography
7 The Cooperative Difference in the Management Styles and Objectives: Phantom Effect of Credit Cooperative
7.1 Introduction
7.2 Theoretical Specificity of the Credit Unions
7.3 Real Distinction Between Traditional Banking and Credit Unions
7.4 Traditional Communication Deficit
7.5 Social Accounting as the New Kirlian Camera for Cooperative Banking
7.6 Conclusions
References
8 European Cooperative Banks and Sustainability
8.1 Introduction and Perimeter of Analysis
The EU in the Context of the Paris Agreement and Sustainable Development Goals (SDG)
Sustainability and Sustainable Finance
Sustainability and Cooperative Values: Preliminary Considerations
8.2 European Cooperative Banks and Sustainable Finance: Current Approaches
Cooperative Banks and Sustainability: Origins and Developments
Cooperative Banks Current Practices in Sustainable Finance
8.3 Challenges and Opportunities for Cooperative Banks to Deliver on Sustainability
Main Impact of Regulation in Fostering Sustainability
Supporting Local Development and Climate Goals: Opportunities and Challenges for Cooperative Banks
Cooperative Banks and Social Goals: Is This a Specific Pillar of the Cooperative Banks’ Contribution to Sustainability?
8.4 Conclusions
References
9 How Do Cooperative Banks Consider Climate Risk and Climate Change?
9.1 Introduction
9.2 Climate-Related Risk Factors
9.3 Impact of Climate Change on the Banking Sector
Climate-Related Financial Risks for Banks
Evidence on the Impact of Climate-Related Risk Factors on the Banking Sector
9.4 Cooperative Banks and Climate Change
Impact of Climate Change on the Cooperative Banking Sector
Relationship Banking and Soft Information
Branch Networks and Decentralised Decision-Making
Bank Capital and Lending Supply
Market Shares in Loans to the Agricultural Sector
Climate-Related Management Practices of European Cooperative Banks
Adapting Existing Governance Structures
Reducing Direct Carbon Footprint
Reducing the Carbon Footprint of Financing and Investment Activities
Developing Analytical Tools for Assessing Physical Risk Exposure
Estimating Climate-Related Financial Risks with Scenario Analysis
9.5 Concluding Remarks
References
10 Profitability and Digitalisation: The Effects on Cooperative Banks and Their Governance
10.1 Introduction
10.2 Profitability of Cooperative Banks
10.3 Profitability and Group Governance
10.4 Digitalisation and Banks
Characteristics of Digitalisation
The Effects of Digitalisation on Banks’ Activities
The Effects of Digitalisation on Cooperative Banks’ and Cooperative Banking Groups’ Profitability
References
11 How Do Cooperative Banks Build Their Own Proximity Type in the Social Media
11.1 Introduction
11.2 Defining Proximity and Identifying Its Different Facets
Defining Proximity
Identifying the Different Proximity Types
Proximity Based on the Frequency of Interactions
Proximity Based on a Perceived Similarity
Proximity Based on a Perceived Enrichment
Proximity Based on a Perceived Social Recognition
11.3 The Challenge of Identity and Proximity of Cooperative Banks in the Digital Landscape
11.4 Explorative Study: Three Cooperative Banks’ Communications on Instagram
Introduction to the Study
Methodology
Analysis
Crédit Agricole @creditagricole
Bred—Banque Populaire @bredbp
Crédit Mutuel @creditmutuel
Results
Emerging Status of the Three Cooperative Banks Through Their Instagram Communication
Emerging Relationship Style of the Three Cooperative Banks Through Their Instagram Communication
The Types of Proximity for Cooperative Banks
11.5 Conclusion
References
12 Conclusions
Index

Citation preview

Edited by Marco Migliorelli · Eric Lamarque

Contemporary Trends in European Cooperative Banking Sustainability, Governance, Digital Transformation, and Health Crisis Response

Contemporary Trends in European Cooperative Banking

Marco Migliorelli · Eric Lamarque Editors

Contemporary Trends in European Cooperative Banking Sustainability, Governance, Digital Transformation, and Health Crisis Response

Editors Marco Migliorelli IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School) Paris, France

Eric Lamarque IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School) Paris, France

ISBN 978-3-030-98193-8 ISBN 978-3-030-98194-5 (eBook) https://doi.org/10.1007/978-3-030-98194-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

The cooperative banking segment in Europe counts today more than 2500 local or national banks, more than 200 million customers and about 85 million members. Conceptualised more than 150 years ago, the cooperative banks’ business model remains unique in the financial market. It is featured by democratic foundations (one-head-one-vote principle), proximity to the members and the community they serve, limited profit-seeking nature, prudent management. However, these principles are applied today in a variety of organisational structures, economic and regulatory contexts, making oftentimes cooperative banks significantly different from a country to another (and even within the same country). When observing the financial and social performances of cooperative banks in the last two decades in Europe, it can be stated that cooperative banks navigated the Great Crisis blasted in 2008 in the United States relatively well, being able in many countries to play a concrete countercyclical role and contribute to the resilience of the economy. Progressively stricter regulation, low-interests rates set by central banks, increasing digitalisation and low profitability from traditional banking services have then progressively shaped the post-crisis banking sector, creating new challenges. To adapt to the new scenario, reforms of the cooperative banking segment, featured by different perimeters and scope, have been carried out in several European countries (e.g. Italy, Finland, the Netherlands, Spain), oftentimes resulting in the creation of more consolidated cooperative banking groups or networks. In some cases, these reforms resulted in v

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a significant reduction in the weight of cooperative banks in the national banking system (e.g. in Italy or Spain). Against this background, a stream of literature has developed to address the main changes occurred in the cooperative banking market in Europe as following the Great Crisis (e.g. Karofolas, 2015; Miklaszewska, 2017; Migliorelli, 2018; Poli, 2019). This notwithstanding, literature has not yet sufficiently discussed more recent trends today still affecting cooperative banks. This book, which is in the form of an edited collection, aims at further expanding existing knowledge on the European cooperative banking sector by analysing these trends. Namely: • The need to further evolve the cooperative banks’ governance structures and processes in order to foster (and in some cases restore) democracy and transparency in the decision-making, also in light of the new possibilities today given by technology in terms of members participation; • The role of cooperative banks in the policy and societal movement towards sustainability, including as concerns adopting and mainstreaming sustainable finance; • The most recent tendencies in the digital transformation journey of cooperative banks (including as concerns the evolution in the concept of proximity) and the impact of the consolidation of Fintech players in the financial services market; • The specific role of cooperative banks in the economic crisis that has followed the unfolding of the COVID-19 pandemic vis-à-vis their members and the communities they serve. This book is composed by 12 chapters. Chapter 1, written by Marco Migliorelli and Eric Lamarque, describes the main steps of the evolutionary path of cooperative banks in Europe from their origins to date. It addresses in particular the changes in the business model following the enlargement of the activity towards non-members, the creation of nation-wide groups or networks and the digital revolution. With a forward-looking approach, the chapter also discusses the possible implications of the sustainability agenda for cooperative banks. Chapter 2, authored by Giovanni Ferri and Angelo Leogrande, deals with the role of cooperative banks within the European variety of capitalism. In this respect, they argue that cooperative banks, with their intangible values

PREFACE

vii

based on equality and communitarian engagement, remain a socioeconomic pillar that supports the EU in its way towards the common good, including within the European Green Deal and the Next Generation EU programmes. In Chapter 3, Silvio Goglio and Mitja Stefancic reflect on what can be considered effective regulation for cooperative banks in Europe. To this end, they first argument on how regulation in banking should be considered a public good and, as such, can create positive or negative externalities for a broad spectrum of economic actors. Hence, they discuss how, despite their complexity and a call for proportionality, actual regulation may still be suboptimal for cooperative banks, by affecting their organisation, business model and corporate values. In Chapter 4, authored by Eric Lamarque, the way to improve the contribution of members in banks’ decisions is discussed. To this extent, it is argued that the “traditional” contribution of a small number of members at the general assembly is not anymore sufficient, and more commitment is expected from cooperative banks to support members’ initiative. On the other side, at the board level, the author argues that it is time to reflect on whether members should be simple ambassadors that generally promote the bank or they need to be able to effectively challenge managers on strategy or risk-related policies. Chapter 5, written by Aude Deville, Séverine Ventolini and Nathalie Bénet, explores how cooperative banks tackle the challenge of the governance of risks. In particular, they investigate how the decentralisation of decisions in cooperative banks, combined with a strong anchor and communication on cooperative values, help mitigate risks, and in particular credit risk. In Chapter 6, Cynthia Srnec and Philippe Eynaud discuss the possible interactions between cooperatives on the subject of innovation and development of alternative model of banking. This is done by taking into account the example of the development of a Fintech building a digital platform to support intercompany barter transactions. Chapter 7, written by Jose Luis Retolaza and Leire San-Jose, focuses on the management style of cooperative banks vis-à-vis their commercial counterparts. The authors analyse four basic dimensions of banking affinity: transparency, asset allocation, guarantee system and governance, to try to explain similarities and differences in the performance of both types of entities. In Chapter 8, Elisa Bevilacqua discusses the implications of the sustainability revolution for cooperative banks. She first recognises that, for their nature, cooperative banks have integrated environmental, social and governance (ESG) considerations in their business model since their origins. Then, she discusses how the way forward

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for cooperative banks on sustainability will be intrinsically linked to the evolution path of their main clients, that is small and medium enterprises, associations and households. Chapter 9, authored by Giorgio Caselli, deals with cooperative banks and climate change. It examines the key features of the cooperative banks’ business model that are likely to shape the impact of climate-related risk factors on financial risks faced by cooperative banks. The main sets of practices that have been adopted by the largest European cooperative banks to respond to the risks and opportunities posed by a changing climate are also presented. In Chapter 10, Eric Meyer discusses the relationship between digitalisation and profitability in the cooperative banks context. He explores the channels how digitalisation may affect the current governance structures of cooperative banks and their groups. In this respect, examples are given on how cooperative banks react to the challenges of digitalisation. In Chapter 11, Nathalie Veg-Sala, Valérie Zeitoun and Géraldine Michel explore how cooperative banks can build or cultivate their clients’ relationships through digital channels. They argue that cooperative banks need to consider using digital supports to express themselves and nourish their customer brand proximity. They also evaluate to what extent digital channels can help the cooperative banks to propose a specific type of proximity related to their distinctive brand identity. Finally, in Chapter 12, the editors state the conclusions. Paris, France

Marco Migliorelli Eric Lamarque

Acknowledgments We would like to thank the contributors. This book would have not come to fruition without their strong expertise and exceptional commitment.

References Karofolas (Ed.) (2016). Credit cooperative institutions in European countries. Springer. Migliorelli (Ed.) (2018). New cooperative banking in Europe. Strategies for adapting the business model post crisis. Palgrave Macmillan. Miklaszewska (Ed.) (2017). Institutional diversity in banking. small country, small bank perspectives. Palgrave Macmillan. Poli (Ed.) (2019). Co-operative banking networks in Europe models and performance. Palgrave Macmillan.

Contents

1

2

The Co-evolutionary Nature of European Cooperative Banks Marco Migliorelli and Eric Lamarque 1.1 Introduction 1.2 Cooperative Banks and Their Founding Principles La Raison d’être of the First Cooperative Banks: A Historical Heritage Cooperative Banks in Europe and Co-evolutionary Theory Strategic Proactivity and Relaxing of Cooperative Founding Principles 1.3 The Macroeconomic Dimension of Cooperative Banks 1.4 Sustainability as Major Trend of Development for European Cooperative Banks 1.5 Conclusions References The Founding Role of Cooperative Banking Within the European Variety of Capitalism Giovanni Ferri and Angelo Leogrande 2.1 Introduction 2.2 Cooperative Banks’ Institutional Place Within Europe’s Value System

1 1 7 7 8 14 17 19 22 23 29 29 30

ix

x

CONTENTS

Cooperative Banks, Asymmetric Information, and Market Failures Cooperative Banks, Tacit Knowledge, and Learning by Doing Cooperative Banks as Institutions Cooperative Banks and the Theory of the Firm 2.3 Key Trends in the Evolution of European Cooperative Banks: A Review of the Literature General Characteristics of European Cooperative Banks European Cooperative Banking Groups (ECBG) Cooperative Banks and Financial Crisis Cooperative Banks at National Level in Europe A Comparative Analysis of Cooperative Banks and Other Typologies of Banking Ownership in Europe Digitalization of European Cooperative Banks Institutions, Laws, and Cooperative Banks 2.4 Cooperative Banks and the Green Transition in Europe 2.5 Conclusions References 3

Cooperative Banks and EU Regulation: A General Assessment Silvio Goglio and Mitja Stefancic 3.1 Introduction 3.2 Peculiarities of Cooperative Banks and Implications for an Optimal Regulation 3.3 Financial Regulation as a Collective Good: Considerations for Cooperative Banks 3.4 Bank Re-regulation as a Response to the 2007–2009 Crisis 3.5 Top-Down Regulation (and the Lack of Self-Regulation) 3.6 Proportionality in the Application of Single Supervisory Mechanism: What Does It Mean? 3.7 Practical Concerns and Discussion References

32 32 33 34 34 34 38 39 40

44 49 50 50 51 51 55 55 57 60 62 65 66 69 70

CONTENTS

4

5

How Can Members Contribute More to Cooperative Life and Decision Processes? Eric Lamarque 4.1 Introduction 4.2 Diversity of the Members and Diversity of Commitment Nature of Benefits Offered to Members Upgrading Member Contributions 4.3 For a More Effective Contribution of Board and Members to Strategic Decisions Board Members’ Level of Contribution Independence of Boards and Board Members in CBs: Myth and Reality 4.4 Conclusion References Decentralization of Decisions and Governance of Risk in Cooperative Contexts Nathalie Bénet, Aude Deville, and Séverine Ventolini 5.1 Introduction 5.2 Governance of Risks and Decentralization: A Literature Review The Specificities of Cooperative Bank Governance Effects on Risk Setting The Importance of Soft Privileged Information for Managing Credit Risks The Importance of Employee Selection and Socialization to Cooperative Values to Manage Risks 5.3 Case Study of CB Bank: Data Collection and Context 5.4 Case Study of CB Bank Findings: Strong Relationships Between Values, Decentralization Practices and Risk Management Soft Information Use as an Expression of Cooperative Values Empowerment, Trust and Risk Sharing as Powerful Socialization Practices Mitigating Risks

xi

75 75 77 78 81 84 84 88 92 93 97 97 99 100 101

102 103

107 107 109

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CONTENTS

The Role of Values in Handling Credit Risks: Perceived Specificity of Cooperative Banks 5.5 Discussion and Conclusion Appendix: Data description—Interviews References 6

7

When Cooperative Banks Are Dealing with One Cooperative Fintech Firm: What Can We Learn from the Sociology of Markets? Cynthia Srnec and Philippe Eynaud 6.1 Introduction 6.2 When Social and Strategic Action Fields Intertwine in Finance Markets as Fields of Social Action Finance as a Strategic Action Field 6.3 A Research Based on a Qualitative Approach 6.4 Birth, Growth, and Transformation of France Barter (FB): A Cooperative Fintech Firm The Origin of the Project The Governance of FB Business-Oriented Platform Facilitating a Business Ecosystem A Business Project with Human and Territorial Dimensions Sources of Income and Value Creation The Collaboration Project with Cooperative Banks The End of FB as a Cooperative 6.5 When Sharing Cooperative Values Is Not Enough 6.6 Conclusion Appendix: Table of individual interviews Bibliography The Cooperative Difference in the Management Styles and Objectives: Phantom Effect of Credit Cooperative Jose Luis Retolaza and Leire San-Jose 7.1 Introduction 7.2 Theoretical Specificity of the Credit Unions 7.3 Real Distinction Between Traditional Banking and Credit Unions 7.4 Traditional Communication Deficit

111 113 115 116

119 120 121 121 123 124 125 125 127 127 129 131 132 133 134 134 137 139 139 143 143 145 148 153

CONTENTS

Social Accounting as the New Kirlian Camera for Cooperative Banking 7.6 Conclusions References

xiii

7.5

8

9

European Cooperative Banks and Sustainability Elisa Bevilacqua 8.1 Introduction and Perimeter of Analysis The EU in the Context of the Paris Agreement and Sustainable Development Goals (SDG) Sustainability and Sustainable Finance Sustainability and Cooperative Values: Preliminary Considerations 8.2 European Cooperative Banks and Sustainable Finance: Current Approaches Cooperative Banks and Sustainability: Origins and Developments Cooperative Banks Current Practices in Sustainable Finance 8.3 Challenges and Opportunities for Cooperative Banks to Deliver on Sustainability Main Impact of Regulation in Fostering Sustainability Supporting Local Development and Climate Goals: Opportunities and Challenges for Cooperative Banks Cooperative Banks and Social Goals: Is This a Specific Pillar of the Cooperative Banks’ Contribution to Sustainability? 8.4 Conclusions References How Do Cooperative Banks Consider Climate Risk and Climate Change? Giorgio Caselli 9.1 Introduction 9.2 Climate-Related Risk Factors 9.3 Impact of Climate Change on the Banking Sector Climate-Related Financial Risks for Banks Evidence on the Impact of Climate-Related Risk Factors on the Banking Sector

158 160 162 165 165 165 170 173 175 175 178 181 181 185

188 190 191 193 193 195 199 199 201

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9.4

Cooperative Banks and Climate Change Impact of Climate Change on the Cooperative Banking Sector Relationship Banking and Soft Information Branch Networks and Decentralised Decision-Making Bank Capital and Lending Supply Market Shares in Loans to the Agricultural Sector Climate-Related Management Practices of European Cooperative Banks Adapting Existing Governance Structures Reducing Direct Carbon Footprint Reducing the Carbon Footprint of Financing and Investment Activities Developing Analytical Tools for Assessing Physical Risk Exposure Estimating Climate-Related Financial Risks with Scenario Analysis 9.5 Concluding Remarks References 10

11

Profitability and Digitalisation: The Effects on Cooperative Banks and Their Governance Eric Meyer 10.1 Introduction 10.2 Profitability of Cooperative Banks 10.3 Profitability and Group Governance 10.4 Digitalisation and Banks Characteristics of Digitalisation The Effects of Digitalisation on Banks’ Activities The Effects of Digitalisation on Cooperative Banks’ and Cooperative Banking Groups’ Profitability References How Do Cooperative Banks Build Their Own Proximity Type in the Social Media Nathalie Veg-Sala, Valérie Zeitoun, and Géraldine Michel 11.1 Introduction 11.2 Defining Proximity and Identifying Its Different Facets

202 203 204 205 207 208 209 210 211 213 216 217 219 220 225 225 226 232 235 235 238 239 241 243 243 245

CONTENTS

Defining Proximity Identifying the Different Proximity Types Proximity Based on the Frequency of Interactions Proximity Based on a Perceived Similarity Proximity Based on a Perceived Enrichment Proximity Based on a Perceived Social Recognition 11.3 The Challenge of Identity and Proximity of Cooperative Banks in the Digital Landscape 11.4 Explorative Study: Three Cooperative Banks’ Communications on Instagram Introduction to the Study Methodology Analysis Crédit Agricole @creditagricole Bred—Banque Populaire @bred_bp Crédit Mutuel @creditmutuel Results Emerging Status of the Three Cooperative Banks Through Their Instagram Communication Emerging Relationship Style of the Three Cooperative Banks Through Their Instagram Communication The Types of Proximity for Cooperative Banks 11.5 Conclusion References 12

Conclusions Eric Lamarque and Marco Migliorelli

Index

xv

245 245 246 246 246 247 247 248 248 249 250 250 250 250 257 257

258 259 261 262 267

271

Notes on Contributors

Nathalie Bénet is an Associate Professor at the Toulouse School of Management and a member of TSM Research. She obtained her Ph.D. in management sciences from the University of Nice Sophia Antipolis. Her research focuses on management control systems and more particularly on performance measurement systems in the services and industry areas. Elisa Bevilacqua is head of sustainable finance at the European Association of Co-operative Banks (EACB), based in Brussels. She is an economist by training and holds an international M.B.A.. She has written extensively on cooperative banks, in particular on their role in the European economy, their governance structure, their approach to corporate social responsibility and to green and sustainable finance. Giorgio Caselli is a Research Fellow at the Centre for Business Research, Cambridge Judge Business School, and a postdoctoral research associate at St Edmund’s College, University of Cambridge. He holds a Ph.D. in financial economics from Cranfield University. His research interests lie at the intersection of business economics and finance, with a specific focus on how firm behaviour shapes macroeconomic outcomes. Aude Deville is a Professor of Management at the University of Côte d’Azur, IAE Nice Graduate School of Management and a member of the GRM research centre. She holds a Ph.D. in management from the University of Strasbourg. Her research focuses on performances of bank branches networks, performance measurement systems and sense making. xvii

xviii

NOTES ON CONTRIBUTORS

Philippe Eynaud is a Full Professor at the IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School). He has experience in civil society and non-profit management as well as information systems. He is a board member of two international research networks: EMES, focused on social enterprises, and RIODD, dedicated to sustainable development. Giovanni Ferri is a Full Professor at the LUMSA University in Rome, where he is also the director of the Master of Science in Management of Sustainable Development Goals. He worked at the World Bank and at the Bank of Italy covering apical research and policy roles. His research interests include financial market imperfections, the transmission of the monetary and financial shocks, corporate governance and sustainability. Silvio Goglio is a Former Associate Professor of political economy at the University of Trento. At present, he is coordinator of the research area in cooperatives and development at Euricse. His research interests include collective efficiency and local governance, institutional changes and economic performance, local and cooperative credit, and regional development. Eric Lamarque is Dean at the IAE of the University Paris 1 PanthéonSorbonne (Sorbonne Business School) where he is also Professor and Director of the research chair Management and Governance of Financial Cooperatives. He is the President of the IAE France. He is author of several publications on the role of cooperative banks in Europe and was for twelve years member of the board of a cooperative bank in France. Angelo Leogrande is Assistant Professor at the LUM University Giuseppe Degennaro in Casamassima, where he is also researcher for the LUM Enterprise, a spin off oriented to develop digitalisation services for SMEs. His research interests include cooperative banking, business ethics, innovation technology and knowledge management. Eric Meyer is a Full Professor at the University of Münster, where he is also the director of the Institute for Cooperatives. He is the author of several publications on the theme of the financial and social performances of cooperative banks in Europe, and particularly in Germany. Géraldine Michel is Professor at the IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School) and Director of the research chair Brands and Values. She is the author of several books and

NOTES ON CONTRIBUTORS

xix

she has published articles about brands in international journals. Her current research interests are brand management, social representation and values. Marco Migliorelli is an Economist at the European Commission1 . He also performs academic research at the IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School) as senior research associate. He holds a Ph.D. in banking and finance from the University of Rome Tor Vergata. His main research interests include cooperative banking, green and sustainable finance, and financing instruments innovation. Jose Luis Retolaza is a Professor at the University of Deusto. He belongs to the HUME research group and actively collaborates with the ECRI research group. He is the scientific director of GE Accounting and Director of Aurkilan Business Ethics Research Institute. His main contributions to literature relate to firm theory, stakeholder theory, social accounting and social efficiency. Leire San-Jose is a Professor at the University of the Basque Country. She leads the ECRI research group, which contributes to research on ethics in finance and the social value of organisations. Her research interest covers social efficiency of banks, cash management, social value and stakeholder theory. Cynthia Srnec is a Research Fellow at the Centre for the Sociology of Organisations at Sciences Po Paris. She holds a Ph.D. in sociology from the University of Lumière Lyon II and the University of Buenos Aires. Her research focuses on governance, working conditions and networks on social and solidarity economy, and on platforms economy and digital work. Mitja Stefancic holds an MPhil from the University of Cambridge and a Ph.D. from the University of Ljubljana. He is currently co-editor of WEA commentaries, a publication of the World Economics Association. He gained on-the-field experience with local cooperative banks

1 The contents included in this book do not necessarily reflect the official opinion of

the European Commission. Responsibility for the information and views expressed in the book lies entirely with the authors.

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NOTES ON CONTRIBUTORS

based in Trieste, Italy, and has been recently active in knowledge transfer programmes in Slovenia. Nathalie Veg-Sala is an Associate Professor at the University of ParisNanterre. Her research focuses on brand management and luxury. She is a member of the CEROS laboratory at the University of Paris-Nanterre and of the chair Brands and Values at the IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School). Her work has been published in numerous national and international academic journals. Séverine Ventolini is a Professor of Management at the University of Tours and member of VALLOREM research centre. She obtained her Ph.D. in management sciences from the University of Lyon. She is currently assistant chief editor of the Revue Française de Gestion. Her research focuses on organisational behaviour. Valérie Zeitoun is an Associate Professor at IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School). She is a specialist and teaches consumer behaviour and methodologies of qualitative research. Her research focuses on the mechanisms and issues of the consumer brand relationship. She has published her research in major international academic journals.

List of Figures

Fig. 7.1 Fig. 9.1 Fig. 10.1 Fig. 10.2 Fig. 10.3 Fig. 10.4

Bank vs Banking Cooperative Distributed Value Comparison Global emissions of carbon dioxide and temperature anomalies Profitability of cooperative banking groups (Pre-impairment operating profits/total assets) Cooperative banking groups, total operating income/total assets Cooperative banking groups, net interest income/total assets Banks’ value chain

152 197 228 228 229 233

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List of Tables

Table 1.1 Table 1.2 Table 1.3 Table 7.1 Table 7.2 Table 7.3 Table 8.1 Table 10.1 Table 10.2

Table 11.1 Table 11.2 Table 11.3 Table 11.4

Main cooperative banking groups and networks in Europe today Indicative number of members and clients for European cooperative banking groups or networks The heterogeneity of cooperative banking groups or networks in Europe Traditional Banks versus Credit Unions SEI Score: Traditional Banks vs. Credit Unions Analysis of equality of measures between Banks and Cooperatives Sustainable Development Goals (SDG) Share of local or regional banks in the groups’ totals in 2020. Author’s elaboration on data FitchConnect Comparison income variables/total assets for cooperative banks and cooperative banking groups in 2020. Author’s elaboration on data FitchConnect Analysis of Crédit Agricole—Instagram approach Analysis of Bred—Banque Populaire—Instagram approach Analysis of Crédit Mutuel—Instagram approach Strategic construction of three distinctive proximity types

4 9 12 147 157 157 168 230

231 251 253 255 260

xxiii

CHAPTER 1

The Co-evolutionary Nature of European Cooperative Banks Marco Migliorelli and Eric Lamarque

1.1

Introduction

The conventional cooperative banks’ business model is highly distinctive in the financial markets. It is featured by unique and nested principles such as democratic participation, proximity to the members and the community served, dual bottom-line approach, prudent management and limited

The contents included in this chapter do not necessarily reflect the official opinion of the European Commission. Responsibility for the information and views expressed lies entirely with the authors M. Migliorelli (B) · E. Lamarque IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School), Paris, France e-mail: [email protected] E. Lamarque e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_1

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M. MIGLIORELLI AND E. LAMARQUE

profit-seeking nature. Cooperative banks originated in Europe following the ideas and the action of Friedrich Wilhelm Raiffeisen (1818–1888) and Hermann Schulze-Delitzsch (1808–1883). In the first half of the nineteenth century, in what is today Germany, they adopted already existing cooperative principles to newly created organisations with the aim of ensuring basic financing services to underserved local communities (e.g. Bruni & Zamagni, 2007). These communities (in rural regions in the case of Raiffeisen, in urban or suburban areas in the case of Schulze-Delitzsch) were suffering from the consequences of the major socio-economic shifts of that era, in particular the progressive liberalisation of agricultural markets and the phase-in of the industrial revolution in the continental Europe. Even though these changes proved in the longer term to have an overall positive impact on the living conditions of the populations, in rural areas they triggered a sharp reduction in the farmers’ remuneration and latent high unemployment, while in urban areas caused many small artisans to be crowded out of the market by cheaper and better quality products made by machines. By departing from different education and religious backgrounds (e.g. Cornée et al., 2018), Raiffeisen and Schulze-Delitzsch backed their action by the same intuition that, to navigate the adverse changing times, local communities should learn to “help-themselves ”. This meant that, as traditional financial intermediaries were curtailing support to farmers and small artisans due to their diminishing economic potential and absence of valuable collaterals, local communities had to establish a new way of self-financing. The first cooperative banks saw the light and rapidly emerged as effective instruments of social innovation (e.g. Goglio & Catturani, 2018). Sitting at the centre of the functioning of the community, serving their members-owners primarily with own resources and being prudent in risk-taking, cooperative banks progressively bridged the gap left by profitdriven financial organisations. By prompting an approach where bank’s financial performance needed to coexist with social value for members and the community (what is today referred to as “dual bottom-line”), cooperative banks developed innovative management principles (Ayadi et al., 2010). Members were involved in the key decision-making processes as peers, independently of the amount of their contribution to the bank’s capital (following the formula “one-head-one-vote”). The continuous interaction with the members, based on proximity and social ties, helped cooperative banks to be effective in the assessment and management of risks. By fostering a long-term relationship based on the exchange

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of both soft and hard information (what it is today called relationship lending), cooperative banks were able to depart from the typical collateral-based financing approach and develop a new set of practices to evaluate the idiosyncratic credit risk of individuals, small enterprises and associations (e.g. Cornée et al., 2018). Profits generated from banking operations were retained fully or at a larger extent within the bank in the form of reserves, underpinning a vision in which capital is considered an intergenerational source of wealth for the community as a whole. For this reason, member shares could not be sold in the market and they could only be redeemed at face value. From Germany, cooperative financial institutions spread all over Europe, thanks to the success of their social innovation mandate. In over 150 years of history, cooperative banks made their journey along several social, political and economic events, including periods of severe recession and two world wars. As of today, they are among the largest lenders in Europe,1 counting 85 million members and 214 million customers.2 However, national and regional circumstances had a critical impact on how they developed locally (e.g. Fonteyne, 2007; Karofolas, 2016). Differences among European cooperative banks in terms of size, market positioning, organisational structure, business practices are today significant. Cooperative banks play a systemic role in key European countries such as Austria, Finland, France, Germany or the Netherlands (e.g. Lang et al., 2016; Poli, 2019), while their presence may be considered less significant in countries such as Portugal or Spain (see Table 1.1). Even though cooperative banks confirmed over time both their efficiency in serving local communities and their financial resilience (e.g. Ferri et al., 2014; Poli, 2019), they cannot be considered static institutions. Some recent studies (e.g. Groeneveld, 2020) have attempted to summarise the main common stages of the evolution of cooperative banks from their origins to date. These include:

1 The weight of cooperative banks in terms of bank deposits and loans can be estimated to about one-fifth in the European Union as a whole (Fiordelisi & Mare, 2014). Four cooperative conglomerates such as Crédit Agricole, BPCE and Crédit Mutuel in France and Rabobank in the Netherlands are among the 20 largest European banks by assets and 11th, 19th, 37th and 43rd in the ranking of the largest banks in the world, respectively (Standard and Poor’s, 2017). 2 Source: European Association of Cooperative Banks (EACB) website (http://www. eacb.coop/en/home.html).

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M. MIGLIORELLI AND E. LAMARQUE

Table 1.1 Main cooperative banking groups and networks in Europe today

Austria

Österreichische Raiffeisenbanken Österreichischer Volksbanken Bulgaria Central Co-operative Bank Denmark Nykredit Finland OP Financial Group France Crédit Agricole Crédit Mutuel BPCE Germany Co-operative Financial Network Greece Association of Cooperative Banks of Greece Hungary SZHISZ Italy Federcasse (BCC) Lithuania LCCU Group Luxembourg Banque Raiffeissen The Rabobank Netherlands Poland National Union of Co-operative Banks (KZBS) Portugal Credito Agricola Romania Creditcoop Slovenia Dezelna Banka Slovenije d.d

Number of legally independent local or regional cooperative banks

Total assets (EUR ml)

Domestic market share (%) Deposits

Loans

Mortgages

368

319.663

31.1

31.8

31.4

9

27.496

5.0

4.5

7.0

n.a

3.122

5.6

3.8

4.6

56 147 39 18 29 841

215.556 147.024 2.010.996 930.916 1.338.064 1.384.088

5.3 39.2 24.5 15.9 21.9 22.1

32.0 35.5 22.4 17.1 21.0 22.4

42.0 39.5 31.5 19.2 26.0 30.6

7

3.158

1.0

0.8

n.a

4 259 48 1 89

7.795 220.557 452 8.912 590.598

6.5 7.8 1.8 19.0 33.0

8.2 7.5 1.9 12.0 n.a

5.8 10.2 1.4 13.0 20.9

538

47.243

10.1

6.8

5.4

79 38 1

19.362 308 1.018

7.8 n.a 2.9

5.7 n.a 2.1

3.3 n.a n.a

(continued)

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5

Table 1.1 (continued)

Spain

United Kingdom

Unión Nacional de Cooperativas de Crédito (UNCC) Banco de Crédito Cooperativo (BCC) Building Societies Association

Number of legally independent local or regional cooperative banks

Total assets (EUR ml)

Domestic market share (%) Deposits

Loans

Mortgages

42

107.165

6.7

5.5

n.a

18

47.406

2.5

2.6

n.a

43

501.487

18.5

n.a

23.1

Notes Author’s elaboration on data EACB, available at: http://www.eacb.coop/en/cooperativebanks/key-figures.html. Data as of 31 December 2019. n.a. stays for not available

• a progressive reduction of the emphasis on agricultural communities and small artisans; • the tendency to serve a larger base of clients than only members; • the progressive enlargement of the activity towards business segments other than lending; • the aggregation of small local cooperative banks into country-wide groups or networks; • the deployment of digitalisation in banking operations (in this respect, similarly to all other types of banks). Face to such an evolution, a number of scholars have started questioning the coherence between the de facto strategies adopted by several cooperative banks and the founding principles of democratic governance, proximity to the members and the community, dual bottom-line, prudent management, limited profit-seeking, that still today have a flagship role in determining the cooperative banks’ uniqueness in the European financial landscape (e.g. Groeneveld, 2020; Migliorelli, 2018). In this respect, some evolutionary trends have been suggested as possible root causes of a progressive deterioration of the archetypal specificity of cooperative banks. These include the enlargement in the scope of the business far above the core deposit and lending activity, that has in many cases produced

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an hybridisation of the business model with a more prominent role of market risks vis-à-vis credit risk (e.g. Ory et al., 2006), the expansion of the base of clients and the adoption of complex governance structures to manage larger dimensions, which has in turn contributed to reduce the engagement of members (e.g. Stoop et al., 2021), or the introduction of new technologies and communication channels, that has had a detrimental impact on bank-clients proximity (e.g. Gorlier et al., 2018).3 For some authors, the room for an effective differentiation between cooperative banks and other types of banks, in particular commercial banks, is irreversibly vanishing (e.g. Ory et al., 2006). Against this background, the objective of this chapter is twofold. On the one hand, it aims to contribute to the debate on whether European cooperative banks have over time effectively relaxed the adherence to their founding principles and, if so, why. On the other hand, it discusses whether cooperative banks are able to still play today and in the foreseeable future a specific, self-standing role in the financial market or they are on the contrary destined to converge to a unique dimension of European banking (that, at best, they can contribute to determine). To do that, the remainder of this chapter is divided into four sections. Section 1.2 debates on role of the cooperative founding principles in cooperative banks’ operations, by adopting a co-evolutionary perspective. Section 1.3 gives an overview of the macroeconomic dimension of cooperative banks in the modern European banking market. Section 1.4 discusses future evolutions foreseen for cooperative banks, in particular as concerns their engagement towards sustainability. Finally, Sect. 1.5 states the conclusions of our analysis.

3 Some literature includes regulation among the elements that can induce European cooperative banks to progressively converge towards the business model typically fostered by commercial banks (e.g. Ory et al., 2012; Richez-Battesti & Leseul, 2016). For these authors, despite the use in the European Union of the principle of proportionality and the inclusion in the key regulations of provisions dealing with the main specificities of cooperative banks (e.g. the treatment of members shares or the arrangements featuring cooperative banking groups and networks), the general approach to treat cooperative banks as “an exception of the rule” conveys the risk of underestimating the impact of regulation on the cooperative banking business model and in the longer term of producing a regulatory-driven push in the direction of hamogeneisation of the different European business models in banking.

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1.2 Cooperative Banks and Their Founding Principles La Raison d’être of the First Cooperative Banks: A Historical Heritage It can be easily stated that the principles at the heart of the functioning of conventional cooperative banking business model, as identified by Friedrich Wilhelm Raiffeisen and Hermann Schulze-Delitzsch, were effective in tackling the specific need for which the first cooperative banks were created: provide credit to underserved communities left aside by the financial system. In this respect, cooperative banks were certainly able to offer an effective and efficient remedy to a significant market and government failure. This notwithstanding, it can be argued that such a raison d’être has only little significance in today’s European banking market. This is true even though several studies have clarified that banks using relationship lending, hence including cooperative banks, are even today able to provide credit to individuals, small and medium businesses at a higher pace than banks using transaction lending technologies (e.g. Uzzi & Lancaster, 2003; Cole et al., 2004; Banerjee et al., 2021). In this respect, they reduce the information asymmetries between lenders and borrowers and create value that can be shared between the parts involved in the transaction.4 This effect may be even amplified for cooperative banks when statutory provisions force to concentrate lending in a specific territory (Groeneveld et al., 2018). However, while credit rationing for farmers and artisans may still today be relevant in same areas or in periods of economic downturn, it makes sense to conclude that this issue is of a much smaller magnitude today than it could have been in Germany during the first half of the nineteenth century. In fact, in many European countries the size of the farms has considerably increased, reducing the financing gap in the agricultural market attributable to the barriers to access finance that typically feature small businesses. Policymakers also play a more prominent role, though the development of dedicated supporting instruments directed to small and medium businesses (e.g. 4 Besides the information asymmetries that usually feature the relation between small economic agents and financial intermediaries (and that can induce the latter to limit credit) market failures affecting small and medium enterprises relates to the high costs to access directly the financial markets, which normally restrict the possibilities of financing for to bank lending.

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M. MIGLIORELLI AND E. LAMARQUE

EU, 2013, 2021) and, in the relevant case of agriculture, via the Common Agricultural Policy (CAP). In addition, it can be argued that other forms of intermediation, as for example microfinance or social finance, have emerged over time and may today play a more significant role than cooperative banks when it comes to reach underserved communities or layers of population.5 Cooperative Banks in Europe and Co-evolutionary Theory One possibility to coherently reconcile the relevant presence of cooperative banks in Europe today with the fading of the need for which they were originally created is given by the application of co-evolutionary theories. Inspired by the works of Darwin (1859), the research stream that adopts the co-evolutionary view conceptualises that the development of the organisations, pushed by the main drivers of growth and survival, is the effect of a dynamic process of combination between strategic proactivity and environmental boundaries or constraints (e.g. Breslin, 2014; Cafferata, 2014). Differently from the traditional approaches to management and organisation (to which the existing body of literature on cooperative banks may be largely referred), co-evolutionary scholars maintain that certain phenomena cannot be properly accounted for by understanding organisations or their environments as stand-alone, single and static units of investigation (Abatecola et al., 2016). Co-evolution has hence been associated with several facets related to competition, such as strategic renewal, technological innovation, industrial dynamics, absorptive capacity, or networks’ formation (Abatecola, 2014). In this context, the main process of variation, selection and retention has been progressively synthetized to describe how organisations may evolve. Adopting such a view can help identifying some of the key rationales of the evolution of cooperative banks over time. From there, it is also possible to observe whether cooperative banks had to relax, in their transformation process, the adherence to some of their founding principles. A first noteworthy instance of the co-evolutionary nature of cooperative banks is given by the enlargement of the activity to non-members. 5 In addition, also relationship lending cannot be considered as a monopoly of the banks that have traditionally developed it, but has to be understood as a lending technology that can be, in principle, adopted by any bank as a result of a strategic decision (Berger & Udell, 2006).

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With limited exceptions and with a clear heterogeneity among countries, it is today not necessary for a client of the banks to be a member of the cooperative (see Table 1.2). This is true even if the number of members Table 1.2 Indicative number of members and clients for European cooperative banking groups or networks

United Kingdom Lithuania Denmark Austria Germany Finland Greece

Austria Spain France Luxembourg Portugal France Italy Spain

The Netherlands France Hungary Bulgaria Slovenia

Building Societies Association LCCU Group Nykredit Österreichischer Volksbanken Co-operative Financial Network OP Financial Group Association of Cooperative Banks of Greece Österreichische Raiffeisenbanken Banco de Crédito Cooperativo (BCC) BPCE Banque Raiffeissen Credito Agricola Crédit Mutuel Federcasse (BCC) Unión Nacional de Cooperativas de Crédito (UNCC) Rabobank Crédit Agricole SZHISZ Central Co-operative Bank Dezelna Banka Slovenije d.d

Number of members

Number of clients

Ratio members to clients

25.000.000

25.000.000

1: 1

110.695 992.000 660.807

120.550 1.235.000 1.072.639

1: 1.1 1: 1.2 1: 1.6

18.544.863

30.000.000

1: 1.6

2.003.000 184.025

3.894.000 428.692

1: 1.9 1: 2.3

1.700.000

4.000.000

1: 2.4

1.430.086

3.441.666

1: 2.4

9.000.000 36.804 430.572 8.000.000 1.333.570 1.574.534

30.000.000 122.547 1.684.462 34.200.000 6.000.000 7.064.825

1: 1: 1: 1: 1: 1:

3.3 3.3 3.9 4.3 4.5 4.5

1.900.00 10.500.000 5.230 6.356

9.500.000 52.000.000 1.342.552 1.831.666

1: 1: 1: 1:

4.7 4.9 257 288

287

87.977

1: 307

Notes Author’s elaboration on data EACB, available at: http://www.eacb.coop/en/cooperativebanks/key-figures.html. Data as of 31 December 2019

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M. MIGLIORELLI AND E. LAMARQUE

has experienced an important increase in the last twenty years.6 In line with a co-evolutionary perspective, it can be argued that, for cooperative banks, broadening the span of activity to non-members has represented first and foremost a strategic decision taken to seize a nearly boundless growth opportunity. In fact, to non-members could be offered the same banking services already available to members (being “off-the-shelf ” products) at a little incremental cost for the organisation. By being able to mobilise a larger base of active clients, cooperative banks could benefit from sizeable economies of scale, better manage financial risks via an improved diversification of their asset composition, and eventually reinforce their competitive positioning. Ultimately, these paybacks translated into higher chances of survival in the longer term.7 In the same vein, the process of aggregation of small local cooperative banks into larger groups or networks that could be observed in particular the last decade can be explained under a co-evolutionary perspective. Mild forms of aggregations of local cooperative banks were already in place at the beginning of twentieth century in some European countries, through the establishment of federations of banks (e.g. in Italy). Nevertheless, the institutionalisation of groups or networks had a considerable acceleration in the aftermath of the Great Financial Crisis (2007–2009). Even though European cooperative banks faced relatively well the early phases of the crisis, largely avoiding bail-out procedures, in many cases they were not shielded from its long-term effects. In particular since 2010, very low interest rates set by the European Central Bank, high levels of impairments due to declining quality of the credit as well as the deterioration of the margins of basic banking services (which are the backbone of cooperative banks operations), produced an unprecedented competitive pressure also on cooperative banks, harming the survival of many institutions. To face such a pressure, many cooperative banks were pushed to carry out deep reorganisations with the clear and sole aim of ensuring or restoring economic and financial equilibrium (e.g. Groeneveld et al., 6 Since the start of this millennium, the total number of members of cooperative banks surged from 39 million to around 60 million in 2018, which is a rise of 54%. The average long-term expansion of the number of memberships lies around 2.5% per year. The ratio of the total number of members to total population grew by 4.3% and currently equals around 17% (Groeneveld, 2020). 7 Furthermore, enlargement towards non-members, when focused within the existing area of activity of the bank, could still be perceived as a social service offered to the entire community.

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THE CO-EVOLUTIONARY NATURE OF EUROPEAN …

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2018). To this extent, new banking groups or networks were created, and some of the existing ones were reinforced. Accordingly, branch presence was rationalised and administrative costs streamlined. Large-scale restructuring processes were undertaken also in countries where the activity of cooperative banks was systemically relevant, such as Finland, Germany or the Netherlands, yet with different perimeters and dynamics.8 As of today, groups or networks are the prominent organisational forms for cooperative banks in almost all European countries (even if, in practice, high heterogeneity still exists among these groups and networks, see Table 1.3). As a matter of fact, survival considerations have played a critical role in steering the evolutionary behaviour of cooperative banks after the Great Crisis. Under the point of view of the development of the organisation, the rationale of the evolutionary choice of adopting the group or network structure was ultimately backed by a better management of costs and, at a lesser extent, market synergies. When adopting a co-evolutionary view to explain the behaviour of cooperative banks in recent years, also digitalisation should be interpreted as an exogenous factor able to significantly alter the pre-existing competitive environment (in this respect, in the same way of major an economic crisis). At first, digitalisation was used by cooperative banks (similarly to all other types of banks) as a lever for revisiting operational processes and generating cost efficiency. However, it rapidly became an enabler of service improvement and allowed, inter alia, the creation of completely new communication channels (e.g. internet banking or web-based applications). Nowadays, digitalisation can be considered to have blurred the traditional boundaries of banking operations. In particular through the action of Fintech companies, market segments that were conventionally reserved to banks, such as payments, financial counselling and even unspecialised lending are progressively witnessing the emergence of new business models. This digitalisation-driven transformation of the banking operations is today still ongoing, and a new equilibrium in the market has not been reached. As a matter of evidence, cooperative banks would need to keep dealing with a fluid dynamic environment in the years to

8 In some cases, government-driven action resulted in a considerable drop in the overall presence of cooperative banks in the market. This happened, for example, via the transformation of the larger Banche Popolari in joint-stock companies in Italy or through a steered process or mergers and acquisitions in Spain. For a wider discussion, see Groeneveld et al. (2018).

Yes High Crédit Agricole, Crédit Mutuel, BPCE (FR)

No

Yes No Low or medium BVR (DE), Fachverband der Raiffeisenbanken (AT)

Art. 113(6) CRR

Integrated cooperative networks

Art. 113(7) CRR

Networks with an institutional protection scheme

Integrated models

Yes Very high OP-Pohjola (FI), Credito Agricola (PT), Raiffeisen Luxembourg (LU)

No

Art. 10 CRR

Consolidated cooperative groups

Notes As of today, the general architecture of the existing cooperative banking groups or networks is typically an inverted pyramid whose basis is represented by members belonging to local banks and local banks that collectively own a central entity (which is usually a bank itself). This two tiers structure may evolve in a three tiers structure when a regional bank is inserted between local entities and the central entity. The central entity is usually in charge of the governance and may have the power to control affiliates, even though it is formally owned, wholly or partially, by those affiliates. The main operational functions of the central entity are to provide liquidity, cash clearing and access to national central banks facilities and financial markets. In this respect, banking cooperatives groups or networks usually work according to the principle of subsidiary. Local entities are mainly responsible for managing business relationships with members and clients and for supporting local communities at a larger extent, while the other tiers of the inverted pyramid carry on specialised activities, that can hence be considered outsourced (e.g. in the areas of asset management or, in the most sophisticated groups or networks, even investment banking). If, on the one hand, the group or network structure offers the advantages of centralised business functions (which became necessary in particular to ensure sufficient level of efficiency with the increasing pressure of competition), on the other hand, it may imply lower autonomy and independence of local entities in managing their business. In this general framework, it is possible to detect two main types of models of cooperative banks conglomerates in Europe, on the basis of their specific organisational structure: basic networks and integrated models. In basic networks, cooperation and centralisation are limited. However, local banks are associated in accordance with statutory or legal provisions and still own the central entity, which is able to facilitate access to financial markets and guarantees centralised liquidity management. These banks do not have an Institutional Protection Scheme (IPS) as identified by the Art. 113(7) of the Capital Requirements Regulation (CRR), or a cross-guarantee scheme. Integrated models of cooperative banks are the most common in European

No Very low Polish and Hungarian cooperative banks

Art. 400(2)(d), 422(8) CRR No

Basic networks

The heterogeneity of cooperative banking groups or networks in Europe

Main legal references in the EU framework Institutional Protection Scheme Cross-guarantee scheme Degree of centralisation Examples

Table 1.3

12 M. MIGLIORELLI AND E. LAMARQUE

(continued)

countries. Banks of this type share ownership structure and common features of advertising, brand name and products, creating a strong identity in customers’ perception. The variation in the degrees of integration of the management, centralisation of the control and independence of local entities also permits to detect three different kinds of integrated models: networks with an IPS, integrated cooperative networks and consolidated cooperative groups. In networks with an IPS, banks remain largely independent in their daily activity but are tied by arrangements that ensure liquidity and solvency in case of bankruptcy. Local institutions within the network are individually supervised at national level. In integrated cooperative networks (as recognised by Art. 113(6) CRR), a parent-subsidiary relationship exists between the central entity and local entities, with the former having a number of control powers and the latter keeping political control on the central institution. Banks of this type may be supervised by the European Central Bank (ECB) (because of the size of the agglomerate), based on consolidated accounts. Consolidate cooperative groups (in line with Art. 10 CRR) are characterised by the highest degree of integration, which permits to consider the central body and local or regional banks as a single entity, even for what it concerns specific prudential requirements. In this sense, consolidated accounts are considered for monitoring the solvency and the liquidity of all the group entities. In this type of groups, the central entity has the mandate to supervise and instruct the management of local or regional banks. Moreover, the banks typically benefit from a cross-guarantee scheme. Authors’ elaboration

Table 1.3

1 THE CO-EVOLUTIONARY NATURE OF EUROPEAN …

13

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M. MIGLIORELLI AND E. LAMARQUE

come. In line with a co-evolutionary interpretation, the failure to provide a proactive response in line with the changed competitive environment could put at risk their survival. Strategic Proactivity and Relaxing of Cooperative Founding Principles An argument can be made according to the idea that the evolution of cooperative banks in Europe, being the result of a mix of changing boundaries in the environment in which they compete for growth and survival and strategic proactivity, has periodically imposed a reassessment of the way the founding cooperative principles could be applied. The few studies trying to assess these dynamics suggest that larger dimensions (linked in particular to the enlargement of the activity to non-members and the creation of groups and networks) and digitalisation have been the two major co-evolutionary factors that have induced cooperative banks to relax the adherence to some of their founding principles, even though without completely or formally abandoning them (Groeneveld, 2020; Stoop et al., 2021). As regards the nexus between bank dimension and adherence to cooperative principles, a first determinant should be referred to the effective engagement of the members and the gone-with democratic governance. The intuition that larger organisations may focus less on providing financial and non-financial value to single individuals or small communities due to their reduced relative business incidence and to a greater distance between local stakeholders and central decision-makers seems confirmed also for cooperative banks. In this respect, literature has shown that large cooperative banking groups or networks have gradually reduced their capacity to actively involve their members (e.g. Lamarque, 2018; Ory et al., 2006), and the scale of the cooperative bank’s operations has an inverse relation with members and customers interaction at a larger extent (Stoop et al., 2021).9 The assessment of the characteristics of the bank’s governance structure is clearly pivotal in the attempt to explain these trends. When it comes to cooperative banks, the issues linked to the governance refer to several nested facets, including the modalities 9 Literature, even if not directly referred to cooperative banks, has also shown how lending levels towards small businesses and individuals can be negatively affected when the lender is characterized by a complex hierarchical organization (Stein, 2002) and is physically distant from the potential borrower (Bellucci et al., 2013).

1

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of expression of the will of the members at the different levels of the organisation or the relation between managers and the board (in particular when considering that the board should inter alia control that the activity of the banks is carried out in the interest of the owners, that is the members). Regulation is also becoming progressively stringent, for example as concerns the process of selection of the board (to be “fit and proper”), the remuneration of the board members, or in envisaging a better gender balance within the board. A few works have already clarified that overly-complex governance structures featured by several layers (relating to local, regional and national entities) have contributed over time to limit the decision-making power of local members and hence the possibility for these latter to effectively participate in the evolution of the bank (e.g. Deville & Lamarque, 2014). Specific criticalities have been further observed as concerns the balance of powers between managers and the board (Lamarque, 2018). As cooperatives, cooperative banks promote a system that in principle allows members to be elected to governing bodies. However, finding among members candidates that have enough financial expertise as well as any relevant expertise in bank management (including digital, global vision of customer behaviour, regulation) to be able to effectively control and challenge managers is in practice particularly difficult. In fact, members’ representation is typically rooted at local level and backed by personal ties, with relevant expertise being rarely a decisive factor in the election processes. The development of dedicated training programmes for board members, required by supervisors, has likely reduced the gap with managers in recent years, but it remains difficult for board members to challenge managers on key strategic subjects, such as risk appetite and risk governance. The resulting presence of strong competent managers (needed to manage large, complex organisations) vis-à-vis weak boards (in terms of relevant expertise) tends to reduce members’ effective power and the possibility to steer decision-making. Moreover, an unbalanced power in the hands of managers may result in increasingly proactive growth strategies (“empire building ”) which may find little or no correspondence in founding cooperative principles such as proximity or limited profit-seeking. Concrete past examples of business decisions of cooperative banks in this sense have ranged from expanding the business towards new market segments (e.g. the case of cooperative banks having large investment banking or trading units) or geographical areas (e.g. the apparent paradox of cooperative banks controlling commercial banks abroad). It can be easily stated that the observed

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hybridisation of the conventional cooperative business model has gone hand-to-hand with the increase in size of the bank, the two elements nurturing each other. A key debate today is hence to decide if board members should act just as “ambassadors ” of the cooperative bank with local authorities, or be real “ambassadors ” of members in the board, in this sense with the aim to use the board as an effective strategic driver for bank decisions. The second key factor that has likely forced cooperative banks to relax, at least in part, the adherence to some of their funding principles is digitalisation (e.g. Stoop et al., 2021). In particular, it can be argued that the unfolding of the digital revolution in the banking sector has weakened the role of proximity in cooperative banks’ operations. Especially in the last two decades, product and channel innovation led by digitalisation have made increasingly difficult for cooperative banks to deliver services in the strict proximity of their clients. This has been particularly true in the retail segment, in which physical interaction has almost disappeared. An average retail customer may count today a handful of visits to the branch per year, in the best case. Digitalisation has in fact established and maintained a distance between the bank and the users of banking services. Typical examples of this dynamic are the roll-out of remote banking and, more recently, of mobile applications. In addition, social networks have arisen as innovative channels of remote interaction, compounding marketing, communication and client support functionalities (e.g. Gorlier et al., 2018). As a result of these (still co-evolutionary) changes, cooperative banks are today less able to guarantee an effective proximity with their clients, even remaining in many cases formally engaged to it.10 In addition, traditional capitalistic banks tend today to develop new proximity 10 This notwithstanding, one should not underestimate the possible use of digitalisation as a lever to revitalise proximity. In a wider perspective, it can be argued that the social meaning of proximity is rapidly evolving, somehow implying the consideration of a new “digital proximity”. Such a dimension should be referred to the regular exchange of personalised information via internet-based supports that aims at extending on a virtual space an existing relation based on a common interest or shared values. By making use of the new communication channels offered by digitalisation, cooperative banks could indeed try to reinforce the sentiment of proximity with their clients. Adapted communication and multichannel interaction could in future play the role that was traditionally played by physical presence. In this respect, some authors have already pointed out that cooperative banks may have not yet sufficiently analysed this shift in common perception, and the use of digitalisation to revamp the role of proximity in their banking operations remains a largely unexplored opportunity (e.g. Gorlier et al., 2018; Migliorelli, 2018).

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and personalisation strategies with their customers without the need to use large physical networks. As a result, the traditional evident competitive advantage of cooperative banks in delivery proximity seems to be diluted.

1.3 The Macroeconomic Dimension of Cooperative Banks The role of cooperative banks within the European banking system, that their guiding principles clearly contributed to determine, should be also analysed under a macroeconomic perspective. Departing from the consideration that cooperative principles are grounded on ethics and do not pertain to market logics, it is first evident that cooperative banks have represented through time a necessary and evolving balance (or compromise) between market-driven and values-driven forces. Statutory limits to profit distribution, local roots and long-term relationship with members remain fundamentals elements of differentiation vis-à-vis capitalistic organisations even in an era in which many cooperative banks are progressively relaxing the adherence to some of their founding principles. In more specific terms, the systemic relevance of cooperative banking in a macroeconomic perspective should be assessed in line with the strand of literature aiming to verify the hypothesis that diversity in the financial markets can bring non-negligible advantages in terms of financial stability, systemic risk management and easiness for the economy to respond to economic downturns (e.g. Caselli, 2018). To this end, the cooperative banks’ incremental contribution can be discriminated around two nested elements: their role in supporting small and medium enterprises (SMEs) and their countercyclical attitude. Literature has already highlighted the main characteristics of the access to external funds for SMEs and the role of cooperative banking in easing some of the related market failures. On the one hand, several authors have put in evidence that SMEs typically suffer from a structural limited access to alternative sources of financing other than bank lending, and the inability to differentiate their funding often represent a concrete hurdle to their economic growth (e.g. Beck et al., 2009; Liu et al., 2011). On the other hand, it has been observed that SMEs may experience different degrees of credit limitation due to the opaqueness of their balance sheets (and more in general due to the difficulty to periodically produce reliable

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financial information to the market), as this makes it harder for financial intermediaries to correctly evaluate their creditworthiness. Limited information can in particular affect lending from institutions that base their credit decisions principally on hard, objective, and transparent data (e.g. Berger & Udell, 2002), are characterised by complex hierarchical organisations (Stein, 2002) and are physically distant from the potential borrowers (Bellucci et al., 2013). Against this background, literature is abundant supporting the conclusion that cooperative banks, by implementing relationship lending practices, are indeed able to reduce the asymmetry of information that typically feature the borrower-lender relation in SMEs lending and can contribute to reduce credit constraints (e.g. Miklaszewska, 2017; Poli, 2019).11 Cooperative banks are by far the most important relationship banking institutions,12 and relationship lending is the main lending technology they use. This comes in opposition to the use of the traditional transaction lending technologies13 adopted in particular by commercial banks. Relationship lending practices hence allow cooperative banks to efficiently collect and store soft information and, as this is a lengthy process, they are prone to exploit this information over time, in line with their natural inclination (e.g. Berger et al., 2001; Boot, 2000).14 However, it can be also argued that today the question of the risk appetite of cooperative banks is not sufficiently discussed on the basis of this capacity to collect additional soft information. Many managers consider that they do not have to take in more credit risk than capitalistic 11 To this extent, relationship lending should be identified as the provision of financial services by a financial intermediary on the basis of both soft and hard information, the former obtained through a long-term engagement and continuous interaction with the client (Cornée et al., 2018). 12 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. De Young 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. 13 Examples of transaction lending technologies are financial statement lending, assetbased lending and small business credit scoring. 14 In addition, some evidence exists proving that the quality and the lengthy relationship with the bank can result in concrete financial benefits for SMEs in terms of cost of funding. The longer the relationship, the lower the loan rates and the fewer the loan covenants (Berger & Udell, 1995).

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banks do, even if the demand come from local SME’s or small cooperatives in other sectors. Although the support of the local economy remains a key mission for cooperative banks, sometimes this comes without taking in more risk than other types of banks. By also leveraging their tendency to foster a long-term relationship with their members and clients, cooperative banks have also been able to play in Europe a significant countercyclical role. By focussing on the nexus between banks’ business model and lending, some authors have provided evidence that cooperative banks (and other stakeholder banks backed by the relationship lending paradigm), have outpaced in periods of economic downturn other types of financial intermediaries in terms of provision of credit to the economy (e.g. Bolton et al., 2013; McKillop et al., 2020). In particular, literature linked to the bank lending channel has shown that cooperative banks have been more resilient to monetary shocks in terms of lending supply than other types of banks and have been able to take advantage of the reduction of the interest rates to provide more funds to their clients (e.g. Ferri et al., 2014). Lending growth in cooperative banks, as compared to that in commercial banks in particular, is more regular and markedly less sensitive to negative shocks (Meriläinen, 2016), both in absolute and in relative terms when compared to total assets (Becchetti et al., 2016). However, some limitation to this countercyclical role may exist in case of prolonged recessions able to significantly alter the quality of the balance sheet of the borrowers that in turn can deteriorate cooperative banks’ capital-to-asset structure (Migliorelli & Brunelli, 2017). Also linked to their anchoring to local economy, some recent studies highlighted how cooperative banks could mitigate income inequality in local communities more than their commercial counterparts, specifically thanks to their nature and orientation (Minetti et al., 2021) and that a financial system populated by a critical mass of cooperative banks is likely to be more stable and financially more inclusive than one where any single type dominates (Caselli, 2018).

1.4 Sustainability as Major Trend of Development for European Cooperative Banks On a forward-looking perspective, it can be expected that European cooperative banks will continue to evolve in order to adapt to a continuously changing environment. Again, these transformations will be the result of a mix of external forces, over which they may not have control, and strategic

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proactivity. Cooperative values will likely remain central in the evolutionary discourse around cooperative banks, as being the essential part of their identity, even though the effective adherence to these principles may still remain subject to growth or survivorship considerations. Beside digitalisation and governance, already portrayed above, the main driver of evolution for cooperative banks in the near future will likely be sustainability. The societal and political debate around the need to build a more sustainable society has intensified over the last a few years, in particular following the Paris Agreement and the adoption of the Sustainable Development Goals (SDG), both in 2015. The fight against climate change, the preservation of the environment, the reduction of inequalities, the empowerment of women and girls are nowadays among the most pressing political priorities. To this extent, Europe has been at the centre of many flagship initiatives, including recently the so-called “European Green Deal ” (EC, 2019). With the consolidation of the political commitment towards the various aspects of sustainability, the attention has progressively shifted on the financial resources needed to fuel the transition. In this respect, new concepts and frameworks have progressively emerged in the financial market, first developed by the financial industry and hence adopted by policymakers. These include “sustainable finance”, “green finance” or “climate finance”.15 The urgency to finance the sustainability transition has only increased as following the COVID-19 health crisis. Cooperative banks are naturally inclined to promote sustainability. The cooperative principles of democratic governance, proximity to the members and the community, prudent management, convey a strong indication towards the support of some key sustainable objectives, such as the preservation of the environment, the promotion of the equality, the responsible consumption (e.g. Migliorelli, 2018). Furthermore, cooperative banks already play a crucial role when it comes to the financing of sustainable initiatives. In this respect, their operational relevance is given in particular by their unique capacity to reach SMEs and households, which are often pivotal actors for the success of sustainable policy actions. Embracing sustainability (and sustainable finance) is hence one of the expected lines of evolution of cooperative banks in the years to come.

15 For a more exhaustive overview, see Migliorelli (2021).

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However, despite the many advantages (e.g. in terms of funding intermediation, possibilities of product innovation, policy alignment), such a shift implies significant strategic and organisational challenges, which can come at a cost and can eventually result in situations in which sustainability orientation and existing operations may conflict. On the organisational point of view, an effort will certainly be necessary to comply with new industry and policy standards (e.g. for issuing “green bonds ” or managing “green loans ”), as well as reporting and disclosure requirements. Additional and progressively more stringent regulation should be indeed expected as concerns the reliability of the sustainability-related information provided by banks to the market. To this extent, costs related to compliance may become particularly important for small cooperative groups or networks, and will also depend on the specific regulatory approach (e.g. as concerns the application of the principle of proportionality embedded in the EU legislative framework). On the other side, fostering sustainability may in some cases conflict with the cooperative banks’ traditional territorial-based approach. In this respect, as following the new sustainable finance paradigm, a progressive discontinuation of the financing of non-sustainable industries may be prompted. However, this may eventually conduct cooperative banks to disrupt the support to some of their members or local communities. This may be the case of small cooperative banks active in areas where polluting industries are still dominant and represent the key source of income for the population (e.g. some Polish territories). Furthermore, the assessment of the incidence of sustainability-related risks on financial risks, which is an integral part of the sustainable finance framework, may lead to a substantial review of the risk-taking strategies adopted by cooperative banks, with possible implications at local level.16 To this extent, some cooperative banks may be induced to reduce their presence in some areas or sectors in which sustainability-related risks will be increasingly important. This may be for example the case of territories that can experience a reduction in their economic potential due, for example, climate change or environmental degradation (e.g. areas increasingly affected by the threat of extreme weather events or desertification). In all these cases, coherence between sustainability orientation and cooperative principles such as proximity or

16 For a wider dissertation on the link between sustainability-related risks and financial risks, see Migliorelli (2020).

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prudent management may not be given for granted, and a trade-off may indeed exist. Finally, because the question of sustainability is now a global concern, capitalistic banks will also invest or support strategies to develop this new dimension in baking operations. That is, sustainability will likely become a new field of competition between banks. Cooperative banks do not have to consider to have a natural competitive advantage due to their status, but they have to reflect on how they can continue to differentiate from other types of banks.

1.5

Conclusions

The main thesis of this chapter is that cooperative banks, similarly to any other types of businesses, have progressively adapted their organisation to respond to endogenous and exogenous forces able to continuously alter their competitive environment. In doing that, self-expansion and survivorship have alternatively played a specific and intertwined role when facing the issues of synthetizing their strategic response. The evolution of cooperative banks in Europe since their inception in the first half of the nineteenth century mainly reflects the need to adapt to the major social and economic shifts that occurred over time. These shifts include the slow but constant improvement in the living conditions of farmers and other underserved layers of population, the development and continuous integration of capital and financial markets, the digital revolution and, looking ahead, the sustainability revolution. We argue that such forces were able to put under question not yet the underlying values of cooperative banks—such as democracy, solidarity or equality—which are also among the fundamental pillars of European societies, but the effective implementation of some of their founding principles, in particular as concerns democratic governance, proximity, limited profit-seeking. More in detail, our narrative analysis brings us to the following main conclusions: • The original needs that pushed the creation of the first cooperative banks (offering credit to underserved layers of population) have at a large extent been satisfied or do not exist anymore in several European countries; • External factors and competitive pressure have pushed cooperative banks to constantly evolve in order to grow or survive, igniting

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several national or regional transformation paths that have often forced the relaxing (but not the formal abandon) of some of the founding principles guiding the cooperative banks’ activity; • Even if they have relaxed the adherence of their founding principles, cooperative banks are in many cases still able to offer a socially valuable value proposition, by supporting extensively SMEs, playing a concrete countercyclical role or contributing to reducing inequalities and building a case for preserving diversity in banking; • Looking forward, the sustainability revolution will further shape the role of cooperative banks within the European banking market, the impact depending on how it will be implemented on the ground; • As the different transformation paths featuring cooperative banks will continue with a strong geographical specificity, it may become relevant to start discussing different cooperative banks’ business models (featured inter alia by different levels of adherence to founding cooperative principles) more than a unique European cooperative banking dimension. We argue that, even the success story of cooperative banks cannot be denied, and on the contrary should be recognised, an effort should be made to preserve in the longer term the cooperative distinctiveness in the European banking market and, at a larger extent, with the European varieties of capitalism. More generally, we think that time is coming to redefine the foundation of cooperative model in today’s world and define its place between private and non-for-profit offers.

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CHAPTER 2

The Founding Role of Cooperative Banking Within the European Variety of Capitalism Giovanni Ferri

2.1

and Angelo Leogrande

Introduction

In this chapter, we analyze the relationship between the Cooperative Banking sector and the European variety of capitalism. Contrary to the idea of Francis Fukuyama, expressed in his book “The End of History and the Last Man,” capitalism shows a great variety of manifestations among different countries. Yet, in spite of heterogeneity across individual member countries, Continental Europe—in substance matching the European Union (EU) after Brexit—shows greater propensity to solidarity, compared to the United States and the United Kingdom. Lately,

G. Ferri LUMSA University of Rome, Rome, Italy e-mail: [email protected] A. Leogrande (B) LUM University Giuseppe Degennaro, Casamassima, Italy

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_2

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the von der Leyen Presidency of the European Commission has emphasized the existence of a set of founding European values by creating a Vice-Presidency on “Promoting our European way of life.” Even the launch of the European Green Deal (EGD) and Next Generation EU (NGEU) programs may be seen as evolutions of an overarching policy promoting the common good within a solidarity approach based on the rule of law. European economies have different institutional, political, and legal frameworks. However, regardless of the various characteristics in individual member countries, cooperative banks have a significant presence almost everywhere and possess unique characteristics based on universal principles such as the idea of human solidarity, fraternity, social commitment, and reducing inequality. Indeed, these principles are coherent with the European values to which we referred above. The roots of cooperative banks, with their intangible values based on brotherhood, equity, and communitarian engagement, is a socio-economic pillar that supports the EU in its way forward, including the EGD and NGEU programs toward the common good. Nevertheless, we highlight that the heritage of regulatory and supervisory actions of the past decades—inspired by neoliberal views favoring a single bank business model—has repeatedly challenged the ability of cooperative banks to maintain their identity and bestow their contribution to society. Thus, while the fact that the EU is homeland to the strongest cooperative banking sector in the world is explained by these banks’ adherence to the European values, we conclude that banking regulation and supervision will have to change to safeguard Europe’s evolving cooperative banking sector. In the rest of the chapter, in Sect. 2.2 we analyze how cooperative banks occupy a precise place within Europe’s value system to support the social economy and local communities. Next, in Sect. 2.3 we review the key trends in the evolution of European cooperative banks. Based on these premises, Sect. 2.4 depicts the possible role of cooperative banks within Europe’s Green Transition. Finally, Sect. 2.5 concludes.

2.2 Cooperative Banks’ Institutional Place Within Europe’s Value System Since the foundations of these banks are grounded in economic theory, we propose four pillars addressing the epistemological characteristics of

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these banks. At the same time, and before going on to specify these special pillars of cooperative banks, we propose that the birth and development of cooperative banks in Europe occupies a precise place within Europe’s value system. That is, these banks’ role should be viewed as one of the foundations characterizing the very nature of continental Europe’s variety of capitalism. Specifically, contrary to the Anglo-American reality, Europeans hold that the statement “each individual gets what s/he deserves” is generally false, whereas individual income/wealth descend from elements largely beyond their control (Alesina et al., 2001). Accordingly, contrary views of the free market ensue. Markets produce results corresponding to an individual’s effort for Americans. However, the opposite holds in Europe and, thus, Europeans subscribe to the need/opportunity to regulate markets against the potential distortions damaging the weak part of society and also supporting the establishment of mechanisms of social solidarity. These issues come from observing that even after Communist regimes have collapsed, Capitalism is not uniform, but exhibits varieties (Hall & Soskice, 2001). Why do these different varieties of capitalism exist? Do these differences depend on exceptional but transient factors, which will go away shortly? Or do they depend on peoples’ founding values? Answering is not easy. A liberal view would be that Europeans are skeptical about markets since they seldom experienced free markets. In a sense, the more widespread interventions to regulate markets could themselves create the Europeans’ skepticism. In this view, values pro or contrary to free markets would arise endogenously. Instead, an alternative view is that values are essentially exogenous since they display culture, ethics and moral sediments, conventions of organizing society, etc. Along the latter view, markets and institutions must adjust to values and not the contrary. Hence, if values are exogenous, against Europeans’ skepticism on free markets, it is obvious that it was a mistake to assign markets the main character of the European unification while disregarding solidarity. This has important ramifications as to how cooperative banks are handled in Europe. Within an integration led by the free market logic, the EU has shaped its regulations/policies along the one-size-fits-all approach, giving no room to cooperative banks’ pro-social DNA. Let’s turn to the four pillars addressing the epistemological characteristics of cooperative banks.

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Cooperative Banks, Asymmetric Information, and Market Failures First, cooperative banks enjoy various organizational advantages in curbing the negative effects of asymmetric information. For one, contract theory has shown that asymmetric information (Rothschild & Stiglitz, 1978) generates market failure through moral hazard (Akerlof, 1970) and adverse selection (Spence, 1973). By using relationship banking cooperative banks reduce asymmetric information and the risk of credit deterioration (Agarwal et al., 2018). Relationship banking orients the contract between borrower and lender in a long-run perspective, avoiding shortermism. As a result, more stable customer relationships ensue with positive effects on financial sustainability (Ferri et al., 2001). Furthermore, in cooperative banks borrowers are often also members (Angelini et al., 1998), thus improving the ability of a cooperative bank to have enough information to remove the main lending risks (Peltoniemi, 2007). Since cooperative banks can ease market failure due to asymmetric information, they may also play a countercyclical role promoting sustainability during macroeconomic recessions and financial crises (Chiaramonte et al., 2015). In the context of asymmetric information, knowledge plays a crucial role. In fact, the ability of cooperative banks to extract knowledge from clients through the application of the relationship banking model in the long-run works like a sort of insurance able to assure the bank from risks of the failure of the counterpart. The mix of multiple stakes that clients have as borrower and members summed with the ability of the cooperative bank to acquire knowledge from the relationship banking offers deeper managerial tools to reduce risks of failures and promote financial sustainability (Coco & Ferri, 2010) even in the turmoil of a financial crisis. Cooperative Banks, Tacit Knowledge, and Learning by Doing Besides easing market failure within a credit relationship, cooperative banks can promote tacit knowledge (Polanyi, 1958) and implicit contracts among stakeholders, i.e., members, employees, clients, communities. Tacit knowledge is defined as a knowledge that can be transmitted neither verbally nor in written text. Tacit knowledge can be considered as a practice and in this sense, it recalls the idea of learning by doing developed by J. K. Arrow (1971). Tacit knowledge and learning by doing are necessary to implement cooperative values in banking activity. Since cooperative

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banks are oriented to proximity, solidarity, financial sustainability then these values can be applied with a practice, in the sense of praxis, based on the execution of principles rather than a simple pronunciation or declamation. Tacit knowledge and learning by doing create the methodology by which cooperative banks shape a more resilient and fair local financial system. Furthermore, the practice of cooperative banking has also an effect in shaping the governance of SMEs creating a nexus between cooperative values of banks and the social and ethical commitments of borrowers. There is a positive relationship between the governance of cooperative banks and the governance of knowledge inspired to values of solidarity and proximity that constitutes a common ground between lenders and borrowers (Krafft & Ravix, 2008). Cooperative banks can exercise a cultural and value-based hegemony (Gramsci, 1971) in the local economy that through tacit knowledge and learning by doing can also have a role in the orientation of SMEs’ governance toward sustainability, proximity, and solidarity. Cooperative Banks as Institutions Third, it is necessary to understand that banks in general, and cooperative banks specifically do not perfectly fit the definition of firm but have some characteristics in common with the epistemology of institutions at least in the sense of Douglas North (1991). Specifically, North describes institutions as a set of formal and informal laws to solve the asymmetric information of non-repeated games, that can drive to market failure, establishing a cooperative framework among contract counterparts in the long-run (North, 1971). Institutions expand the area of contracts, enhance trust among agents, and promote behaviors that are more cooperative and reduce the risk of free riding. In fact, in the absence of institutions, agents have more incentive to free ride since they can intend every single contract as non-repeatable in a short-term predatory environment. Banks, and specifically cooperative banks, solve the asymmetric information between economic agents that have an excess of financial resources and others that lack those resources establishing, through credit, long-run relationships, then promoting trust among counterparts, expand economic relationships in the long-run. In this sense cooperative banks add something more: the ethical and moral orientation, the promise of a financial activity that can be performed in the pursuing of social and communitarian values (Shiller, 2013).

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Cooperative Banks and the Theory of the Firm The epistemological determinants of cooperative banks can also be understood in the application of Ronald Coase’s theory of the firm (Coase, 1937). Coase investigated why a firm should produce goods and services internally rather than simply stipulate market contracts—in the sense of transactions. He concluded that producing internally gives firms increasing returns. In this sense also cooperative banks, for their social and ethical mission, do exist since the cost of producing internally forms of credits toward households and SMEs in local communities is lower than that of contracting the same financial contracts—as transactions—in the credit market. Cooperative banks have increasing returns, at least up to a point, in offering relationship banking, financial sustainability, and community building, since those transactions in the credit market would be more costly.

2.3 Key Trends in the Evolution of European Cooperative Banks: A Review of the Literature General Characteristics of European Cooperative Banks Groeneveld (2015) studies the governance of European cooperative banks. Cooperative banks can promote either social diversity or financial stability. The author suggests that the financial and social sustainability of cooperative banks is based on their control management system, i.e., the fact that, in the absence of shareholders, cooperative banks exercise monitoring through the involvement of members. Specifically, the ability of members to actively participate in the management and control of the cooperative banks depends on their commitment and engagement. The participation of member in the cooperative management can have positive effects on: • • • • •

Performance; Distribution policies; Digitalization of banking services; Innovativeness; Positioning in the local credit market strengthening the commitment with local communities and entrepreneurial activities; • Connections with local society.

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However, the author considers also the perils that cooperative banks can face in investing in non-cooperative activities especially for cooperative banks that are part of cooperative banking groups. The suggestion is to reduce the investment in non-cooperative assets to the 30–40% to the total assets. The main risk for a cooperative bank that invest in noncooperative assets is to lose credibility either in respect to their members, local communities, and other cooperative banks associated at the group level. To reduce this risk, it is necessary that the non-cooperative banking activities performed by cooperative banks are realized in the strict interest of cooperative members. Furthermore, the author suggests that the presence of external providers of funds should be limited in the interest of preserving the cooperative principle. Kuc (2018) investigates the relationship between size and efficiency in European cooperative banks in the period 2006–2015. The author analyzes 183 cooperative banks in 12 European countries applying the Stochastic Frontier Analysis. The study is oriented to examine the effect of the post-2007 financial crisis on the European cooperative banking system. Results show that: • Cooperative banks are more efficient in respect to other banks in the European banking system; • The relationship between size and efficiency is linear. The author suggests that cooperative banks should not improve their size and should remain small to preserve the dimensional advantages in respect to bigger, riskier, and less efficient banks. Policymakers should recognize the nature of cooperative banks and promote their ability to generate value even preserving their small size. However, the author expresses critique toward the application of a unique legislation for cooperative banks across European nations. Clark et al. (2018) investigate the relationship between competition and financial stability in European cooperative banks in the period 2006–2014. The authors use a modified Lerner Index to analyze the relationship between market power in loans and in deposits for cooperative banks. A secondary research question is to test the existence of a nonlinear relationship between competition and stability among European

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cooperative banks. Results show that in the case of European cooperative banks: • The relationship between market power and stability has the form of a hump-shaped curve; • There is a positive relationship between solvency and the diversification of assets and liabilities; • There is a positive and linear relationship between deposits and solvency. The authors suggest that market power has a controversial role in shaping cooperative banks solvency, profitability, sustainability, and efficiency. Cornée et al. (2018) offer an overview of cooperative banks in Europe. The authors recall the role of cooperative principles in promoting cooperative banks. Even if humans are certainly the only species that have developed a deeper sense of self-consciousness, they also have shown a great ability in promoting large social groups to solve the question of survivor. The tension between an individual attitude and the necessity of social integration to beat the enemy, the nature, or the adversity is a characteristic of human development and human civilization. The authors clarify the presence of three main advantages in the cooperative behavior, i.e., • A positive impact on productivity in the presence of division of labor; • A quali-quantitative increase in the production of goods and services; • The development of an social insurance, even in the private sector, oriented to face social, economic, and environmental risks. These principles have enlightened the vision of Wilhelm Raiffeisen and Franz Hermann Schulze-Delitzsch that, independently, in the nineteenth Germany had a vision and the courage to promote cooperation to solve the question of poverty and starvation. Raiffeisen and Schulze-Delitzsch cooperative banks were both inspired by mutualistic principles but had also differences in terms of localization and operativity. Later, cooperative banks spread throughout Europe. The European cooperative bank system is not completely homogeneous and effectively there are several elements of diversity and variety among cooperative banks at a country

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level. However, despite the institutional, legal, and operational differences among European countries, the European cooperative banks share common values and principles: • • • • • •

Membership and democratic governance: Proximity; Prudent management ; Maximization of stakeholder value; Long term orientation; Relationship banking .

However, the authors suggest not to consider cooperative banks as philanthropic institutions and organizations, even if cooperative banks are morally and ethically oriented. Lamarque (2018) affords the question of governance in cooperative banks. Memberships are an essential Key Performance Indicator-KPI to understand and investigate the role decision-making rules and practices in a cooperative bank. Each member of the cooperative banks has one vote no matter how many shares she has acquired. The “one head one vote” decision-making systems create a unique governance model that is inspired to pure democratic values. As in modern democracies, not all the citizens participate in the political decision-making, in the same way also in cooperative banks only a selected minority of members exercise the governance. Despite the heterogeneity of members in terms of governance and consciousness of active participation, in the aftermath of the crisis, the cooperative banks have rediscovered the role of membership as a tool to promote different banking model in respect to shareholder banks. However, to promote membership as a significant difference between stakeholders and shareholder banks, cooperative banks need to invest more in the activation of the members’ participation in the banking governance. The author proposed essentially three different arguments: • The role of membership for the decision-making system in the governance of cooperative banks; • The presence of heterogeneous models of cooperative banks; • The role of risk-aversion and risk-propension in the cooperative banking system.

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Finally, the author suggests reforming the Basel III requirements to better encounter the specific characteristics of the European cooperative banking system. European Cooperative Banking Groups (ECBG) Groeneveld (2014) investigates the literature on financial cooperatives. The author considers the characteristics of the European Cooperative Banking Groups-ECBGs. Specifically, results show the presence of a positive relationship between the cooperative banking values and managerial methods and the ability of European Cooperative Banking Groups to perform differently either respect the business cycle or respect other banks. The authors create a complex database with financial variables for 15 European Cooperative Banking Groups in 10 countries augmented with general banking system variables. Results show that European Cooperative Banking Groups: • Are more risk-averse in respect to other banks; • Have greater capitalization than commercial banks; • Are more oriented to financial sustainability in respect to other banks and financial intermediaries; • Tend to orient their activity toward the retail rather than the institutional market. Groeneveld (2016) compares the financial performance of 15 European Cooperative Banking Groups to the banking sector at a country level in the 2014. Data suggest that the number of members in cooperative banks is increased of 18 time from 1997 with 1.3 million members registered until 2014. The fluctuations of cooperative banks assets have been limited in respect to that of other banks. The greater resilience of cooperative banks in respect to other banks is since their business model is based on deposits from SMEs and households. Cooperative banks tend to have a higher number of branches and employees to better serve the local community and the real economy. The author has analyzed the performance of cooperative banks in respect to the banking sectors in terms of average Return on Equity-ROE in the period 2002–2014. The author has chosen a medium period to capture the effect of the business cycle. Results show that:

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• The ROE of cooperative banks is more stable in the long run in respect to the ROE of the banking sector; • The level of ROE of cooperative banks is lower than the ROE of the banking sector in the period 2002–2008; • The level of ROE of cooperative banks is higher than the ROE of the banking sector in the period 2008–2014; • In 2014 the ROE of cooperative banks was 250% greater than the ROE of all other banks; • The cost-income ratio of cooperative banks was 4.7% lower than the cost-income ratio of other banks; • The average tier 1 ratio of cooperative banks in 2014 was 13.1 in comparison with 12.7 of the correspondent value of other banks. The author sustains that the better financial performance that European cooperative banks have shown in the aftermath of the Great Financial Crisis is due to their managerial and business model. Cooperative banks invest more in retail baking reducing revenues volatility. Other banks invest more in financial assets, i.e., trading portfolios and investment banks, with a positive effect on the increase of risk and in the improving of revenue volatility. Cooperative Banks and Financial Crisis Meyer (2018) considers the resiliency of cooperative banks in Europe during the 2008 financial crisis. While many banks, especially commercial and for profits banks, have required a governmental intervention, cooperative banks have preserved their financial capability, with few exceptions. The authors argue that while, on the one side, commercial banks have acquired risky assets, on the other side, cooperative banks have lowered their financial risk thanks either to their local mandate or to their organizational structure. In effect cooperative banks tend to offer more credit to the real economy rather than invest resources in derivatives and financial markets. The different orientation of cooperative banks in respect to commercial banks in the sense of risk has improved the ability of cooperative banks to suffer less from the financial crisis. The authors consider the cooperative banking model as more traditional in respect to shareholder banks. After the crisis monetary authorities have introduced more stringent regulations. The authors suggest new managerial methods that

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cooperative banks can apply to better perform in the changed institutional and regulatory environment. Barbu and Boitan (2019) analyze the question of the credibility of the credibility and reputation of the European financial and banking system in the aftermath of the Great Financial Crisis. The authors investigate the performance of European cooperative banks to verify if they have lost their original values or if they continue in the promoting of local economies, communities, solidarity, and financial sustainability. Data are collected from the 23 national organizations that participate in the European Association of Co-operative Banks. The authors focus their attention of financial performance with a cluster analysis to better classify European cooperative banks based on their ability to operate in the application of the cooperative principles. The authors analyze the sequent elements of the financial performance of cooperative banks: • • • •

Liquidity position; Profitability; Capital adequacy; Cost efficiency.

Results show that: • There is an increase heterogeneity among cooperative banks in Europe in terms of business models; • Cooperative banks among European countries significantly differ in terms of financial performance. The authors conclude suggesting the intervention of policymakers to promote a more resilient and sustainable cooperative banking sector in Europe. Cooperative Banks at National Level in Europe Karafolas (2016) investigates the role of credit cooperative in the Greek banking system after the reform of the 1990s. The Greek Law has distinguished cooperative banks and credit cooperatives. The main difference between cooperative banks and credit cooperative is that while cooperative banks are considered as banks, credit cooperative cannot operate as

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banks. Credit cooperative have had a large diffusion in Greek, especially in respect to cooperative banks. Cooperative banks are marginal in the Greek banking system at a national level in term of assets and branches. The authors retain that the Greek Law has marginalized the role of cooperative banks. One of the main limitations of the Greek cooperative system consists in the many limitations that regulators have imposed to their ability to promote national cooperative groups. The “Great Financial Crisis ” of 2007 has worsened the condition of the Greek cooperative banking system. Cooperative banks have suffered from the financial crisis due to the deterioration of credit and the Bank of Greece has recalled the licenses of six cooperative banks. The Great Financial Crisis has created a new Greek banking system based on one side on a complex set of Mergers and Acquisition-M&A, and on the other side, on the political intervention of European institution with the financial stability fund. Golec (2017) investigates the ability of cooperative banks to operate at a local level in Poland. The authors sustain that one of the main advantages of cooperatives consists in their ability to use the financial resources raised for the benefit of the local community. Quarterly data are analyzed from 75 cooperative banks in Poland in the period 2009–2016. Data are processed in a regression model. The authors are interested in estimate the level of deposits in respect to loans. Results show that in Poland the loans to deposits ratio is equal to 0.7. The authors suggest applying new political economies able to improve the ability of cooperative banks to offer credit toward the local community in Poland. Lagoa and Pina (2015) afford the question of the cooperative banks in Portugal. The authors observe that cooperative banks have shown a significant resilience during the Subprime crisis. However, despite their financial sustainability during the crisis, the credit market in which cooperative banks operate is characterized by the presence of a high competitiveness. Generally, to solve the question of local competition, cooperative banks improve their size. The authors use data of Portuguese cooperative banks in the period 2009–2011 to analyze the relationship between size and profitability. Results show that: • Size has a significant impact on profitability for local banks; • Time invariant characteristics of local banks have a role in determining the profitability of local banks; • Larger cooperative banks have better credit risk management.

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The authors suggest that in the case of Portuguese “Caixas,” the strategy of improving the size of local cooperative banks is positively associated either to profitability or to better financial sustainability. Aiello and Bonanno (2016) investigate the relationship between Italian cooperative banks-BCCs and local economies in the period 2006–2011. The authors apply a twofold method: First they apply a stochastic frontier and in sequent a regression to investigate the determinants of efficiency at individual and environmental level. Results show that: • Italian BCCs have performed better than other Italian banks during the Great Financial Crisis; • The efficiency of Italian BCCs is decreasing in the observed period; • The efficiency of BCCs is positively associated with market concentration and demand density; • The efficiency of BCCs is negatively associated with the number of bank branches at local level; • The performance of BCCs is cost and profit invariant; • There is a negative relationship between BCCs cost efficiency and local development; • There is a positive relationship between BCCs profitability and the increase in systemic credit risk. The analysis considers the operational resilience, financial sustainability, and countercyclical characteristics of Italian BCCs. Jones and Kalmi (2015) analyze the question of the relationship between membership and financial performance in Finnish cooperative banks. The authors challenge the “conventional wisdom” that statues the presence of a negative relationship between membership and performance for cooperative banks. The authors measure the investigated relationship with GMM and fixed effects with controls either for firm-level heterogeneity and endogeneity. A new indicator is created to capture the membership-performance nexus in cooperative banks, i.e., the membership rate. Results show that there is a positive relationship between membership and cooperative banks in Finland. The authors suggest that this positive relationship has an institutional explanation: Since 1990 Finnish cooperative banks have promoted membership as a competitive advantage. More committed members have generated a more efficient cooperative banking system in the sense of financial performance. The

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authors suggest that improving membership in cooperative banks has the sequent consequences: • Augment customer loyalty; • Create a more customer oriented decision-making activity; • Assure an increase in equity in application of Basel II regulation for capital requirements; • Promote a deeper financial solidity; • Reduce costs of borrowing; • Improve the economic efficiency. The authors suggest that membership creates loyalty and promote a better performance for cooperative banks. The positive relationship between membership and performance is the base for the creation of a “New view of cooperatives ” in which membership is key factor to explain performance, market penetration, financial sustainability, and customer orientation. Šúbertová (2016) investigates the presence of credit cooperatives in Slovakia. The author suggests that the first credit cooperative in the world has been established in Slovakia in the 1845 and was called “Farmers’ Unit.” Nevertheless, since then, the cooperative banking sector in Slovakia suffers for deeper underdevelopment. The author suggests that cooperative banks have better performance during the economic crisis. Cooperative banks have the sequent strategic social and financial advantages: • Sustain the lower and middle classes in their access of credit ; • Provide credit and financial supports toward Small and Medium Enterprises-SMEs ; • Practice lower interest rates. However, cooperative banks also have “dark sides,” such as: • The accumulation of funds depends from membership; • There is a low efficacy in providing long term loans; • Higher operating costs in respect to other non-banking cooperatives.

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The author suggests to policymakers to apply political economies oriented to promote a widespread diffusion of cooperative banks in the Slovakian economy. A Comparative Analysis of Cooperative Banks and Other Typologies of Banking Ownership in Europe Meriläinen (2019) considers the role of Loan Loss Provisions-LLP in Western European banks in the period 2004–2015. The author tries to investigate if there are some relationships between the Loan Loss Provisions-LLP and the business cycle. Specifically, the study focuses on the relationship between bank ownership type and loan loss accounting. Regressions are run on data. Four typologies of banks are analyzed: • • • •

Commercial banks; Cooperative banks; Private savings banks ; Publicly owned saving banks.

Results show that: • • • •

Loan loss provision is independent from discretionary factors; Loan loss provision is countercyclical; Cooperative banks are more prudent in provisions; Stakeholders banks, i.e., cooperative banks and savings banks , accumulate provisions against future risks while commercial banks are less provident.

Lang et al. (2016) describe the characteristics of cooperative banks and small financial institutions in Europe. The authors consider that European cooperative banks in respect to other banks have the sequent attributes: • • • • • •

Low level of total assets; Higher solvency; Higher asset quality; Lower leverage; Lower loans-to deposit ratios A more conservative business model;

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• Deeper relationships with SMEs ; • A more stable capital base; • Suffer less from financial crisis. The authors also consider the complex set of challenges that European cooperative banks face in the aftermath of the Great Financial Crisis and in the application of Basel III. The deposit market share of cooperative banks should be reduced as a consequence of the changing in regulation, supervision, and capital requirements. Ferri et al. (2014) consider the role of the Great Financial Crisis in Europe. The authors try to estimate if the financial crisis was organizational and ownership invariant in the European banking sector. Data are collected from rating agencies, i.e., Moody’s and Fitch for the period 2006–2011. Specifically, the authors analyze the relationship between ratings and ownership structure in European banks. Two main groups of banks are juxtaposed, i.e., stakeholder banks and shareholder banks. Stakeholder banks are later divided among savings banks and cooperative banks. Result shows that: • stakeholder banks suffer less for downgrading in respect to for-profit banks; • cooperative groups over-performed stakeholder banks in the sense of ratings; • there are significantly difference between Fitch and Moody’s in rating banks, i.e., Fitch gives more positive rating to stakeholder banks in respect to Moody’s; • cooperative banks have been more resilient than shareholder banks during the crisis. The authors conclude suggesting that the ownership structure has a role in reducing the risk-taking behavior of banks and finally, that the disagreement between Moody’s and Fitch in rating banks could be considered as a sort of noise in the market of merit valuation. Ferri (2012) analyzes the differences between stakeholder banks and shareholder banks in the aftermath of the Great Financial Crisis in the context of a changing legal and institutional framework that is designed for commercial and for-profit banks and seems to reject the moral and

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financial virtues of cooperative banks. The author suggests that the differences between stakeholder and shareholder banks are not based on a legal framework but find its motivations in the economic convenience of institutions and organizations in shaping their banking activity, in managing their relationships with clients, and in promoting their financial services. Specifically cooperative banks, and in general stakeholder banks, have the sequent characteristics: • Are more efficient in solving conflict of interest among depositors and bank owners; • Are more oriented to relationship banking ; • Are more resilient in financial crisis. The differences between stakeholder and shareholder banks are not only based on ownership structures. On the contrary, they have shaped the entire credit marketing. The credit market has faced a transformation from the traditional banking model of “Originate to Hold”-OTH to the more financially innovative, more profitable, and riskier “Originate to Distribute”-OTD. While stakeholder banks have continued to perform OTH, shareholder banks have shifted their business model and credit management from OTH to OTD. The author concludes that cooperative banks face three main challenges: • The necessity to re-organize their structure to preserve their values; • Find new and alternative methodologies to promote relationship banking for the sake of local communities, families, and SMEs ; • Improving their political role to have a hegemony on financial regulation to assure the continuation of their traditional activities, moral values, and social orientations. Chyra-Rolicz (2016) describes the long history of cooperative banks in Poland. Polish cooperative banks have an history of 150 years, and they show a great resiliency surviving in the turmoil and crisis of different regimes, states, and political orders. However, even if the political and institutional orders changed, Polish cooperative banks continue to assure credit to their members and support the local economy with a stake in solidarity. Today Polish cooperative banks are living a new era of prosperity in accordance with a new and more coop-oriented institutional

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and political environment. The author recalls the work of Franciszek Stefczyk leader of the Polish cooperative movement. Cooperative savings and credit chases have grown in Poland. The Polish cooperative banking system counts 1.599 chases and 2.1 million members. The author shows how cooperative banks act as an institution of the Polish economy and society. Coccorese et al. (2016) afford the question of inner and outer competition among cooperative banks that participate of the same network. Inner competition is the competition among cooperative banks that are associated at the same banking network while outer competition regards cooperative banks that are members of different banking networks or groups. The main hypothesis of the authors is that inner competition is inefficient in respect to outer competition. The proposition is tested for the case of Italian Banche di Credito Cooperativo-BCC. Results show that: • BCCs monopoly outperforms BCCs duopoly; • BCCs that face an outer competition are more productive in respect to BCCs that engage in inner competition. The authors suggest to limits rivalry to promote efficiency and productivity among BCCs and cooperative banking sector. Coccorese and Ferri (2020) investigate the degree of efficiency in recent mergers among Italian Banche di Credito Cooperativo-BCCs. The authors use a twofold approach in their research question: • Estimate the bank level cost efficiency scores over the period 1993–2013 through a stochastic frontier; • Explain the BCCs’ scores using dummies and a vector of control variables. Results show that BCCs that have merged at least three times with other BCCs have an increase in mutual banks cost efficiency of five percent. Finally, the authors suggest that the mergers and acquisitions of BCCs have increased the size of cooperative banks reducing their ability to serve their traditional clients of households and SMEs. Kalmi (2016) analyzes the evolution of Finnish cooperative banks. The authors state that initially cooperative banks worked as agricultural lenders

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significantly influenced from the Raiffeisen movement. After World War II, cooperative banks improve their relevance actively participating in the reconstruction of the country. During the 1970s cooperative banks were legally recognized as banks from the Finnish Law. Cooperative banks show a high level of resiliency during the 1990s banking crisis. After the crisis Finnish cooperative banks were divided in two different groups, i.e., OP Group and POP Group. The OP Group acquired an insurance companies and become the leading cooperative banking group in Finland. During the Great Financial Crisis, both OP Group and POP Group were financially sustainable. The author retains that the legislative intervention has oriented Finnish Cooperative Banking Group toward new re-organizations and changes. Richez-Battesti and Leseul (2016) analyze the main characteristics of French cooperative banks. The author suggests that French cooperative banks have obtained many relevant objectives, i.e., • An increase in market share; • The creation of new financial services; • Have introduced significant innovation in banking and financial services; • Have promoted significant re-organization in the banking sector such as the creation of cooperative banking groups. The author concludes that French cooperative banks have shown a greater financial resiliency during the Great Financial Crisis and have continued to offer credit toward their traditional clients constituted of SMEs and households. Kleanthous and Hadjimanolis (2016) investigate the condition of cooperative banks in Cyprus. Cypriot Cooperative Banks were founded in 1909 to offer credit for poors and reduce the usage of usury. Nevertheless, the Great Financial Crisis has changed the Cypriot Cooperative Banking System. In 2013, under the axes of the European Institutions, Cypriot cooperative banks were forced to merge with the sequent consequences: • cooperative banks were reduced from 100 to 18; • the 99% of the ownership of cooperative banks was transferred to the Cypriot State;

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• the State of Cyprus invested 1.5 billion euros to re-found cooperative banks; • the supervision of cooperative banks was passed to the Central Bank of Cyprus; • the 18 cooperative banks were successively merged to a single institution open to M&A with foreign partners. The authors suggest that the reforms that have been introduced in the Cypriot Cooperative Banking System challenge the idea and practice of cooperative banks as not-for-profit financial organizations oriented to promote credit and solidarity among population especially in local communities with a particular attention to SMEs and households. Digitalization of European Cooperative Banks Gorlier et al. (2018) analyze the ability of cooperative banks to promote and defend the idea of proximity offering banking services in the digital age. The digitalization of cooperative banks is a challenge for the traditional banking model since remote services and online banking do not require any kind of proximity neither relationship banking. The application of technological innovation to cooperative banks can reduce their ability to promote social value, financial sustainability, and local communities. The introduction of new digital technologies changes the client-employee relation in cooperative banks. To afford these questions, the authors have realized two studies using a two-focus group: • one constituted of ten clients of either French cooperative and commercial bank; • one composed of 8 employees of a French cooperative bank. Results show that: • The digitalization has a positive effect on the brand of cooperative banks; • Employees can offer more customized services to their clients through digitalization;

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• The positive effect that digitalization has on the brand of cooperative banks also enforce the customer loyalty, retention, and satisfaction of the client, creating a “client-brand relationship”; • The digitalization-brand value nexus in cooperative banks can promote the employee loyalty toward the employer boosting efficiency and creating the premise to a better performance of the relationship banking model through internet; • Cooperative banks’ brand value offers the common intangible in which employees, clients, members, and stakeholders can recognize and share their moral aspirations; • There is a mutual and positive relationship among cooperative values, digitalization techniques and proximity toward the clients, and brand value. Institutions, Laws, and Cooperative Banks Soana and Ferri (2019) criticize the Capital Requirement Directives IV-CRD IV that even if oriented to reduce the risk in the European banking sector has created a discriminatory condition for Small Cooperative Banks-SCB. In effect Small Cooperative Banks-SCB have lower risks than commercial and for-profit banks. The authors realize a survey on manager compensation, risk taking, and internal governance confronting the situation before and after the application of the CRD-IV with a focus on Small Cooperative Banks-SCB. Results show that at least for the case of Small Cooperative Banks-SCB the application of the CRD-IV has created organizational changes that are not justified by the presence of real individual or market risks.

2.4 Cooperative Banks and the Green Transition in Europe The finance-sustainability nexus must ponder which forms of finance— types of intermediaries and markets, but also instruments or contractual arrangements—are functional to the sustainable transition. In this respect, we may expect cooperative banks to be champions of the European sustainable transition, accelerated by the European Green Deal and Next Generation EU.

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The transition to sustainable development via sustainable finance is, in fact, a great opportunity for cooperative banks (Goglio & Catturani, 2019), whose vocation pursues the common good—nowadays identifiable as saving planet Earth—and which, thanks to superior knowledge on borrowers, may more credibly certify the sustainable scores of the issuers of sustainable financial assets (e.g., green bonds) to be placed in asset management for the customers, so shifting from interest to fee income.

2.5

Conclusions

In this chapter, we have analyzed the role of cooperative banks within the European variety of capitalism. As we have discussed in the introduction, the theoretical and epistemological characteristics of cooperative banks, i.e., their ideal type in the sense of Max Weber (Weber, 1949), are based on four pillars: asymmetric information, tacit knowledge and learning by doing, the theory of institutions, the theory of the firm. Despite their unitarian foundation in the theory of economics, as we have shown in the second paragraph, there are many differences among cooperative banks among European countries. Different countries have different legislations, and the historical development of the cooperative banking system has created a certain degree of heterogeneity at national level. The analysis of the economic literature shows that cooperative banks have also common features, i.e., operational characteristics, the resilience during financial crisis, proximity, financial sustainability, and the creation of deep relationships with local community. Nevertheless, cooperative banks also suffer for the re-organization of the European banking system that in creating a more risk-averse banking system have missed to recognize the specificity of cooperative banks. In this sense, policymakers should intervene to promote a legislation that even in enforcing more stringent capital requirement for the European banking system, should recognize and preserve the specificity of cooperative banks as institutions.

References Agarwal, S., Chomsisengphet, S., Liu, C., Song, C. & Souleles, N. S. (2018). Benefits of relationship banking: Evidence from consumer credit markets. Journal of Monetary Economics, 96, 16–32. Aiello, F., & Bonanno, G. (2016). Bank efficiency and local market conditions: Evidence from Italy. Journal of Economics and Business, 83, 70–90.

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Ferri, G., Kang, T. S., & Kim, I. J. (2001). The value of relationship banking during financial crises: evidence from the republic of Korea (Vol. 2553). In World Bank Publications. Goglio, S., & Catturani, I. (2019). Sustainable finance: A common ground for the future in Europe?. In The rise of green finance in Europe (pp. 239–261). Palgrave Macmillan. Golec, M. M. (2017). Locality and the transfer of funds in the cooperative banking sector in Poland. Copernican Journal of Finance & Accounting, 6(3), 21–33. Gorlier, T., Michel, G., & Zeitoun, V. (2018). The new paradigm of digital proximity for cooperative banks. In New cooperative banking in Europe (pp. 163–181). Palgrave Macmillan. Gramsci, A. (1971). Selections from the prison notebooks of Antonio Gramsci. s.l.:Quentin Hoare and Geoffrey Nowell Smith. Groeneveld, H. (2016). Snapshot of European cooperative banking. TIAS, 2–21. Groeneveld, H. M. (2014). Features, facts and figures of European cooperative banking groups over recent business cycles. Journal of Entrepreneurial and Organizational Diversity, Special Issue on Cooperative Banks, 3(1), 11–33. Groeneveld, J. M. (2015). Governance of European cooperative banks (TIAS, Working Paper). Hall, P. A., & Soskice, D. (Eds.). (2001). Varieties of capitalism. The institutional foundations of comparative advantage. Oxford University Press. Jones, D., & Kalmi, P. (2015). Membership and performance in Finnish financial cooperatives: A new view of cooperatives? Review of Social Economy, 73(3), 283–309. Kalmi, P. (2016). Co-operative banks in Finland. In Credit Cooperative institutions in European countries (p. 43). Karafolas, S. (2016). The Greek cooperative credit system. In Credit cooperative institutions in European countries (pp. 111–126). Springer. Kleanthous, A., & Hadjimanolis, A. (2016). Co-operative credit institutions in Cyprus. In Credit cooperative institutions in European countries (pp. 19–41). Springer. Krafft, J., & Ravix, J. L. (2008). Corporate governance and the governance of knowledge: Rethinking the relationship in terms of corporate coherence. Economics of Innovation and New Technology, 17 (1–2), 79–95. Kuc, M. (2018). Cost efficiency of European cooperative banks (IES Working Paper, Issue 21). Lagoa, S., & Pina, L. P. (2015). Size and profitability in co-operative banking: A picture from inside a Portuguese institution. CIRIEC-España, revista de economía pública, social y cooperativa, 83, 201–234.

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CHAPTER 3

Cooperative Banks and EU Regulation: A General Assessment Silvio Goglio and Mitja Stefancic

3.1

Introduction

Effective regulation in banking, as in other industries or economic sectors, can be considered as a public good, since it sets out to create positive externalities for a broad spectrum of economic actors, as businesses, families and banks themselves. However, the process of designing such regulation is not a neutral one. It can take several years before the common rules and norms of compliance are defined and accepted by the regulated entities, and always involves lobbying based on business power and political strategy, as well as some degree of intergovernmental bargaining (Culpepper & Tesche, 2021; Howarth & James, 2020). This

S. Goglio University of Trento, Trento, Italy e-mail: [email protected] M. Stefancic (B) EURICSE, Trento, Italy

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_3

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chapter focuses on the new regulatory framework under which cooperative banks in Europe operate. Our argument is that, despite their complexity and a call for proportionality, the new rules of regulation and supervision (particularly over the last few years) are not optimal for such banks, whose characteristics and role in the economy are not taken into account. As a result, this framework imposes a heavy burden on cooperative banks and may significantly affect their organization, business model and corporate values, thereby impoverishing the biodiversity of the banking system and diminishing its potential. The new financial regulatory architecture emerged in response to the 2007–2009 global financial crisis. In the European Union specific context, it was hastened and influenced by the drawbacks suffered by several institutions because of the ensuing economic crisis and recession, which caused increasing bank funding costs and an erosion of bank capital (Tölö & Viren, 2021). Although the viability and consequences of the new EU regulatory mechanism on cooperative banks are still to be examined in details (Jovanovi´c et al., 2017) and their after-effects to be assessed, the first findings suggest that it is not sympathetic to this kind of banks, and not entirely suitable for them, mainly for those operating at local level. In particular, it seems to somewhat neglect the peculiarities and specific systemic robustness that allowed them to perform a persistently significant contribution to the local, regional and sometimes national development. Investigating the reasons for that, we argue that the causes can be traced back to both the scarce ability of cooperative banks (or their representative bodies) to actively participate in the process of designing the new regulation, and the standardized mindset of regulating authorities. Since the beginning of the process, cooperative banks should have been more active in shaping the above-mentioned mechanism, particularly in pushing for proportionality. Albeit wanting to avoid taking a too critical perspective, the evidence suggests that they have largely missed this opportunity, finding themselves at the end somewhat constrained to adapt to the new framework with no other option. On the other hand, the efforts and outcomes from the work of the European regulators have not provided measures able to entirely safeguard cooperative banks’ values and mutualistic goals in doing their business. This is perhaps the result— among other things—of lack of any deeper philosophy, which could be useful in designing effective regulation.

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The remainder of the paper is structured as follows. Section 3.2 introduces the intrinsic characteristics of the cooperative banking model and the organization of cooperative banks in Europe. Section 3.3 defines bank regulation as a collective good, thus providing a point of view necessary to better understand what type of regulation would be more suitable for cooperative banks, particularly the smallest ones. Section 3.4 critically discusses financial re-regulation, while Sect. 3.5 focuses specifically on the ‘top-down’ process of regulation, which applies to cooperative banks in the same way as to all other banks. Section 3.6 discusses the concept of proportionality in bank regulation. Section 3.7 sets some practical concerns, which should be hopefully relevant to scholars and regulators, and provides a final discussion.

3.2 Peculiarities of Cooperative Banks and Implications for an Optimal Regulation Before focusing on the regulation suitable for cooperative banks, a short account of their specificities can be useful. As stressed by Jovanovi´c et al. (2017), ‘the decisive difference of cooperative banks from other banks is their legal form as a registered cooperative, which determines their objectives and activities’ (p. 39). They have a propensity for adopting relatively conservative business strategies and stakeholder maximization policies with a preference for sustainable returns with longer time horizons (Butzbach & Von Mettenheim, 2015; Lang et al., 2016). They are in principle customer-oriented and tend to be particularly efficient in maintaining long-lasting relationships with their customers and cooperative members. Their lower propensity to engage in short-term investment horizons is matched by a much lower propensity to engage in financial speculation (Poli, 2020). The cooperative ownership is indeed a distinctive characteristic (Angelini et al., 1998) and members tend to enjoy easier access to credit. Stated otherwise, these banks are particularly strong in relationship banking, a feature that enables managers to make informed decisions in the provision of loans and financial services because of a relatively in-depth knowledge of customers’ business. Economically efficient these banks can help creating positive externalities for the local economy and the society. To quote from Clark et al. (2018, p. 91): ‘cooperative banks create value through the unique nature of their relationships not only with the borrowers, but also with the local environment where they operate’.

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The basic characteristics which differentiate cooperative banks from joint-stock ones are: the equity held as a proportion of total assets by the more integrated cooperative networks is always higher than that of the corresponding commercial (shareholder) ones; stakeholder-oriented banking groups provide significant contributions to the development of local economies and have less intense links with financial markets; cooperative banks are on average less prone to engage in speculation and in risky financial operations (e.g. Poli, 2020, p. 382). Instead, they are somewhat more solvent—particularly those with diversified assets and liabilities (Clark et al., 2018). Not last, we can stress their importance in solving some aspects of the increasing problems of sustainability, environmental crisis, and health care. The organization of individual cooperative banks can be better understood when considering that they often operate under larger networks. To quote from McKillop et al. (2020): ‘in Europe, cooperative banks have developed prominent central institutions and formed network alliances. These networks range from loose associations to cohesive groups, and can be simple or complex multi-levelled structures’. Some examples can be useful for clarifying this point. The organizational models adopted by Austrian cooperative banks tend to make up formal networks, albeit with various degrees of integration. These systems are made up of legally autonomous local institutions at the regional and national level whose capital belongs to local banks, thus creating an inverted ownership structure (Poli, 2020). In Finland, the main cooperative banking networks are generally highly integrated (even though some individual banks are rather reluctant to be part of a formal organisational framework) and consist of well-capitalized banks (Kalmi, 2016). In France leading cooperative banking groups have adopted hybrid structures whereby networks of French credit institutions are affiliated to a central body which is currently under substantial control of the affiliated banks (Marchetti & Sabetta, 2009; Poli, 2020). According to Poli (2020), the more efficient the network, the better the results of individual cooperative banks, since the indicators of the single units’ profitability and operating efficiency are generally more satisfactory in more integrated networks. However, an inverse, although not necessarily alternative, relationship could be assumed and tested: the more efficient the individual banks, the more integrated the network. That as long as we take into account a not negligible positive aspect of such networks observed by Coccorese and Ferri (2019): that of limiting an

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excessive inner competition among the banks themselves, which often ends in a negative sum game. A restriction that appears to be a desirable strategy to preserve the stability of cooperative banking networks themselves. Furthermore, strategically integrated cooperative groups are less focused on trading financial products over time, meaning that they do not engage in financial trading, which can end up in speculation. We can conclude that, despite some recent reforms of the cooperative banking systems, often prone to favour demutualization, among which the Italian one is particularly significant, a number of substantial differences between shareholder banks and stakeholder banks indeed persist in European countries and chances for further developments of the last model still exist. As remarked by Poli (2020), only in the case of the Netherlands the differences between the cooperative banking model and the shareholder-oriented model of banking tend to be more blurred. The differences between cooperative and joint stock banks, however, do not exclude a considerable differentiation among cooperative banks themselves. First, they operate under the setting of national legislations and organisms of supervision that are not entirely homogeneous across Europe. Secondly, the two macro groups of Raiffeisen cooperative banks and Popular banks (à la Schulze-Delitzsch), which are sometimes considered under the same category, are not entirely similar. Thirdly, in countries such as Austria, Finland, France, Germany, Italy and the Netherlands, they are as popular and competitive as to be—as a segment of the national market—of a systemic interest to the national banking systems (Chiaramonte et al., 2013). Elsewhere, as in the case of Ireland and UK, certain models of cooperative banking that are common to continental Europe simply did not blossom and only the so-called building societies currently approximate to cooperative banks (Colvin & McLaughlin, 2014). Lastly, there are significant differences between large integrated groups and small and affiliated banks that still preserve a relative autonomy; it is also necessary to distinguish between integrated groups and networks that rely on second level banks. As a result, it becomes difficult to define a general ideal type of regulation for all of them.

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3.3 Financial Regulation as a Collective Good: Considerations for Cooperative Banks On a basic level, regulation aims to maintain banks’ solvency by avoiding excessive risks. In particular, it helps in securing that banks have an efficient management, so that they do not engage in too risky lending policies, risky investments or become themselves too risky within the sector. Furthermore, a well-designed regulation should grant an even playing field for all banks, regardless of their size, business model and corporate values. Last but not least, when deciding upon the regulatory set up and the regulatory framework, regulators need to show transparency and independency from banks’ pressure and that of political authorities in order to secure credibility (Rochet, 2009). Given these qualities, effective regulation can be considered as a collective or public good, or—as some other scholars prefer to put it—a ‘particular public action’ (Ülgen, 2021b). From a general point of view, economic and financial actors benefit from situations that increase the level of positive externalities. These latter can derive from respect for institutions (i.e. norms, customs or agreements), and they consequently consist in forms of behaviour which find their justification in these institutions. By complying with an appropriate norm, an actor transmits a benefit to the other members of the community. A collective good is designed to create positive externalities and therefore system economies—be them national or simply confined to a circumscribed group (Buchanan, 1965, 1975). In other words, ‘a collective good for some group is nothing more than some aspect of the state of the world that all members of that group wish to see brought about’ (Schofield, 1985, p. 207; see also the seminal Samuelson, 1954). Indeed, if effective regulation prevents bank failures and excessive risk-taking by bank managers, secures a fair competition among single banks and grants an even playing field for all banks, regardless of their size, business model and corporate values, it has all the characteristics of a categorial (or club) public good, i.e. relative to the banking system. At the same time, if it favours the general stability of the economic system and helps consolidate the financial prerequisites for sustainable national economic development, it can be considered a general public good. Crucial to our argument is the dialectics (the reciprocal interaction) between institutions (the rules) and organizations (in our case, the banks). On the one hand, the former are the basis for being and mode of being

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of the latter; on the other hand, the latter can endeavour to shape and modify the former into a form more favourable for the pursuit of their goals (cfr. North, 1990). Public goods can be supplied both by private organizations, midway between the single actor and the state, giving rise to the so-called collective action, and by the state. Historically, the growing necessity of public goods has been one of the main justifications for the expansion of the state and for the proliferation of ever more complex forms of government. Yet this has often come about at the cost of increasing diseconomies and inefficiencies, since the centralization of supply brings with it not only excessive homogeneity but also agency problems and bureaucratic elephantiasis. Market failures in the efficient supply of public goods can therefore be flanked by state failures, especially in the case of categorial public goods for the satisfaction of demand by circumscribed groups with specific needs. When intermediate organizations of public goods supply are strong, differentiation of supply prevails, with substantial autonomy in its formation. Instead, when top-down processes of supply prevail, the outcome from such supply is predominantly homogeneous (Goglio, 1999). Competition can arise between intermediate and central organizations for the supply of public goods because the central authority, often jealous of its monopoly, seeks to thwart, rather than encourage, the rise and spread of local forms of public goods supply. It follows that the latter find an environment more conducive to their development when they have the political force and the dialectical capacity (namely, the human capital) to dialogue with the state or the regulator at an supranational level. Finally, it should not be forgotten that a public goods supply efficient for a group of actors is not necessarily desirable from the collective point of view: the externalities which it generates may not automatically be positive outside the narrow group concerned, or even for all the members of the group (cfr. Posner, 1975; Tullock, 1967). In this case, it is necessary to evaluate whether: (1) the supply does not lead to general improvements in the quantity and quality of a product (efficiency); (2) the supply of too generic instruments does not lead to the maximum efficiency, as it discriminate against some members, and thus reducing their performance. In the first case, we are definitely in presence of the supply of negative local public goods with harmful effects on development; in the second case, there is an excessive homogenization and it is necessary to resort to more differentiated interventions.

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How does all this apply to the case of the EU banking regulation? First, the 2007–2009 crisis clearly showed that the loose former framework was inefficient and dangerous, and therefore needed updated and more rigorous rules. The lack of regulation was due to the principle of self-regulation, which did not work and proved unable to grant financial stability (Ülgen, 2021a), especially for large banks: therefore, there are responsibilities on the part of their organizations for not having produced rules (public goods). At the same time, the situation of cooperative banks was in general less problematic, since there was still a code of conduct largely respected, and their second level organizations exercised a greater control. Obviously, there were exceptions, even significant ones (e.g. among some of the major Austrian and Italian Popular banks), but on average self-regulation worked relatively well. Secondly, in the absence of a supply of categorical public goods (regulation), the state (EU) intervened and ended up making a homogeneous supply designed on large banks. This for two reasons: the first is that large banks cover greater market shares and present greater risks for the banking and general economic system. The second is that the cooperative and small banks have not been able (probably because of both their politicallobbying weakness and their unpreparedness) to influence the process of redesigning the regulation, while perhaps the organizations of the large ones have been more active, thus leaving the field free to the homogenizing tendency of the state. Consequently, we have a negative public good from a categorical point of view, as it does not create positive externalities for cooperative banks and does not favour their strengthening; and a negative from a general point of view because, given the usefulness of the mutual banks for local economies, weakening them weakens general economic development.

3.4 Bank Re-regulation as a Response to the 2007–2009 Crisis Among the tasks of a sound regulation, there is that of providing guiding principles for top managers of banks. The impression that one gets is, however, that in the past something went wrong in these regards. On the one hand, managers of commercial banks were simply not well-enough trained, including those with a ‘sound’ academic curriculum (Colander et al., 2009). On the other hand, even at a local level the managers of cooperative banks have adopted a more commercial style in conceiving

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their role and in managing this kind of banks—perhaps the result of a very orthodox and sometimes narrow education of business schools everywhere in Europe, not unlike in the USA. In turn, this has influenced the development policies, incentives and behaviour of the banks themselves. This is not a negligible point for the authorities, as they have the power through the new regulatory framework to either encourage the ‘commercialisation’ of cooperative banks, or, instead, to favour a diversification, if they believe that these intermediaries significantly contribute to the stability of the larger financial system. In the latter case, cooperative banks should be regulated differently than other commercial banks and incentivized to pursuing and strengthening principles of mutuality, rather than letting them conform to market trends and the related expectations. In parallel, since a strong cooperative banking model (as the cooperative business more in general) requires the adherence to specific cooperative values and principles (Novkovic, 2006), managers should have not only an adequate level of education (D’Amato & Gallo, 2019), but also a proven capability to think and act socially, e.g. by financially managing projects for the collective good. Prior to the onset of the 2007–2009 global financial crisis, the room for banking and financial regulation was quite limited. As observed by some economists, ‘regulators and economists trusted the market as the main discipline device, and the empirical evidence supported policies that enhance transparency and improve monitoring incentives’ (Schularick & Zimmermann, 2018, p. 126). All this changed when the crisis broke out and the minimal regulatory principles showed all their limits (Onado, 2012). The perception of the financial and intermediation risks as well as of the role of banks within the economy drastically changed, also because of the high costs that the European taxpayers had to bear. All this led to increasing interest on the topic of financial crisis (Moro & Beker, 2016) both among academic economists and the general public. Most of the economists agree with the fact that the crisis was primarily caused by the subprime mortgage disaster (mainly in the Anglo-American markets), which then translated into a proper economic crisis, and in turn developed into a new financial crisis as a result inter alia of the high rate of non-performing loans. Consequently, the new European regulatory framework has been designed primarily to secure banks’ resilience and strengthen their ability to finance the real economy, introducing stricter requirements. The objective was to enhance the ability of large banks to withstand external shocks and, at the same time, establish improved

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recovery mechanisms and resolution schemes (Claessens & Kodres, 2014; ECB, 2018). Little or no attention was paid to the consequences for small local and cooperative banks, which faced a significant difficulty in keeping the pace with the new obligations. The higher costs necessary to comply with the stricter regulation (Alessandrini et al., 2016; Clark et al., 2018), as well the new legal requirements and self-defined ethical business codes, have been matched by the declining profits due to lower interest rate margins, which formed the core of their business model. Stated otherwise, after a period of severe de-regulation, the deterioration of the situation required a drastic correction. Some experts called for radical reforms in the regulation and supervision of financial institutions and some substantial reconsideration of the way regulatory and supervisory institutions operate in pursuing their institutional goals. Some economists, as Cukierman (2011), pointed out that the 2007– 2009 financial crisis had revealed that in global markets characterized by significant asymmetries of information, disruptive financial innovations and incomplete regulatory frameworks, self-regulation would not work. However critical, this consideration does not take into account the plurality of financial intermediaries present on the markets and, in particular, their diverse risk profiles, organizational strategies and their speculative appetites. The new legislation that gradually came into effect is based on a rather complex three-pillar regulatory scheme accounting for: (a) credit risk; (b) market risk; and (c) operational risk. However, cooperative banks in Europe have rarely engaged in risky activities, because they tend to follow more conservative business strategies as compared to commercial banks and care more for stakeholders (Fonteyne, 2007; Stefancic, 2016). Not last, in several European countries cooperative banks performed better than other banks during the financial crisis and at first the quality of their loans deteriorated less. Nevertheless, they have been subject to the same new regulatory framework. Moreover, the 2015 European Bank Recovery and Resolution Directive introduced a multifaceted EU outline for restructuring failing banks, focusing on the prevention of bank crisis, early intervention and the resolution of bank distress. The directive assigned EU states the task to set up resolution funds capitalized ex ante by banks, with a target level of 1% of all covered deposits to be achieved within a period of ten years. Again, regulators have envisaged the new rules by mainly focusing on large, systemic banks and without taking into proper account local cooperative banks. Even worse, in some cases the goals set by the regulators have had

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adverse effects or ended up in negative incentives. One example is the new capital regulation, designed with the general idea to reduce the risk of large banks to become even larger and thereby increase systemic risks. In response to the crisis, European policymakers and regulators aimed to increase both the quantity and quality of bank capital, but the analysis performed by scholars such as Maragopoulos (2021) shows that the capital regulation functions as an incentive rather than as an obstacle to a further increase of banks’ size when it comes to relatively small banks. Furthermore, the inconsistent approaches applied by national authorities result in an excessive heterogeneity as regards the calibration of O-SIIs (Other Systematically Important Institutions) buffer rates, contributing to the fragmentation of the regulatory landscape and the creation of an uneven playing field in the Banking Union (Maragopoulos, 2021). Considering the above, the question arises if cooperative banks have gone through the 2007–2009 crisis and the successive re-stabilization measures without significant changes in their constitutive characters or, forced to adapt to a common model of commercial banking, they have lost their peculiarities. In addition, if the latter is true, has this transformation had net negative effects on the performance of the entire economic system? A definitive answer is obviously premature. However, the first evidence seems to suggest that almost everywhere in Europe the new rules and guidelines have deeply influenced cooperative banks. On the onset of the crisis, they had to quickly adapt to the changes in the banking market, and have been therefore able to maintain only to some extent their traditional feature (Bülbül et al., 2013). Perhaps even more relevant is that, during the last years, local cooperative banks have been encouraged to join larger cooperative groups or merge at national level. At the same time, it emerges that the average efficiency of European cooperative banks has either stayed unchanged or has declined since 2008, with the smaller banks being more efficient than the larger ones (Vozková & Kuc, 2017).

3.5 Top-Down Regulation (and the Lack of Self-Regulation) The need for an essential reform for cooperative banks in several European countries was already at stake before the onset of the financial crisis 2007–2009. Arguably, cooperative banks have proved unable to take on individual reforms and propose a self-regulation that could have partially

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shielded them from the heavy burdens of the new legislation. Instead, the initiative and the operational proposals came primarily from the ECB, the national central banks and from international institutions such as the IMF. In particular, economists employed at the IMF provided analysis and encouraged the adoption of reforms adducing the reason of the survival of these banks on the market (see for instance Gutierrez, 2008 for a discussion on reforms in Italian cooperative banks). In other words, despite European cooperative banks were providing on average a safer business model compared to shareholder banks, in the aftermath of the abovementioned crisis they not only had to complete a number of reforms requested by national regulators and central banking authorities, but they were also subject to a re-regulation process that touched upon all types of banks. We can assert with confidence that the European cooperative banks have been largely constrained to adapt to the new regulatory framework with no other option. In the absence of concrete, convincing proposals for a thorough selfregulation at national or at European level, cooperative banks became subject to a top-down regulation process designed with large commercial banks in mind. This is somehow puzzling, since some type of selfregulation could have been applied to less-risky segments and bank types, as it happens in other industries. In fact, there are several industries, professional fields or niches of industries that operate as self-regulated markets—from health care to higher education. Nevertheless, some analysts expressed their scepticisms towards the new regulatory measures and policies developed in Europe in the aftermath of the crisis, and called in the process of their implementation for a better consideration of the positive role of the banks’ heterogeneity (Roulet, 2018). As a counterweight to the lack of attention to the differences in the European banking market, more recently some (assumingly) new ideas have started to emerge, emphasized in general speeches and strategic plans in order to better address the issues of cooperative banks in Europe, particularly with the aim to protect some of their defining features. Among others, the concept of proportionality has taken a particular relevance.

3.6

Proportionality in the Application of Single Supervisory Mechanism: What Does It Mean?

Proportionality in banking can be defined as a means of ideally adapting the number of rules as well as the intensity of supervision to the specifics

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of each bank or, more practically, to each bank category, i.e. taking into consideration whether it is a commercial bank, a cooperative bank, a local savings bank, a more hybrid banking model, etc. Proportionality is not a matter of reducing prudential standards for local banks or those with a small dimension. Instead, it involves a careful assessment of banks’ ownership, risk profiles, business models, level of international business and size before deciding upon adequate regulatory measures aimed at preventing excessive risks (Boss et al., 2018; Joosen & Lehmann, 2019). In other words, it consists of a fine tuning of regulation. The idea of proportionality sharply contrasts the ‘one size fits all’ regulatory policy. There are several reasons why proportionality is a crucial issue, particularly when it comes to securing the survival of important institutions as cooperative banks, but not only. Such reasons can be summarized as follows: 1. regulation involves costs: compliance costs imposed on banks, costs of the regulatory agencies, and costs for customers, when banks manage to transfer part of theirs to consumers; 2. regulation tends to be particularly costly for small banks with simpler business models, partly because of the fixed costs that compliance systems usually involve; 3. regulation can induce changes in banks’ business models, which are not necessary for the achievement of the regulatory objectives or which can be even undesirable: the necessity of applying strictly commercial business models is a substantial risk that cooperative banks are currently facing in Europe. A deeper understanding of proportionality is needed if the ambition of the regulator is really to preserve a rich banking ecosystem by securing that the diverse types can operate in the market in the long run. A proportionate regulation must be able to preserve differences present in the banking industry and stress their contribution to financial stability, on the one hand, and economic benefits of firms and households, on the other. Conversely, disproportionate or non-proportionate regulation may induce arbitrage within the banking system if, for any reason, regulation affects excessively some types of banks. Disproportionate regulation can negatively influence competition in the industry, for instance by encouraging the rise of negative incentives for bankers, by allowing excessive

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risk taking of managers, or simply by increasing barriers to entry into the market. In particular, uneven regulation may end in imposing an unequal burden on small banks, mostly those operating at a local level, which can make it harder for them to compete in an industry designed with larger commercial financial intermediaries in mind. There are different ways to classify banks within a framework of proportionality, the simplest being a categorization according to their size: assets and liabilities, number of branches, volume of commercial operations. Operationally this approach leads to distinguish among large systemic banks, medium-sized banks or small, less complex institutions that operate locally or regionally. Such categorization allows for a mode of application of the principle of proportionality: • systemic banks are those having the greatest impact on the market and in terms of financial stability; • medium-sized banks are less significant compared to the first category, yet they still have greater risk exposure than small banks and in cases of distress can have a major impact on regional or national economies; • local and less complex banks are for instance local cooperative banks which perform a relevant function to local economies; yet they do not represent a systemic threat in case of default, due to their limited size and volume of business, and could therefore be subject to a simplified type of regulation. European cooperative groups would fit under the second category or rarely the first. These institutions can easily adapt in the mainstream regulation and bear the costs. Different is the case of local cooperative banks, for which the ratio between the risks that the regulation eliminates and the costs it entails is not realistic. To maintain an environment of fair competition, which does not penalize the latter category, regulation costs should be related to the potential systemic risk and the size, so that they affect equally per unit of risk and product. In other words, guidelines should distinguish when regulation is necessary and when it is pleonastic, because it is not necessary or because it is already included in the regulation of the network in which the local bank gravitates. No differently do insurance companies behave, applying different policies to buses and city

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cars: applying the same policies would only mean eliminating the city cars market.

3.7

Practical Concerns and Discussion

The indiscriminate application of EU regulation to all kind of banks, in particular to local cooperative banks, presents two unsolved paradoxes. First paradox: on the one hand, many economists, such as Ferri (2008), stress the valuable function of these financial institutions, in favour of SMEs and households, which becomes clear particularly in times of crisis and credit shortage. This is exactly what happened in the early stages of the 2007–2009 global financial crisis. On the other hand, the new regulation, which was conceived mainly as a response to the excessive propensity for risk and financial speculation pursued by other kinds of banks, is heavy penalizing cooperative banks themselves. Despite a call for proportionality, the outcomes in term of new rules are not optimal for these last ones and sometimes even perceived as a potential obstacle to their future development (Jurkowska, 2018). Constrained to comply with the new regulations, in several countries they are going through processes of mergers and concentration that may endanger some of those features that proved useful in facing the crisis. It is not insignificant that the costs and restrictions imposed by the regulators weaken cooperative banks’ ability to respond to the challenges of modernization, among which of particular importance is the rapid pace of digitalization of banking, that may put at risk in the years to come their ‘relationship banking’ model. As suggested by Poli (2020), ‘in today’s digital world, technology challenges the way banking relationships are managed in a banking business model, including in the co-operative sector, which places relationships and inclusion at the centre of its distinctive mission’ (p. 395). Second paradox: the new regulation framework was a reaction to the long wave of de-regulation and the alleged self-regulation, a leitmotif for large commercial banks since the 1980s. The crisis clearly showed that this was no longer a viable organizational strategy, especially for large banks and investment banks. However, self-regulation could have been precisely the optimal strategy for the less-risky segments of European cooperative banks, to prevent them from the application of a regulation particularly costly for them. Since cooperative banks mostly refer to second level banks or to groups, inside these structures there is an interest in mutual control, as the members of the network have to intervene to rescue associates in

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difficulty. The new regulation could therefore only apply to the second level. As already said, our opinion is that these paradoxes are first the result of a lack both of a timely self-reform and an effective communication by cooperative banks to the regulators in terms of their specifics and valuable peculiarities. Moreover, regulators in Europe have not shown awareness in applying a deeper philosophy to effectively design the new rules. Such philosophy is necessary in order to understand and preserve the differences that exist not only between commercial and cooperative banks, but also between cooperative banks themselves. This suggests that the whole discourse of effective regulation can boil down to the assumptions at the base of the regulatory process, namely to the question: are financial stability and financial prosperity secured through diversity of financial intermediaries or through their homogenization? A lack of answer to this question may not only render the cooperative banking model difficult to sustain in the long-term, but it may also become the basis of a yet new crisis in the years to come, something that we should try to avoid by all means.

References Alessandrini, P., Fratianni, M., Papi, L., & Zazzaro, A. (2016). The asymmetric burden of regulation: Will local banks survive? (MOFIR Working paper n. 125). Money and Finance Research group (Mo.Fi.R.)—Univiversità. Politecnica delle Marche. Angelini, P., Di Salvo, R., & Ferri, G. (1998). Availability and cost of credit for small businesses: Customer relationships and credit cooperatives. Journal of Banking & Finance, 22(6–8), 925–954. Boss, M., Lederer, G., Mujic, N., & Schwaiger, M. (2018). Proportionality in banking regulation. Monetary Policy & The Economy, Oesterreichische Nationalbank Q , 2. Buchanan, J. M. (1965). An economic theory of clubs. Economica, 32(125), 1–14. Buchanan, J. M. (1975). The limits of liberty: Between anarchy and Leviathan. University of Chicago Press. Bülbül, D., Schmidt, R. H., & Schüwer, U (2013). Savings banks and cooperative banks in Europe (SAFE white paper). Butzbach, O., & von Mettenheim, K. E. (2015). Alternative banking and theory. Accounting, Economics, and Law: A Convivium, 5(2), 105–171.

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Chiaramonte, L., Poli, F., & Oriani, M. (2013). On the relationship between bank business models and financial stability: Evidence from the financial crisis in OECD countries. In Bank stability, sovereign debt and derivatives (pp. 7– 30). Palgrave Macmillan. Claessens, S., & Kodres, L. (2014). The regulatory responses to the global financial crisis: Some uncomfortable questions. IMF Working Paper No. WP/14/46. International Monetary Fund. Clark, E., Mare, D. S., & Radi´c, N. (2018). Cooperative banks: What do we know about competition and risk preferences? Journal of International Financial Markets, Institutions & Money, 52, 90–101. Coccorese, P., & Ferri, G. (2019). Is competition among cooperative banks a negative sum game? Journal of Institutional Economics, 15(4), 673–694. Colander, D., Föllmer, H., Haas, A., Goldberg, M. D., Juselius, K., Kirman, A., Lux, T., & Sloth, B. (2009). The financial crisis and the systemic failure of academic economics (Univ. of Copenhagen Dept. of Economics Discussion Paper, [09-03]). Colvin, C. L., & McLaughlin, E. (2014). Reiffeisenism abroad: Why did German cooperative banking fail in Ireland but prosper in the Netherlands? The Economic History Review, 67 (2), 492–516. Cukierman, A. (2011). Reflections on the crisis and on its lessons for regulatory reforms and for central bank policies. In Handbook of central banking, financial regulation and supervision. Edward Elgar. Culpepper, P. D., & Tesche, T. (2021). Death in Veneto? European Banking Union and the structural power of large banks. Journal of Economic Policy Reform, 24(2), 134–150. D’Amato, A., & Gallo, A. (2019). Banking institutional setting and risk-taking: The missing role of directors’ education and turnover. Corporate Governance: The International Journal of Business and Society, 19(4), 774–805. ECB. (2018). Report on recovery plans, July 2018. https://www.bankingsupervis ion.europa.eu/ecb/pub/pdf/ssm.reportrecoveryplans201807.en.pdf. Ferri, G. (2008). Why cooperative banks are particularly important at a time of credit crunch. European Association of Co-operative Banks. Fonteyne, W. (2007). Cooperative banks in Europe-Policy issues. Goglio, S. (1999). Local public goods: Productive and redistributive aspects. Economic Analysis, 2(1), 5–21. Gutierrez, E. (2008). The reform of Italian cooperative banks (IMF Working Paper). Howarth, D., & James, S. (2020). The politics of bank structural reform: Business power and agenda setting in the United Kingdom, France, and Germany. Business and Politics, 22(1), 25–51.

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Joosen, B., & Lehmann, M. (2019). Proportionality in the single rule book. In The Palgrave handbook of European Banking Union Law (pp. 65–90). Palgrave Macmillan. Jovanovi´c, T., Arnold, C., & Voigt, K. I. (2017). Cooperative banks in need of transition: The influence of Basel III on the business model of German cooperative credit institutions. Journal of Co-Operative Organization and Management, 5(1), 39–47. Jurkowska, A. (2018). Organizational model of Polish cooperative banks in the post-crisis regulatory environment. Financial and Credit Activity: Problems of Theory and Practice, 4(27), 88–100. Kalmi, P. (2016). Co-operative banks in Finland. In Credit cooperative institutions in European countries (pp. 43–54). Springer. Lang, F., Signore, S., & Gvetadze, S. (2016). The role of cooperative banks and smaller institutions for the financing of SMEs and small midcaps in Europe (No. 2016/36) (EIF Working Paper). Maragopoulos, N. (2021). When the banking gets tough, the large get going: How capital regulation is driving consolidation (No. 2021/89) (EBI Working Paper). Marchetti, P., & Sabetta, A. (2009). The cooperative banking system in France. In V. Boscia, A. Carretta & P. Schwizer (Eds.), Cooperative banking in Europe: Case studies (pp. 51–94). Palgrave Macmillan. McKillop, D., French, D., Quinn, B., Sobiech, A. L., & Wilson, J. O. (2020). Cooperative financial institutions: A review of the literature. International Review of Financial Analysis , 71. Moro, B., & Beker, V. A. (2016). Modern financial crises. Financial and Monetary Policy Studies, 42, 31–42. North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press. Novkovic, S. (2006). Co-operative business: The role of co-operative principles and values. Journal of Co-Operative Studies, 39(1), 5–16. Onado, M. (2012). Finanza senza paracadute. Il Mulino. Poli, F. (2020). Co-operative banking networks in Europe. Palgrave. Posner, R. A. (1975). The social costs of monopoly and regulation. Journal of Political Economy, 83(4), 807–827. Rochet, J.-C. (2009). Why are there so many banking crises? Princeton University Press. Roulet, C. (2018). Basel III: Effects of capital and liquidity regulations on European bank lending. Journal of Economics and Business, 95, 26–46. Samuelson, P. A. (1954). The pure theory of public expenditure. The Review of Economics and Statistics, 36(4), 387–389. Schofield N. (1985). Anarchy, altruism and cooperation. Social Choice and Welfare, 2(3), 207–219.

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Schularick, M., & Zimmermann, K. (2018). Towards a new paradigm: Stabilising financial markets. Intereconomics, 53(3), 124–135. Stefancic, M. (2016). Are cooperative banks better equipped to weather financial crisis than their commercial counterparts? Evidence from the Italian banking sector before and during the credit crisis. Organizacija, 49(2), 108–126. Tölö, E., & Virén, M. (2021). How much do non-performing loans hinder loan growth in Europe? European Economic Review, 136, 103773. Tullock, G. (1967). The welfare costs of tariffs, monopolies, and theft. Economic Inquiry, 5(3), 224–232. Ülgen, F. (2021a). Financial regulation: From commodification to public action. Journal of Economic Issues, 55(2), 531–538. Ülgen, F. (2021b). Public good, collective action and financial regulation. Annals of Public and Cooperative Economics, 92(1), 147–167. Vozková, K., & Kuc, M. (2017). Cost efficiency of European cooperative banks. International Journal of Economics and Management Engineering, 11(11), 2705–2708.

CHAPTER 4

How Can Members Contribute More to Cooperative Life and Decision Processes? Eric Lamarque

4.1

Introduction

To address the question that gives the title to this chapter, we want to focus on a debate that is often neglected by cooperatives. Cooperatives argue that members are naturally at the center of their preoccupations. Most cooperatives (including cooperative banks) systematically announce they take care of their members. Everything is done for the members. Profits are retained at the equity level to reinforce the ability to invest, innovate, and produce a high quality of services and safety. The annual general assembly of members is claimed to demonstrate the dynamism of membership life and show that a large number of members are implicated in key decisions.

E. Lamarque (B) IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School), Paris, France e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_4

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The analysis of the governance model of cooperative banks (Deville & Lamarque, 2016; EACB, 2021; Lamarque, 2018) shows that they have decision rights via votes at the general assembly at the local level. Similar to shareholders in capitalistic companies, members of cooperative banks contribute directly to some decisions, such as account validation, return on member share and board member election. The elected board members usually contribute to strategy definition and the control of managers. This contribution to governance is considered a leverage to increase the commitment of members in the life of the cooperative (Beal & Sabadie, 2018). However, deeper analysis into the “sociology” of members and considering that cooperative banks (CBs from this point forward) develop their customer base without members, their effective contribution to the decision process could be deemed slightly superficial in terms of the number of people who are truly implicated and in terms of influence on top managers. As in the shareholder model, when the ownership structure is fully diluted (one people—one vote), the risk of seeing the top manager influencing and controlling the decision process is common, and most members gradually lose interest in the cooperative’s activities. The purpose of this chapter is to consider how to implicate more members in the decision process. Several examples show that many members do not participate in the general assembly,1 in meetings of members or in general cooperative life since they feel that a small group of people drive discussions and a lack of time due to their professional life. The increasing impact of regulations and the organization of discussions and debates among the members and among the members and managers are often perceived as of little value added for them. CBs, considering the sensitivity of this sector in the economy and people’s attitudes concerning money, should consider how to better manage members’ contributions if they want to maintain one of the basic roots of their governance model. They have to consider the diversity of expectations and motivations to become members and the differentiation between members and customers. The membership value added must be built by the cooperative on an alternative basis compared to economic and financial value. Another key question for cooperatives, similarly to other companies, is the effective contribution of owners and stakeholders in decision

1 Less than 5% in France for example.

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processes. In the capitalistic model, the question of shareholder participation to the board or the presence of independent board members (independent from controlling shareholders and executives) is always asked to improve the efficiency of decision processes and the performance of the company. Numerous studies have tested the link between board structure and performance, the proportion of independent board members or gender diversity. There is no clear evidence about the superiority of one structure on another. This is due to the difficulty of studying the behaviors of board members during meetings and discussions. What is truly an “independent” board member and “independent board”? How are work and tasks, debates during board meetings and committee meetings organized? What is the level of contribution of board members? Alternative proposals on board contribution, in the context of cooperative structures, are considered. We also consider what should be the consequence on the identification and election of new board members to renew their profile and balance the power with executives in the perspective to share responsibilities with us on several decisions.

4.2 Diversity of the Members and Diversity of Commitment As shown by a study on the importance and significance of membership in 16 European cooperative banks published by the EACB in June 2021,2 the collective member base increased by 19% and currently represents slightly fewer than 75 million people. This descriptive analysis provides interesting insights about membership policy and CBs’ diverse actions to manage their members. From a passive stance to high engagement, the study shows that for an increasing number of CBs, becoming a member is not related to the number of products or services bought on the level of risk that the bank takes. This simple observation generates the question of how to position membership policy as a way to differentiate from capitalistic banks. In these banks, becoming a shareholder is unnecessary to gain specific services. It could be a topic of interest to see if the level of membership in the customer base influences profitability or risk exposure. However, without focusing on economic performance, the CBs and

2 Implemented by the EACB Taskforce on cooperative affairs and analyzed by Professor Hans Groeneveld, Tilburg University, and Ryan Van Hout.

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cooperatives, globally, are built on membership commitment in the life of cooperatives and their participation in governance. Some studies show a higher level of commitment, including in commercial organizations, due to this participation (Lecuyer et al., 2021). Customers’ (members) ownership of banks is also an argument in communication policy, such as proximity to local territories (Lecuyer et al., 2017). Therefore, the management of the membership base is assumed to be more considered by CBs if they want to communicate and use this argument in favor of differentiation. If not, opponents to this model will consider argument as “cooperative washing”3 to build an alternative image to capitalistic banks. However, the perspective or the feeling of belonging a customer gains by being part of a community of members could be expected. There is a diversity of expectations from anonymous member to board members and, thus, a diversity of possible commitment of people and CBs. The leverage through which it could be possible to increase this commitment must be identified. This analysis is based on the studies developed for ten years by the chair on the management and governance of financial cooperatives.4 Nature of Benefits Offered to Members Concerning the use of financial products, customers have a heightened sense of more responsible consumption from their banks or expect banks to make better contributions to sustainable development. The majority of customers in CBs are anonymous members or nonmembers.5 Anonymous members are considered as members who do not have the feeling or do not want to participate in the life of the cooperative and seek basic offers to be satisfied, such as quality of services, level of pricing and efficiency of the distribution channel. Concerning membership diversity, anonymous members must be considered in the decision of whether CBs want to develop their involvement in the cooperative life and associated tasks. This is a key issue because these members or customers are the most likely to switch to another bank. The situation 3 By assimilation with greenwashing. 4 The last book published by the chair and co-edited by Aude Deville, Eric Lamarque

and Géraldine Michel in French—Valeurs coopératives et nouvelles pratiques de gestion— EMS edition, 2020—Cooperative values and new management practices. 5 Approximately 80% in France.

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in other countries is different; therefore, the difference between financial and nonfinancial benefits can be defined: – Financial benefits: The most common in Europe for CBs is to offer an incentive to become a member using a specific offer on a financial characteristic of the product: a lower interest rate for credit, a higher interest rate for saving accounts, and fee reduction when certain services are used. These financial benefits exist in the majority of European countries according to the last study of the EACB but not considering France, for example. The most common benefit, also in France, is the return offered to member share approximately 1% to 1,5% due to the low level of interest rates. However, the suitable financial benefit remains the cash back offered to the member in relation to the level of revenue generated by the member for the CB. Until several years ago, Desjardins in Quebec was the leader of implementing this policy. Fewer CBs have offered this benefit due to the increase in capital requirements, cost of control and increasing level of competition and investment needed in digital strategies. Therefore, it appears that CBs have to consider alternative benefits or combine these benefits with others. – Nonfinancial benefits: In this category are different examples, such as the design of documents or credit cards, specifically for members, corresponding to higher personalization of the relationship. Additionally, members can access specific information via the newsletter, and CBs can support a better understanding of financial products, offer training sessions on financial education for young customers and support new entrepreneurs to build business plans. CBs attempt to develop innovative services to deliver differentiated services. However, in this dimension, competition with capitalistic banks is high, and the challenge is to offer the same level of quality and price. Finally, these benefits seem to be the minimal requirement to be competitive and retain non-member customers or anonymous members and their use of financial services. We consider that the basic level of commitment of a member is his priority to use offers of his main bank, here the CB. However, many examples, in other areas, show that this behavior does not resist irrelevant offers or bad service quality. Because they haven’t developed any feeling

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of membership, there isn’t any barrier to leave the bank. Young customers are very representative of these behaviors. The growing concern for more sustainable development by an increasing number of customers clearly offers leverage to improve the commitment of members to their consumption practices. Financial services, regularly criticized for their roles in economic crisis, credit rationing and systematic support to companies worldwide in their development strategies without considering their corporate social responsibilities, have an opportunity to improve their image. Due to their cooperative values, CBs consider that they have a specific role in this area. The commitment of members could depend on the commitment of CBs to sustainability and common goods. This is the second level of nonfinancial benefit that some members expect and that is a reason why they have chosen this bank. Combining this commitment with individual benefits to customers, CB try to contribute more to customer expectations than capitalistic banks. According to our studies in France (Caby & Lamarque, 2019), between 15–20% of the membership base will be considered. Many chapters in this book develop examples and policies of CBs in this area. ICBA provides several examples of what some CBs are doing in relation to the 17 sustainable development goals (SDGs) of the UNO.6 These descriptive analyses provide interesting and concrete examples of this commitment. However, the current challenge comes from capitalistic banks. The recent work from the European Commission on the taxonomy of climatic and environmental issues, the discussion about a specific regulation for banks to consider climatic issues and specific disclosures, and the reinforcement of CSR goals associated with economic performance encourage all banks to develop new initiatives and be more accountable on CSR. The relative monopoly on these values for CBs gradually disappears and generates innovation in this area. To maintain this advantage, CBs must continually demonstrate a higher level of commitment with respect to environmental/social/governance (ESG) criteria and nonfinancial performance. One of the main challenges is to first establish new and relevant indicators to prove their commitment. Several studies have attempted to define these indicators in terms of social impact or environmental performance. For example, banks must consider the support to some industries such as 6 Sustainable development goals and objectives: Contribution of cooperative banks, ICBA study, https://www.icba.coop/master/document/images/image1576.pdf.

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oil and gas and, more generally, industries related to carbon emissions. Companies must consider how to do more to convert the asset side of the balance sheet to “green” by funding projects for only such companies or projects. Moreover, regulatory or voluntary disclosure will insist on this, and CBs will be compared with capitalistic banks. Locally, CBs must show that they support initiatives from nonprofit organizations, states or local authorities by funding or providing nonfinancial support. The territorial dimension of the support remains a relevant leverage to be differentiated by members. The last area in which some CBs have decided to become more responsible concerns financial education. As finance professors, we are disturbed by people’s, specifically the younger generation’s lack of financial culture or knowledge. Not all CBs have shared their agenda on this subject. In Quebec, for example, Mouvement Desjardins historically became involved in this subject to develop financial inclusion. The topic of financial education may concern all financial cooperatives looking to the roots of number of them; they have perhaps to consider such a contribution again. Upgrading Member Contributions Nevertheless, it seems necessary to find or develop new proposals to reinforce differentiation from all initiatives and increase communication from capitalistic banks or investment funds such as Blackrock. Their lobbying power to influence regulators or customers whom they fully engaged in these subjects is common knowledge. According to their message, some CBs are interested in enlarging the proportion of activist members. Activist members are defined as people who are fully engaged in the life of the cooperative and aligned with its ESG objectives but not specifically interested in being elected in governance bodies. Participating in the decision process is not always an objective. Many members want to be more deeply involved than looking only at the CBs developing initiative to participate. This solution consists of supporting the initiative of members in different areas in accordance with SDGs. Our research7 shows some experiences of such participation in nonfinancial cooperatives or mutual insurance. First, we identify all the contributions of their members to SDG initiatives. In doing so, it

7 Deville A., Lamarque E., Michel G. 2020, previously quoted.

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is possible to identify members who participate in education, agriculture, health, alternative energies and so on. For example, CBs should coordinate and support members, organize discussion between members, share experiences and discuss with experts in each area. CBs should offer their members a place where they could express and discuss their solidarity and inclusive concerns. We have identified several experiences in which CBs have created foundations governed by board members or members elected locally. They become responsible to define the criteria of attribution and select the projects that will benefit from the support of the bank in the territory. In cooperatives dedicated to a specific member category (farmer, policeman, hospitals, teacher, etc.), support for specific initiatives developed in the same area is often considered key feedback to retain members and develop the customer base. The use of products appears correlated to this type of support, and members see the difference from traditional offers. However, there is a clear trade-off between the expectation for this support and the level of price and quality. Finding additional leverage to develop contributions to cooperation is observed by the constitution of an ecosystem of cooperatives at different levels of a supply chain. In regards to the basic offer of financial products and services, some CBs use the support of other cooperatives to deliver additional services via cooperative internet platforms promoted by other nonfinancial cooperatives for nonbanking products. Inter-cooperation is considered an effective way to develop this cooperative culture, which is often considered not sufficiently developed to maintain feelings of membership. Ultimately, the higher the membership feeling is, the higher the contribution to the life of the CBs. A specific stakeholder is highly concerned with the employees. Increasing the contribution of this member category has become a key objective, considering that it will increase the coherence of the model and the customers’ perception of a specific behavior related to the governance of their company. Employees do not have this behavior, and some of them are not members. Different contributions from authors related to the chair of management and governance of financial cooperatives at Sorbonne Business School have identified several experiences, not only in the banking sector, to improve some organizations’ practices and increase involvement of employees based on cooperative commitment. Surprisingly, cooperatives do not compete more to obtain certain labels such as “Great Place to Work® ” in France.

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Regarding management practices, authors have identified compensation policies, evaluation practices or recruitment processes that could be clearly influenced by cooperative values, differentiating cooperatives from traditional companies.8 The challenge is to combine commercial efficiency and compliance requirements with cooperative commitment or values. Identifying common practices which illustrate that is difficult. In other words, all the attributes to build a cooperative culture inside the company are not always fulfilled. Some CBs also develop specific activities for their employee members, and they support their participation in collective initiatives oriented to common goods or solidarity by days of work available to volunteer. The hypothesis, not confirmed by academic research, is that when a cooperative participates in the creation of such a culture, it is possible to see these effects on problem solving or customer relationships and create additional value for customers. Finally, in regards to deeper involvement of customers in commercial decisions, a case that was studied in the insurance sector is again considered. Some mutual insurance organizes different meetings with customers and focus groups to discuss the relevance and effectiveness of products and what kind of additional service would be useful to provide. The development of the community of members, organized by the mutual insurance company, uses blogs or social networks to collect information about expectations and the level of satisfaction (see Chapter 12 of this book). This could be another opportunity to develop proximity with them. To improve the commitment of members and increase the member base, some CBs choose a more effective membership contribution to commercial decisions and to combine the level of product use and participation in the decision process. At the highest level, a question is asked about the support that the community of members and the cooperative could bring to one of them. In the financial sector, this question is sensitive when speaking about a company’s or an individual’s financial distress. Some cooperatives have experimented with foundations dedicated to members in distressful situations. These last cases, which imply more commitment, are less common in cooperatives in general and CBs in particular. The combination of these initiatives, considering different stakeholders, contributes to building a

8 Authors in Deville, Lamarque, Michel, previously quoted.

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true cooperative organization and a cooperative business model that can motivate member implications and contributions, which is truly a differentiating factor from capitalistic banks. However, the combination with an effective level of economic performance and managing a double bottom line increase the challenge, and there is little academic evidence on the level of cooperative commitment that can be reached and the maintenance of a high level of economic performance. A thorough agenda to implement further research on this governance model is necessary.

4.3 For a More Effective Contribution of Board and Members to Strategic Decisions The decision process in CBs has been a sensitive topic for several years. Globally, the efficiency of governance is always sensitive because it refers to power relationships, confidence, legitimacy and human relations at the higher level of an organization. In the banking sector, the issue of governance takes a specific dimension. The growing concern of regulation impacts cooperative principles and requires an increase in the capacity of boards to control top managers and develop different guidelines to promote their capabilities to orient and contribute to key strategic decisions. This second part of this chapter is related to our previous publications (Ghares & Lamarque, 2021; Lamarque, 2017, 2018) and will consider the situation and effectiveness of these contributions on several subjects, such as risk policy and risk appetite or distribution strategies. First, the main categories of board members’ contributions have been identified. Board Members’ Level of Contribution Regarding the governance model, academic research differs between the shareholder model based on agency relationships (Bearle & Means, 1932; Jensen & Meckling, 1976) and transaction costs analysis (Williamson, 1979). Moreover, the stakeholder model is based on the participation of all stakeholders in the decision process (Freeman, 1984). The cooperative is regularly assimilated as a good example of a stakeholder model based on group decision-making due to the effective contribution of customers at the board and general assembly. This assimilation is irrelevant, and we consider that the cooperative model fits more into a “customer holder” model by analogy with shareholders. Indeed, customer

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members hold the power of decision-making when the main rights and responsibilities are considered. They decide the level of member share return, as the shareholder decides the level of dividend. The shareholder and the member/customer are owners of their organizations. The dominant stakeholder in the cooperative model is the customer, and there is no evidence in the academic literature that the decision process will be more participative for other stakeholders than the shareholder model. Our perspective regards the effective contribution of these customers in the decision process at the board level. The difficulty of evaluating the true level of contribution and influence of boards in cooperative groups comes from the complexity of CB organizations and governance structures. CBs with one, two or three layers of decisions with the corresponding board are observed. The common rights and responsibilities of members of the board include statute modification, electing and appointing nonexecutive board members, safeguarding the legal cooperative’s values, and in at least 75% of cases influencing local members and the way the CBs spend money for CSR projects. They also have the power to elect, appoint and dismiss the general manager. Deville and Lamarque (2014, 2016) evaluated the consequences of these different levels in terms of efficiency and performance. According to each model, the power of decision-making is shared at different levels, and the board contributes differently. However, the observation of several general assemblies of members or annual meetings at different layers finally shows two extreme categories of contributions with different consequences on the main decisions. – The member of the board as an ambassador of the CB and the members: Elected members are generally well-known and recognized in local communities (village, district, occupation, nonprofit organizations, etc.) for their contribution and commitment to the activity of the cooperative. Their identification as potential board members is conducted by local bank managers in branches or outgoing members of the board for their capacity to recruit new members and customers as well as network effects and cooptation. They represent the CB in meetings and facilitate dialog with members. On the board, they provide feedback from members/customers about the quality of services and products, and they indicate major claims to managers to try to correct them. Sometimes, several members of the board are implicated in the evaluation

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of projects related to social goals supported by dedicated foundations. This behavior is relevant at the local level. The CB must be managed in the best interest of the members in relation to its statute and mission. Board members keep cooperative values, and the question of their independency with managers is not relevant. The question related more to whether to change their role when they climb the different layers to reach the central or national level, such as a national federation or association. At this top layer, boards have to assume their responsibility of addressing the members and supervisors. – The board member controls managers and contributes to decisions: since the financial crisis of 2007/2008, regulators and supervisors expect a new role of the board and members. One of the reasons identified for the level of risks taken by top managers was the lack of control and influence of the board about the risk policy and strategic decision (Aebi et al., 2012; Ellul & Yerramilli, 2013; Brichall, 2017). The lack of financial expertise and the weaknesses in terms of risk exposure have pushed regulators (Basle Committee for Banking Supervision and European Banking Authority) to ask for more expertise for banks’ board members. Although the CBs did not cause some tremendous collapses, regulators did not consider specific requirements regarding this governance model and the elective process of board members. The underlying idea is not to make better decisions or to be more efficient but only to share responsibilities with managers about the major decisions and the bank’s risk exposure. Before the COVID crisis, supervisors such as the European Central Bank considered that all banks needed to improve governance. All the main board members elected as the Chairman, Chairman of Risk Committee and Chairman of the Audit Committee in a bank under ECB supervision are evaluated to determine if they have skills and capabilities to assume this position and be considered responsible. We have developed several arguments to modify and improve the capacity of boards to control and orient some decisions (Lamarque, 2018) considering the basic principles of cooperative governance (one man—one vote and elective process). Approximately five years after the first requirement, CBs have developed rigorous training programs on key subjects such as strategic planning, regulatory frameworks, financial analyses, risk appetite frameworks, financial markets or macroeconomic indicators.

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Programs of continuous education on these subjects are organized to comply with requirements and improve board members’ ability to assume their tasks of controlling and defining together risk policies with managers. The effectiveness of their contribution must be evaluated. Several difficulties occur in the capacity to assume this new role. The first is the complexity of banking operations, financial products and risk assessment tools. The level of a master’s degree in banking and finance is needed to thoroughly understand these issues.9 In other words, it is nearly impossible for many board members, even in capitalistic banks, and even with several years of board experience. Top managers naturally possess more skills on those subjects. Therefore, some members with a good level of contribution to these subjects are needed. The second comes from the diversity of new key strategic issues for banks, similar to many companies. Two different subjects are considered: climatic transition or technological change and digital strategies. Regarding the first subject, CBs are expected to be truly contributive. Regarding both subjects, banks also need experts to contribute. The board must reject the idea that common topics require only general knowledge. In a process of control decisions, orientation contributions and the growing individual responsibility of board members, it is not possible to have only a general discussion without relevant arguments. Again, the need for people with this profile could be of great interest for boards. In each subject, we observed that the management gave the board nearly the same documents that they had previously. As late as one week prior to some meetings, a board member and committee member could receive hundreds of pages of documents. It seems that there are no efforts to synthesize or adapt documents to the specific position of board members and enable them to challenge executives in all areas of bank management and decisions. This seems to be an issue for people who generally have other professional duties and do not have the same amount of time to prepare for meetings. Even if a bank’s board member has to take the time to assume its mission according to the explicit regulatory requirements, it is nearly impossible to do the same as a full-time 9 The author is the director of a master’s degree program in finance at Sorbonne Business School and develops the curriculum of several diplomas in banking and finance in different universities in France and abroad.

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professional. If the solution to have only professional directors for banks is eliminated, they need to choose the best tools to effectively assume control and participate in decision-making. The last difficulty is regarding the attitude of the member elected at the higher levels of the cooperative. This member is simultaneously elected at the local level, elected to represent the local level at the regional level and finally elected to participate at the central level. He or she must combine ambassador, effective control and orientation among the different levels. Doing so is not easy considering that he or she acts as a customer with specific interests in mind. Even if all regulations ask a board member to consider first the interest of the cooperative, there is always debate about their capacity to avoid conflicts of interest and truly control and challenge the top manager. Independence of Boards and Board Members in CBs: Myth and Reality “Good” governance or developing “good practices” about corporate governance is widely considered to be a key success factor for a company. It is always difficult to validate this idea using traditional indicators of economic performance such as profitability10 or, for listed companies, level of dividend and share value. Many academic studies have tested the characteristics of the structure of the board (number of members, gender diversity, number of independent members, number of meetings, etc.) on the performance level or the level of risk with not always convergent results, but most research concludes a positive relationship. In the banking sector, an important set of studies has also considered these questions and hypotheses, specifically in the context of the financial crisis of 2007/2008. Beyond the questions of performance, the specific subjects for banks are risk control and risk policies. Due to the adverse effects of governance, the Basel Committee on Banking Supervision (BCBS, 2015), European Central Bank (ECB, 2017) and European Banking Authority (EBA, 2014, 2018 ) endorse governance practices that do not threaten the overall financial stability by excessive risk-taking and the “fit and proper” assessment of board members. Therefore, currently, the stakeholder model, which is practiced mostly in European countries, is being given greater attention (Maxfield et al., 2018). 10 Such as Return on Equity (ROE), Return on Assets (ROA) or Return on Invested Capital (ROIC).

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Due to bank supervisors’ interest in overall financial stability, the supervisory guidelines and requirements aim to safeguard all stakeholders’ interests to prevent a banking collapse due to suboptimal risk-taking activities (Anum & Lamarque, 2020). The question of risk-taking and risk management in banks remains the basis of many studies (Stulz, 2015). Considering the determinants of these central bank practices and decisions, the impact of governance (Faleye & Krishnan, 2017), specifically board effectiveness, is now considered (Battaglia & Gallo, 2017; Berger et al., 2014). Since the adoption of the new regulatory framework of Base III in 2013 and the importance of pillar two about the internal supervisory process and risk governance, this topic has become the main leverage of bank failure. The influence on credit risk is also clearly identified (Gontarek & Belghitar, 2018; Lu & Boateng, 2018). Due to complex operations and the need for high-level financial education to understand financial mechanisms, banks’ risk activities are difficult to control. To address such difficulties, banks must have robust risk management practices and effective risk management mechanisms that define risk appetite or risk tolerance and align business strategies with risk profiles. In their study of thirty European systemic banks, Anum and Lamarque (2020) show that risk management practices related to risk committee presence and activity (number of meetings) may not lower banks’ financial fragility. They confirm the argument that only having a risk committee that meets more often may not be beneficial, but the quality of risk controls such as risk appetite arrangements, the status of the chief risk officer and the financial experience of the independent directors in the risk committee are beneficial. This lack of convergence of academic research on the clear relationship between the number of independent board members and performance or risk control and the results of some research that conclude on the higher level of risk taken in shareholder model push CB promoters (chairman of boards and CEOs) to consider that the question of independence is not relevant. The arguments have recently changed, and they consider that boards and board members are naturally independent from the top manager. Lobbying toward supervisory authorities in the last year appears to have been successful in recognizing their independence. Moreover, the evidence comes from the results of CBs and a lower risk exposure compared to capitalistic banks. The financial crisis episode also revealed that shareholders’ friendly governance practices that were deemed to be useful for enhancing corporate worth performed poorly (Beltratti & Stulz,

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2012; Erken et al., 2012). In addition, Anginer et al. (2018) identified that banks with shareholders’ friendly governance practices had lower capitalization and higher insolvency risk. By itself, CB governance would prove to be superior, specifically during the crisis. This argument is supported particularly in France, where CBs are “too big to fail” groups and remained safe during the crisis. At the European or world level, the argument has less relevance with several examples of collapse of some CBs.11 Therefore, the questions of the effective independence of boards in CBs, their experience and their capacity to influence decisions and control continue to be asked at the higher layers. One topic illustrates this situation in banks, the credit policy and the level of risk CBs accept. Some board members often ask for the acceptance of more risks compared to capitalistic banks, specifically when the project and companies or organizations to fund positively contribute to the development of territories and help to reinforce local economic development. Different studies show that in many countries, such as France, CBs are less exposed to risk, particularly credit risk. Boards have poor capacity to substantially influence these decisions. The main criticism addressed to the cooperative governance model is the fact that board confirm and support quite systematically top managers’ decisions. Due to the low level of expertise and the elective process of board members, it seems difficult to have qualified people within to discuss the closing of accounts, risk appetite, climatic risk or digital transformation. Many CBs, including at high-level layers, have more ambassador profiles as board members than truly contributive people. In some cases, the supervisors do not consider the chairman of the board elected to comply with the “fit” criteria expected and remove their statute of the governing body. Another traditional explanation in corporate governance is the natural power of the top executive in the context of diluted ownership, which is the case for cooperatives under the principle of one man/one vote. Boards and, thus, members do not truly have the capacity to orient decisions and could have difficulties assuming control tasks.

11 Veneto Banca (VB) and Banca Popolare di Vicenza (BPVI) in Italy in 2017 or Bankia in Spain in 2009 founded by seven cooperative banks, such as Caja Madrid or Caixa Laietana. To mention cases outside Europe, recently the Punjab and Maharashtra Cooperative in India and globally all the cooperative banking sector in this country is under pressure with high risk of default.

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In terms of hours of training programs, many CB board members prefer to allow the responsibility of decisions remain with the top manager and simply assume feedback from customer/member expectations. This behavior is well identified in the corporate governance literature and explained by stewardship theory. This theory, originally established by observing the behavior of some CEOs who were fully aligned on shareholders’ expectations (Donaldson & Davis, 1991; Donaldson et al., 1997), illustrates that one stakeholder stewards the expectations of another stakeholder. Therefore, chairman of several CBs’ boards and a majority of directors support all the decisions without challenging them. They are trusted votes instead of voting after being convinced by executives’ arguments. If all stakeholders are comfortable with that behavior, we could definitively accept limiting the role of board members in CBs as ambassadors. The problem is that regulation requires a different attitude, more challenging, able to control and able to share responsibilities with executives. Finally, one must consider how to prove their relative independence in the context of cooperative principles and the interest of members accounted for at the higher level of CBs. At the central layer, CB groups are often governed like all capitalistic banks with a requirement to have clearly identified independent board members for at least one-third of the members.12 This independence is evaluated according to several criteria defined by a specific code of governance.13 In the banking sector, “fit and proper” requirements indicate that board members have to be honest, act with integrity and perform their task with independent thinking, which is the only way for supervisors to effectively challenge strategic decisions and control the results and management under a regulatory framework. Many dimensions that limit the independence of people are not included in all these criteria, such as being members of the same network, the same political party or the same sports club. Independence is a relative concept, and there is a need to objectivize it. It is controversial without enough academic justification

12 This proportion is the same for all listed banks in France and companies which officially call for public saving funding. 13 The French Code from AFEP/MEDEF is officially recognized as a soft law document and defines eight criteria to comply with to be considered as independent. For example, criteria 3 indicates that you have to avoid to have significative commercial relationship with the company in which you are a board member. It means to be a customer, a supplier, a banker or an advisor of the company.

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to be universally recognized, which is a common situation in the area of management. The only way to assume, to a certain extent, this independence supposes first to clearly and strictly control the behavior of board members. Minimally, the number and the relevance of questions asked during board meetings to top executives, the time dedicated to discussions around topics such as risk appetite, and voting “no” to some proposals are valuable for creating board transcripts and reports. Evaluating board activity and having the feedback of board members about the effectiveness of this independency is thus of major importance. The second leverage to improve independence is to understand the capabilities of board members on common topics such as accounting, financial risk or financial market and on specific topics such as climate change, digital transformations or other subjects of interest for the CB. These capabilities must be assessed by banks and available for the supervisor. We present the opportunity to develop specific certifications that care necessary for CB board members to be elected. Clearly, such a decision does not comply with the free application to this position when one is a member. However, we must consider whether historical principles of the interest of CBs and their members do not need to evolve. Finally, board members able to maintain cooperatives’ values as well product offers, price policies, access to financial services for people usually excluded from them and support of members in distress must be considered. Today, this role is more relevant than in the past to renewing the member base considering the competition between capitalistic banks and CBs on corporate social responsibility involvement.

4.4

Conclusion

In this chapter, we consider how to improve the contribution of members to the life of the cooperative. The effectiveness of this contribution is a key factor for their commitment. We have analyzed this contribution and this commitment at two levels: individual members and board of directors. If one would like to heighten the feeling of being a community member, in charge of preserving the all members’ interests, he or she must build a governance in which some members, who are elected based on capability and the ability to challenge, convinced the others that

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their interest and cooperatives are considered. This proposal is rooted in academic literature, comparative analysis in different countries and our experience inside boards of financial cooperatives. At a period of fundamental transformations of society, accelerated by the effect of the COVID crisis and technological change, CBs must find new arguments to convince potential members while considering the difference they can offer compared to traditional banks and new online offers. As we mentioned in Chapter 1, the conditions of the emergence of the cooperative model have changed, but differentiated offers can always convince customers. The argument, confirmed by facts and practices, of a real contribution could also leverage attractiveness. It is imperative to find a new positioning of CBs and, more generally, cooperatives to fit these transformations, explaining the current meaning of solidarity and how to alternatively contribute from the public sector and private sector to respond to people’s needs and expectations.

References Aebi, V., Sabato, G., & Schmid, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12), 3213–3226. http://www.isihome.ir/freearticle/ISIHome. ir-24018.pdf Anginer, D., Demirguc-Kunt, A., Huizinga, H., & Ma, K. (2018). Corporate governance of banks and financial stability. Journal of Financial Economics, 130(2), 327–346. Anum, Q., & Lamarque, E. (2020). Internal risk control and supervision as a determinant of risky lending: Evidence from the Big European Banks. European Academy of Management (EURAM) Conference, Trinity Business School, the University of Dublin, Ireland. Basel Committee on Banking Supervision. (2015, July). Guidelines corporate governance principles for banks. Battaglia, F., & Gallo, A. (2017). Strong boards, ownership concentration and EU banks’ systemic risk-taking: Evidence from the financial crisis. Journal of International Financial Markets, Institutions and Money, 46, 128–146. Beal, M., & Sabadie, W. (2018). The impact of customer inclusion in firm governance on customers’ commitment and voice behaviors. Journal of Business Research, 92, 1–8. Bearle, A., & Means, G. (1932). The modern corporation and private property. Macmillan. Beltratti, A., & Stulz, R. M. (2012). The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics, 105(1), 1–17.

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Berger, A. N., Kick, T., & Schaeck, K. (2014). Executive board composition and bank risk taking. Journal of Corporate Finance, 28, 48–65. Birchall, J. (2017). The governance of large cooperative businesses. Coop UK. https://www.uk.coop/sites/default/files/uploads/attachments/govern ance-report_2017_final_web.pdf Caby, J., & Lamarque, E. (2019). Peut-on parler de cration de valeur Sociétariale?. Revue d’Economie Financière, La finance mutualiste, n°134. Deville, A., & Lamarque, E. (2014). Identification and valuation of cooperative banking models. Study for the 2nd International Summit on Cooperatives, Quebec. Deville, A., & Lamarque, E. (2016). Diversity of cooperative bank governance models questioning by regulation: An international qualitative research. French Association of Accounting, Clermont Ferrand. Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of Management, 16(1), 49–64. Donaldson, L., Davis, J. H., & Schoorman, D. (1997, January). Toward a stewardship theory of management. The Academy of Management Review, 22(1), 20–47. Ellul, A., & Yerramilli, V. (2013). Stronger risk controls, lower risk: Evidence from U.S. Bank holding companies. Journal of Finance, 68(5), 1757–1803. Erken, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411. European Association of Cooperative Banks—EACB. (2021). The importance and significance of membership in European Cooperative Banks. Groeneveld H. and Van Hout R., Bruxelles. https://www.eacb.coop/en/studies/eacbpublications/the-importance-and-significance-of-membership-in-europeancooperative-banks.html European Banking Authority (2014). Joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders under directive 2013/36/EU and Directive 2014/65/EU . European Banking Authority. (2018, June). Guidelines on internal governance. European Central Bank (2017, May). Guide to fit and proper assessment. Faleye, O., & Krishnan, K. (2017). Risky lending: Does bank corporate governance matter? Journal of Banking & Finance, 83, 57–69. Freeman, E. (1984). Strategic management: A stakeholder approach. Cambridge University Press, last edition in 2010. Ghares, M., & Lamarque, E. (2021). Corporate government as a structure for control and promotion of ethics in banks. In L. San Jose, R. L. Retolaza, & L. Van Liedekerke (Eds.), Handbook on ethics in finance. Springer.

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Gontarek, W., & Belghitar, Y. (2018). Risk governance: Examining its impact upon bank performance and risk-taking. Financial Markets, Institutions & Instruments, 27 (5), 187–224. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial. Journal of Financial Economics, 3, 305–360. Lamarque, E. (2017). The impact of Basel III on the operations of retail banks. In R. Douady, C. Goulet, & P. Pradier, P. (Eds.), Financial Regulation in the EU . Palgrave MacMillan. Lamarque, E. (2018). The governance of cooperative Banks: Main features and new challenges. In M. Migliorelli (Ed.), New cooperative banking in Europe : Strategies for adapting the business model post crisis. Springer. Lecuyer, C., Capelli, S., & Sabadie, W. (2017). Corporate social responsibility: Communication effects, a comparison between investor-owned banks and member-owned banks. Journal of Advertising Research, 57 (4), 1–27. Lecuyer, C., Capelli, S., & Sabadie, W. (2021). Consumers’ implicit attitudes toward corporate social responsibility and corporate abilities: Examining the influence of bank governance using the implicit association test. Journal of Retailing and Consumer Services, 61, 101989. Lu, J., & Boateng, A. (2018). Board composition, monitoring and credit risk: Evidence from the UK banking industry. Review of Quantitative Finance and Accounting, 51(4), 1107–1128. Maxfield, S., Wang, L., & Magaldi de Sousa, M. (2018). The effectiveness of bank governance reforms in the wake of the financial crisis: A stakeholder approach. Journal of Business Ethics, 150(2), 485–503. Stulz, R. M. (2015). Risk-taking and risk management by banks. Journal of Applied Corporate Finance, 27 (1), 7–19. Williamson, O. (1979). Transaction-cost economics: The governance of contractual relations. The Journal of Law and Economics, 22(2), 233–261.

CHAPTER 5

Decentralization of Decisions and Governance of Risk in Cooperative Contexts Nathalie Bénet , Aude Deville , and Séverine Ventolini

5.1

Introduction

As for any financial institution, the governance of risk in cooperative banks is a central matter of strategic and management concern. Cooperative

N. Bénet (B) Université Toulouse Capitole, TSM-Research CNRS, Toulouse, France e-mail: [email protected] A. Deville Université Côte d’Azur, IAE Nice, GRM, Nice, France e-mail: [email protected] S. Ventolini Université de Tours, IAE, VALLOREM, Tours, France e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_5

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banks’ risks are those of their customers and members, including a combination of economic and social risks translated into banks’ activity, leading them to face a wide range of risks (Caldarelli et al., 2016). Risks are then an integral part of bank activity and take various forms, including credit, liquidity, market and operational risk. With the recent financial crises, such as that of 2008, and with the implementation of the Basel regulations (Basel II and Basel III), awareness of the need to manage risks linked to financial activities has led financial institutions to review their practices on this matter. Indeed, because of banks’ role in and potential impact on economies, regulators have imposed restrictions on the risks banks can take and require them to satisfy minimum capital requirements. Therefore, today, financial institutions face an important issue: the governance and management of risks. Here, enterprise risk management (ERM) is a key component of banks’ governance (e.g., Caldarelli et al., 2016). As highlighted by Mikes and Zhivitskaya (2017), banks have implemented different mechanisms to manage risks, such as creating chief risk officer positions and implementing a risk management framework including analytical models for measuring and controlling quantifiable risks. Nevertheless, ERM systems are not standardized and must be context specific and, more particularly, account for organizational purposes, values and structures (Arena et al., 2010; Caldarelli et al., 2016). This issue is still difficult to handle, as “risk-taking” activities are largely decentralized (Stulz, 2015). The following challenge then follows: the management of the mechanisms implemented to control decentralized risk-related decisions. Despite engaging in less risk-taking activities than capitalistic banks, cooperative banks are not less concerned about financial risks. This phenomenon is of importance in some European countries, such as France, as cooperative banks are characterized as playing a systemic role (e.g., Poli, 2019). Moreover, the literature on cooperative banks (e.g., Ayadi et al., 2010; Caldarelli et al., 2016; San-Jose et al., 2011) highlights that these institutions are ethical banks involved in the development and promotion of the economic and social welfare of local communities. On this context, Caldarelli et al. (2016) note that “economic profitability should be regarded as a good management practice on the part of the bank that helps to guarantee economic sustainability and durability over time.” Therefore, there is a need to manage and achieve economic and financial purposes to jointly reach social and nonfinancial objectives (e.g., Caldarelli et al., 2016; San-Jose et al., 2011). As such, these banks tend

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to fund diverse local activities and organizations and even non-bankable persons (e.g., carrying too much risk for commercial/capitalistic banks) experiencing financial exclusion or organizations such as SMEs that can experience credit limitations, as it is more difficult to correctly evaluate their creditworthiness (e.g., Bouwens & Kroos, 2019; Migliorelli & Lamarque, 2022). Despite this context, Ferri et al. (2014) show that cooperative banks were less downgraded during the financial crisis than other types of banks, and overall, the literature highlights that such banks are effective in the management of such risks, balancing their dual bottom line, i.e., serving local communities and ensuring financial sustainability and resilience (Cornée et al., 2018; Ferri et al., 2014; Migliorelli & Lamarque, 2022). The purpose of this chapter is to explore how cooperative banks tackle the challenge of the governance of risks. More particularly, we investigate how the decentralization of decisions in cooperative banks, combined with a strong anchor and communication on cooperative values, help mitigate risks. We focus particularly on credit risk, which is one of the most important risks for this type of bank (e.g., Caldarelli et al., 2016). Indeed, in contrast to capitalistic banks, most cooperative banks do not bear direct market risks, as the market activities of cooperative groups are usually run through an independent entity (such as a subsidiary) and are not directly connected to the core activities of cooperative banks. Credit risks relate to the purpose of cooperative banks, as they serve as a means to add economic and social value to the banks’ territory. To discuss how the decentralization of decisions supports the governance of risks, we present the case of a French cooperative bank group. This chapter is organized as follows: the literature on the risks and decentralization of decisions made in cooperative banks is reviewed in Part 5.2. Part 5.3 describes our case study of a French cooperative bank group, and Part 5.4 presents the findings. Finally, Part 5.5 discusses the findings and offers important highlights as a conclusion.

5.2 Governance of Risks and Decentralization: A Literature Review According to Stulz (2015), a well-governed bank “should have mechanisms in place that encourage bank managers to make value-maximizing tradeoffs between risk and reward, all while operating within the constraints

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imposed by regulation.” Therefore, in banks, governance and, more particularly, governance of risks begin by choosing the level of risk, which will be not the lowest but the most optimal from the perspective of shareholders (Stulz, 2015). In regard to the governance of cooperative banks, a peculiar feature is the democracy principle “one person—one vote” whereby each member can express her or his opinions on strategic orientations and financial and nonfinancial results of the bank at annual general meetings. As stated above, this implies that the level of risk is assessed through the lens of cooperative values and leads to consideration of potentially riskier projects, as they align with the dual bottom line of a cooperative bank. The Specificities of Cooperative Bank Governance Effects on Risk Setting In cooperative banks, risk governance and risk management play a crucial role, especially as this “allows them to holistically handle riskiness according to the specific nature of these banks’ business model, including their peculiar governance structure” (Caldarelli et al., 2016). In this context, an important lever of action used to govern and manage risks is the cooperative banks’ governance structure itself (Ayadi et al., 2010; Caldarelli et al., 2016; Ferri et al., 2014). As highlighted in prior literature (e.g., Caldarelli et al., 2016; San-Jose et al., 2011), increasing the number of members and/or shares sold is crucial to securing new core equity capital and banks’ level of risk, allowing in turn to manage overall exposure to risk. Nevertheless, this lever is not the only one implemented in cooperative banks to properly govern and manage risks while remaining aligned with their purpose and values. These banks, as capitalistic banks, implement ERM systems at all organizational levels, and these banks usually rely on an extensive decentralization of decision-making (Bouwens & Kroos, 2019; Caldarelli et al., 2016; Campbell, 2012; Stulz, 2015). As a result, “risk-taking” activities, such as lending decisions, are largely made at lower levels of the hierarchy, where it is sometimes difficult to keep track of the overall risk position of the bank (Stulz, 2015). The decentralization of decision rights is therefore an important organizational feature to manage and structure to relate it relevantly to both the risk appetite and values of the bank. Indeed, such decentralization has several impacts, and a notable one is that it influences the outcome of loan decisions (Bouwens & Kroos, 2019; Campbell, 2012). On the one

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hand, the method presents many advantages for banks, as it empowers branches that are closer to customers and members and as such have better information; on the other hand, the approach also faces several criticisms such as the fact that some employees are not able to assume additional responsibility and a loss of control, which could lead to poor decision-making, implying the implementation of strong control mechanisms (e.g., Dugdale, 2017). In this context, research on this topic underlines two specific interrelated aspects of cooperative banks that are central: (1) the importance of local soft and privileged information for credit/lending decisions, which supports the relevance of the decentralization of decisions made in cooperative banks, and (2) the importance of the selection and socialization of employees in accordance with banks’ purposes and values, which is important to how risks (and especially credit risk) are managed. The Importance of Soft Privileged Information for Managing Credit Risks The literature on management globally, and regarding financial institutions more particularly, highlights some criticisms or potential limitations of classic approaches to the decentralization and delegation of decision rights in financial institutions (Bouwens & Kroos, 2019; Dugdale, 2017; Stulz, 2015). Nevertheless, several studies show some differences in the specific settings of cooperative banks (Caldarelli et al., 2016; Campbell, 2012). Indeed, even if on a structural level, the organization of decentralization appears similar, on a relational level, it produces very different effects. While capitalistic banks tend to prefer to rely on hard, objective, verifiable data to establish credit risk ratings and make credit decisions, cooperative banks tend to also rely on and include in their analysis what is called “soft information” (Bellucci et al., 2019; Bouwens & Kroos, 2019; Caldarelli et al., 2016; Campbell, 2012; Migliorelli & Lamarque, 2022). Soft information is privileged information that customer advisors have on their customers, business, territory, etc., enabling them to have proprietary local knowledge that allows them to deviate (or not) from quantitative analysis based on the standard loan rate. By essence, such information is considered non-verifiable information, and therefore, it may be difficult for higher-level managers to discern biased from unbiased information (e.g., Bouwens & Kroos, 2019). Indeed, this local knowledge

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is especially detained by front-office advisors at a lower level of the bank hierarchy and is obtained through relationship lending practices (Boot, 2000; Campbell, 2012; Migliorelli & Lamarque, 2022; Poli, 2019). Relationship lending (or banking) is largely implemented in cooperative banks, as it echoes their values of engagement and commitment to their members, customers and territory. This form of lending relates to the fact that such banks engage in long-term relationships and, in this context, are able to gather qualitative, soft information through continuous interaction with customers (Boot, 2000; Bouwens & Kroos, 2019; Migliorelli & Lamarque, 2022). This allows cooperative banks to benefit from a higher level of information through the evaluation of qualitative data that cannot be reduced to numbers (Caldarelli et al., 2016). This practice has been recognized as pivotal, as it is considered one of the factors leading cooperative banks to have a countercyclical role in Europe (Migliorelli & Lamarque, 2022). This practice also relates to cooperative banks’ territory/spatial knowledge. Indeed, several studies highlight that these banks, despite being hierarchical organizations, are not physically distant from potential borrowers and are better able to evaluate their creditworthiness (e.g., Bellucci et al., 2013; Poli, 2019). In reference to this context, Caldarelli et al. (2016) highlight the importance of soft information allowing qualitative assessments of customer and member credit requests. In their case study of an Italian cooperative bank located in Naples, the authors show how this kind of information was necessary not only to ensure fulfilling a bank’s social purpose of developing the local economy and initiatives but also to avoid financing illegal or mafia-related activities. Overall, the use of soft information is closely related to cooperative banks’ dual bottom-line purpose and cooperative values. However, this is not the only feature that cooperative values have an influence on, as they also have an influence on certain managerial practices in relation to the governance of risks. The Importance of Employee Selection and Socialization to Cooperative Values to Manage Risks Previous research also shows the importance in this context of some control mechanisms, particularly employee selection and socialization (Bénet & Ventolini, 2019; Campbell, 2012). In reference to a mutually owned financial services organization, Campbell (2012) shows that

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in highly decentralized organizations (financial institutions), in which it is difficult to motivate employees to use decision-making authority effectively, employee selection is essential. In reference to lending decisions, the author shows that employees selected through mechanisms that are likely to ensure an alignment of their preferences with organizational objectives and values exhibit an effective use of delegated decisionmaking. Similarly, Bénet and Ventolini (2019) show that in a French group of cooperative banks, the organizational identification process to cooperative bank values is to some extent related to individual values and personal experience, rendering the recruitment and socialization process central to aligning employee behaviors with the organization’s purpose. Finally, Caldarelli et al. (2016) highlight in their study of an Italian cooperative bank that the commitment to the bank’s values and the involvement of all employees in risk management processes, at all levels of the hierarchy, as well as the experience that they gain from this, are very important features in managing risks. For this context, the authors underline that the risk assessment process, even if decentralized to the branch level in regard to small loans, is still supervised by higher-level managers such as the risk controller and board of directors. The goal is more than a control process, as the method is most of all a means to share past personal experience and knowledge of the local area and communities and to ensure that the bank meets its financial and social aims. Overall, the decentralization of decisions influencing risks in cooperative banks is usually backed by specific practices and processes, and the literature more specifically highlights the importance of soft information use and the value of building and sharing local knowledge among managers and advisors at all levels of cooperative banks. This, in turn, helps to build on the decentralized structure of decision-making related to lending activities to strengthen the governance of risks and emphasize the cooperative nature of these banks. To further elaborate on this literature, we study the case of a French cooperative bank group.

5.3 Case Study of CB Bank: Data Collection and Context To explore the role of the decentralization of decisions in cooperative banks and how this mechanism allows in fine the mitigation of credit risks, we study the case of a French cooperative bank group, which we name CB Bank. Our case study relates more specifically to three

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regional banks of the CB Bank group. To collect data from the three different regional banks, we used interviews. Specifically, we conducted 39 interviews (37 hours of interviews) at all hierarchical levels of the three entities by interviewing both head office and branch managers as well as front office employees (e.g., CEOs; HR, accounting, management control, financial, logistics and commercial managers; and business customer, individual customer, private wealth business advisors). The table in the Appendix provides details on the interview data. Data collection took place from August to November 2016. All interviews were recorded and transcribed. The interviews lasted 20–90 minutes and took an average of 60 minutes to complete. The case context is as follows. CB Bank group has a decentralized structure, characterizing almost all cooperative banks, and is organized in regional autonomous entities that cooperate through a vertical (head of the group) and horizontal (other regional entities) network. Each regional bank has a CEO who has strategic objectives established by the national head but who can make independent decisions regarding the implementation process. The current strategy has been widely influenced by the socioeconomic context, which is characterized by greater difficulty in retaining customers who tend to have accounts in multiple banks to lower costs and challenges linked to financial organization regulations (e.g., Basel II and Basel III). Therefore, even if the banks have a central purpose based on balancing their dual bottom line (i.e., serving local communities and ensuring financial sustainability and resilience), this has led regional entities to focus their strategic orientations on products and services, allowing more net profit income (as savings accounts, product and service digitalization, or insurance). The regulation also has an influence on relations with members, as selling more shares has become a prominent target linked to the bank’s survival, ensuring new equity capital. In CB Bank, the cooperative values are the same for the whole group and similar to those of the other cooperative banks and are based on three core principles (e.g., Caldarelli et al., 2016; San-Jose et al., 2011): (1) the affinity principle implying that bank investments need to meet the interests of both members and customers and are to not be made in a speculative way (this can lead to the reinvestment of funds in local businesses, for instance), (2) the responsibility principle related to the fact that the bank is accountable regarding its activities to the overall local community and has a role as a local business actor, and (3) the integrity principle related to the willingness to maintain proximity to members and

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customers and to be a partner in their professional and personal projects, even if the associated risks are somewhat higher (than what would be accepted in a capitalistic bank). Here, the data emphasize that customer advisors and branch managers feel invested in their bank and identify with these values. Their objective is to participate in collective work focused on bank success. Specifically, as the quotes hereafter show, these individuals are proud of their work and want to be useful to society. It is a regional bank; a cooperative bank close to its customers. […] It’s anchored in us: the responsibility to perform well. Deposits made with us and entrusted to us by our customers are a real responsibility. We all have business goals, but not at all costs. (Branch Manager, P25B3) Proximity means that we are present. Above all, it is the advisor who makes the bank and not the other way around. It’s the human relation that comes first; that comes before the brand or the bank’s name. (Individual Customer Advisor, P28B1) Having members and customers means that, thanks to them and their savings, today we are able to allow other customers and members to have attractive credit conditions. Everything we collect here at the local level will be redistributed at the local level. It is for the local economy. We are not going to use it to go finance operations in Asia; it stays here. We will help, for example, a city to rebuild roads. We fund local communities because it’s for the good of all, all the same. (Branch Manager, P22B3) What distinguishes us from other banks is our regional side, which for me is important. Our mission is to support the projects of tomorrow in the regions; we are really involved in regional development, and we have a strong role. And yes, that, I think that’s a big difference; for me, it is one of our strong values. We are playing our part, and we are playing our role of local support. We take risks. We are alongside businesses here, and the goal is to keep the regional economic fabric alive and to keep the region functioning well. We really do have a logic of loyalty, in time, with customers and we do it pretty well. When customers have problems, we support them as much as we can by always looking for an amicable solution and without using the heavy artillery first. It’s also one of our strengths. Before transferring the file to the litigation department, we will try our best to keep the file in our hands, to be in a dialog process, and we will try to do the maximum. (Business Customer Advisor, P21B1)

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Regarding the risk context more specifically, CB Bank’s governance and decentralization practices can be described as follows. First, the governance of CB Bank is, as in other cooperative banks, a means to help define risk appetites and manage the overall risk of the banks. In reference to this context, it is worth noting that selling shares is directly linked to regulation regarding risk management and requirements to reach and stabilize the equity capital structure. In CB Bank, shares are more particularly associated with commercial and profitability objectives as, every year, advisors in branches have to achieve targets set on the sale of the bank’s shares to their customers. Second, regarding decentralization practices, the three regional entities under study are classic cooperative banks. Risk credit is handled at both the head office and branch levels, as the delegation of lending decisions is organized based on the amount of the loan requested. Therefore, customer advisors can grant small loans to their customers. When the amount is higher than a defined threshold (for a customer advisor, this threshold is usually quite low and limited to small loans), the advisor must prepare the lending file case and present it to her or his branch manager or branch network supervisor or the credit officer at the head office, with the latter handling large loan requests. We have a delegation for credit decisions. As a business customer advisor, we do not have a large delegation. It’s the risk aspect that wants that. This is normal, because often advisors can be young. But I feel free to take initiative; we are even asked to be proactive in everything. […] We have carte blanche to do what we want. We have carte blanche to go out of the branch: we go out a lot, to meet and talk with customers, etc. (Business Customer Advisor, P12B2) A customer advisor has a delegation which will be assigned according to their skills and position. Most of the time, they will have to ask with a superior delegation. That is to say, today, 70% of the credit requests are presented to me as it is in my risk delegation. Then, the purpose is to determine if we make it or not; we will check the risk. (Branch Manager, P4B1)

Building on this context and the data analysis, we expose in the next section the findings highlighting the role of the decentralization of decisions and how this mechanism, coupled with specific practices, allows the mitigation of credit risks.

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5.4 Case Study of CB Bank Findings: Strong Relationships Between Values, Decentralization Practices and Risk Management The qualitative analysis of the data highlights three main findings. In this context, the first two findings are aligned with the previous literature and show (1) the importance of the use of relational banking, and particularly the great importance granted to soft knowledge as a special differentiating feature but clearly seen as arising from cooperative values and (2) the importance of employee socialization, but highlighting the importance of specific factors such as feelings of empowerment, trust, responsibility and being part of a team sharing risks. The third finding deepens the two first findings emphazising the importance of cooperative values as the foundation of a successful business model to handle risk, especially compared to capitalistic banks. Soft Information Use as an Expression of Cooperative Values CB Bank importantly relies on relational banking, and managers and advisors emphasize the central role of soft information in lending decisions and the assessment of risk estimates. Here, soft information relies on their good knowledge of the territory and local economy as well as the good knowledge of their customers/members. Data analysis reveals that branch managers and customer advisors are aware that they have privileged information that is very valuable for the bank’s purpose fulfillment. This feature acts as a motivational factor and creates a sense of pride in being the “bank around the corner,” as managers and customer advisors feel that they are doing a good job and are able to make relevant decisions. These individuals consider themselves as professionals who are able to develop professional relationships with customers while also being committed to them. This feeling is based on the length of the given relationship and the trust developed between the bank staff and the customer: they know each of their customer projects, they want them to succeed and, as such, they feel personally engaged and express happiness when projects are successful, as they feel they have contributed to them to some extent.

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In terms of risk, I am happy to work at [CB Bank] because we have a decision-making process that is still local. So, when we present a credit file case that is not in the branch delegation, we have an answer that is timely and much more refined because someone will necessarily know how to assess the project from a local point of view: it is located on this street or this one, it implies that it’s a good thing or it can be difficult, etc. The risk is controlled by knowing the territory. (Business Customer Advisor, P12B2) We have a dashboard called risk management. It allows us to differentiate between real risks and false risks. There are cyclical risks linked to a problem related to a professional or a specific activity or structural risks related to a bad organization. In the latter case, it is a false risk. We will continue to support the client, perhaps granting a new loan to support them and help them succeed. The relationship with the customer is essential. (Branch Manager, P4B1) Our bank has values of being close to our customers and meeting their needs in the best way possible. It’s based on trust. We are really focused on closeness and on building a long-term relationship between the customer and the advisor. […] One of my customers wanted to take over a hotel. The loan was high at over e 2 million. I was really stressed. I wanted to offer them realistic and achievable solutions. We managed to fund it. It was personally satisfying because I was able to support my customer in their project. Now their account is managed by our business center, but I was the one who accompanied them. This is a win-win strategy based on a relationship of mutual trust. (Business Customer Advisor, P11B2)

The quotes above illustrate our findings and show how soft information use gives managers and customer advisors discretion to assess a loan request and distinguish between “true” and “false” risks. Each situation is thoroughly analyzed to understand and estimate inherent risks. In this context, the quotes also highlight the importance of geographic proximity, which allows for a good grasp of the stakes of a project in addition to the customer soft information gathered. The combination of the two key types of soft information gives the bank’s staff confidence in their appreciation of risks and highlights the importance of the geographic, temporal and qualitative features of soft information. In addition to the importance of soft information for lending decisions, internal practices that can be linked to the management of soft information appear highly

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important and lead to a sense of a collective handling of risks. These practices are rooted in value-based socialization processes. We present them in the next section. Empowerment, Trust and Risk Sharing as Powerful Socialization Practices Mitigating Risks Within CB Bank, depending on the extent of lending decision-making granted, decisions are made either at a local (customer advisor or branch manager) or more regional (branch network manager or risk managers at the head office) level. Regardless of the hierarchical level, managers and advisors feel that they are empowered and able to monitor themselves. In this context, the exemplary principle is a cornerstone, as setting an example and knowing “how to be” are important not only within a branch team but also in customer relationships. Moreover, when decisionmaking power is beyond their level of delegation, branch managers and customer advisors have the opportunity to present and “support” their customers’ loan file cases in front of their superiors, who will be in charge of deciding. This reinforces their sense of responsibility and motivates them. We must also have a good analysis in terms of risk. Advisors have to know how to do it and avoid taking reckless risks. It is necessary. One day, I had a manager who told me ‘You have to know how to do it, you have to know how to be.’ It stuck with me at the time. This sentence: knowing how to be and knowing how to do it means with one’s customers but also with one’s colleagues. We are a team. We do not hesitate to ask other members of the team questions to learn. (Branch Manager, P10B2) To me, what’s appealing is that we have power and we are a regional organization. Therefore, for example, for a loan file, we can go and discuss directly with the decision-maker to make our case and validate things with them, and thus we can support our customers’ projects. (Private Wealth Business Advisor, P1B1) I often hear customers asking: “Do you make the credit decision yourself?” So, we tell them, indeed, we have a delegation that is specific to the branch, so we have power regarding this. We are trusted. (Branch Manager, P4B1)

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Me, I think my mission, my peculiar role is to really try to help students and apprentices. I try to help them in the sense of teaching them what a bank account is, what bank charges are, how not to find yourself in delicate situations, how not to write blank checks, and things like that. In fact, the goal of [CB Bank] is really to help customers from birth to death. […] We can negotiate good conditions for them regarding loans, for their projects, and for their studies. Me, I think my role is to try to help people on a daily basis. (Individual Customer Advisor, P31B1) A ‘thank you’ from a customer, that’s a very stupid thing, but it means the customer realizes that, despite everything, we gave 100% for their case. That’s what’s pretty cool. When we manage to get someone out of a fragile financial situation, financing a client, it’s rather rewarding. All this, that’s the side with the customer; there is also the side related to the bank where we can tell ourselves that we have done our job well. (Individual Customer Advisor, P15B2)

As shown in the quotes above, this sense of autonomy and empowerment is important but is not the only feature highlighted in credit decisions made at CB Bank. A great emphasis on teamwork and collective practices is central when the bank’s staff discuss credit risk and decisions. Indeed, even if a bank’s branch manager and customer advisors are in their right to assess lending request risks within their range of decisionmaking, they are invited to not bear all the risks and share with others insights on their customer portfolio to get another point of view. You must make sense of what you are doing. I discuss once a month with my customer advisors and analyze the risky customers under their responsibility with each of them. The aim is to eliminate false risks and limit the impact of real risk. It takes a lot of time to estimate and verify the risk and if it’s a new customer, its reliability. It is my job as a branch manager to support employees. (Branch Manager, P4B1) When they [the branch’s customer advisors] have loan files, for example, they can bring them to us [branch managers]. We check that everything is good. Then, our role is also to support them in approaching and managing credit risk, in the analysis of documents, to ask them questions, and to value and support them so that in the end, they are autonomous. It makes our collaborators evolve. And all that is done in accordance with the bank’s purpose. (Branch Manager, P10B2)

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I present the credit files that are in my hierarchy’s delegation, those that are outside of mine. […] Depending on the delegation, it can be for the branch manager or the branch network manager. We give our opinion; we can talk about the case freely. […] On the risk, it’s a lot more consistent. When we see our director, well, we have free speech. We indicate why we believe in it. We try to convey the feelings of the customer. […] When I have a credit request but it is not related to my area or my city or from a customer who has a project in another town I don’t know, here, I can transfer the case to this area branch, which will make a better decision. It’s more consistent to assess the risk. (Business Customer Advisor, P12B2)

The above quotes highlight the importance of the socialization process to lending decisions. The notions of “collective work,” “support from the hierarchy” and “being able to discuss your file cases freely” are strongly related to the interviewees’ vision of credit risk: it is a cornerstone for the bank’s compliance with regulation and survival, but most of all, it is also a part of the multiple criteria on which they base their decisions regarding a credit request from a customer. In this context, it is worth noting that incentive practices support this collective vision. Indeed, the incentive system design does not rely on individual targets regarding the number of loans made. Such an objective exists at the branch level; nevertheless, it is a collective objective resulting from the sum of the lending activity of all customer advisors and the branch manager.1 In the same way, bonuses are collective bonuses, and individual bonuses are exceptional and rather small. The relation between incentive schemes and delegation is considered very different from that of capitalistic banks, where a typical agency problem is expected to arise. This emphasizes the intrinsic motivation to share risk assessment and risk-taking behaviors. This process is strengthened by the importance of cooperative values in managerial practices, and this point is discussed hereafter in the last part of the findings. The Role of Values in Handling Credit Risks: Perceived Specificity of Cooperative Banks Overall, previous findings emphasize, formally or informally, the influence of the specific business model of cooperative banks and the importance of

1 In this bank, branch managers also act as customer advisors, even if they have a smaller customer portfolio to manage.

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cooperative values and their close link to organizational and managerial practices, particularly in regard to risk. The findings highlight the importance of cooperative values such as responsibility in everyday practices and lending decisions more specifically. Nevertheless, in addition to this, the data analysis also highlights that the interviewees have a tendency to refer to their bank’s values and business model in opposition to the capitalistic bank business model. The interviewees emphasize this and compare the two models in relation to how they manage risks differently. Both managers and customer advisors describe a more stable business model than that of capitalistic/commercial or investment banks. Cooperative banks were more resilient during the 2008 crisis. The business model is different from that of investment banks. We are like grocers; we have branches across the whole territory and we have staff and a lot of customers. We earn very little money per customer, so we must conquer customers all the time all over again… whereas, in an investment bank, they have few staff and few customers. The risk is not the same, and our system offers real stability. (Branch Manager, P20B2) Conversely to commercial banks, we actually diversify our credit activities over a lot of different companies or individuals, so ultimately the risk is much less important. So, in a sense, it is really us who control the risk, because we are the ones who grant, or not, the loans to our customers, so the decision is made locally. (Individual Customer Advisor, P28B1) From an organizational point of view, they [capitalistic banks] are national; therefore, they have a national vision, and indeed, a branch director of [named a commercial bank] gives an opinion on loans, and then they send it all to Paris. Then, whatever these arguments, the last one who sees the case file will make the decision. But this person will have seen the file only on paper; they will not have been in contact with the customer. Whereas we are in contact and we have this power; we can argue. We have importance at the level of the decision leading to the credit decision. (Branch Manager, P10B2)

These quotes exemplify the typical position of a cooperative bank regarding its dual bottom-line purpose in supporting customers even if there are some risks, whereas capitalistic banks do not have this position. It is all thanks to the strong knowledge of the customer built-in time through a relationship between the bank and the customer. This

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seems to be important to banks’ managers and advisors, and it strengthens the influence of cooperative values on how usual banking practices are used but in a different manner. In fine, the vision of risk for CB Bank seems to pose no issues or problems, as managers and customer advisors are confident not only in how the decentralization of lending decisions occurs throughout the bank but also in how decisions are made, as these methods are backed by soft information and teamwork. We discuss these findings in light of previous literature in the next section.

5.5

Discussion and Conclusion

The purpose of this chapter is to investigate cooperative banks’ governance of risk and the implications of the decentralization of decisionmaking in this context. We explore the case of CB Bank to document this aim and focus on a specific type of risk: credit risk. Our findings are in line with previous literature but also offer some new insights in extending it. First, regarding the organizational features of the decentralization of credit decisions, the findings show how risks are controlled through a clear decentralization of decisions throughout the cooperative bank structure from top (the head office) to bottom (the branches and customer advisors). This organization of decision rights throughout cooperative banks allows a clear definition and organization of the risks and responsibilities of managers and employees at all levels. More particularly, each person in the bank has a certain amount of decision-making power that makes her or him feel autonomous and responsible. On the other hand, asking questions and making lending decision-making a collective process are highly encouraged and valued. This creates a feeling of proximity linked to the core cooperative values of the bank and results in a strong feeling of being part of a bank that is different from others (especially capitalistic banks). Our findings emphasize here the need to differentiate through related values and practices. This leads to a different vision of credit risk, which appears to be crucial to the bank’s activity but not much of an issue, as the cooperative business model itself mitigates this risk through the governance structure and relational banking. Overall, these findings add to the literature in showing how “shared risk-taking” leads to a different understanding of credit risk. This work extends previous literature highlighting that cooperative banks tend to be considered more credit risk-taking to fulfill their dual bottom-line

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goals: at CB Bank, the sometimes informal link between risks and cooperative values is a cornerstone, allowing the bank to adopt a responsible vision of this risk. These findings therefore describe a form of clan control (Ouchi, 1979) imposed through the regulation of behaviors focused on shared values and routines and facilitated by the socialization practices linked to credit risks and vision (Caldarelli et al., 2016; Campbell, 2012). Moreover, these findings mitigate the reality of decentralization in cooperative banks. Indeed, even if credit decisions are delegated throughout the bank to the customer advisors’ level through a formal decentralization of decision-making, we can discuss the extent of real decision-making power and how it is perceived by advisors. In fact, they are more or less conscious that they do not have extensive power. Nevertheless, the feeling of empowerment that comes from being able to discuss and support credit file cases beyond their delegation level contributes to a “shared risk-taking” vision and supports responsible behaviors when it comes to credit risk. Second, our findings also add to previous literature on the use of soft information in cooperative banks (Boot, 2000; Caldarelli et al., 2016; Migliorelli & Lamarque, 2022). We specifically highlight the importance of the geographic, temporal and qualitative features of soft information: in our case, it is not only about the customer. Soft information combines historical and current qualitative data linked to (1) good knowledge of the customer profile and (2) good knowledge of local communities and their characteristics and economic and social needs. Moreover, this multidimensional soft information is widely shared throughout the bank to enhance the bank’s knowledge as a whole and make advisors more knowledgeable in regard to credit decisions. In conclusion, cooperative banks rely on strong values that are embedded in every practice of the organization at all levels. A collective sense of handling risk through the formal decentralization structure and strong cooperative values are certainly some of the reasons why such organizations are considered effective in governing risks.

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Appendix: Data description---Interviews Code

Bank

Role

hh:mm

Alias

P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 P13 P14 P15 P16 P17 P18 P19 P20 P21 P22 P23 P24 P25 P26 P27 P28 P29 P30 P31 P32 P33 P34 P35 P36

1 1 3 1 3 3 2 2 2 2 2 2 3 2 2 2 2 2 2 3 1 3 3 3 3 3 3 1 1 1 1 3 3 1 3 1

Private wealth business advisor 1 Branch manager 1 Business customer advisor 1 Branch manager 2 Insurance department manager Financial and control department manager Financial advisor Human resources and organization manager Commercial development manager Branch manager 1 Business customer advisor 1 Business customer advisor 2 Individual customer advisor 1 Financial and legal department manager Individual customer advisor 1 Branch manager 2 Branch manager 3 Logistics manager (CSR department) Individual customer advisor 2 Branch manager 1 Business customer advisor Branch manager 2 Accounting and tax department manager HR training manager Branch manager 3 Private wealth business advisor Business customer advisor 2 Individual customer advisor 1 Branch manager 3 Private wealth business advisor 2 Individual customer advisor 2 Investment department manager Individual customer advisor 2 Financial advisor 1 CEO Branch manager 4

01:06 01:38 00:43 01:27 01:18 00:37 00:37 00:52 00:51 00:45 00:27 00:38 00:36 01:04 00:42 00:34 00:37 00:46 00:43 01:12 01:05 01:19 01:15 01:26 01:01 00:23 00:50 01:05 01:25 00:55 01:07 01:00 00:21 00:52 01:20 01:15

P1B1 P2B1 P3B3 P4B1 P5H3 P6H3 P7B2 P8H2 P9H2 P10B2 P11B2 P12B2 P13B3 P14H2 P15B2 P16B2 P17B2 P18H2 P19B2 P20B3 P21B1 P22B3 P23H3 P24H3 P25B3 P26B3 P27B3 P28B1 P29B1 P30B1 P31B1 P32H3 P33B3 P34B1 P35H3 P36B1 (continued)

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(continued) Code

Bank

Role

hh:mm

Alias

P37 P38 P39

1 2 1

CEO CEO Financial advisor 2

01:04 01:04 01:00

P37H1 P38H2 P39B1

Note The column “Bank” ranges from 1 to 3, as interviews were conducted at three different regional banks. In the Alias code, “H” denotes a head office manager or employee and “B” denotes a branch manager or employee

References Arena, M., Arnaboldi, M., & Azzone, G. (2010). The organizational dynamics of enterprise risk management. Accounting, Organizations and Society, 35(7), 659–675. Ayadi, R., Llewellyn, D., Schmidt, R., Arbak, E., & Pieter De Groen, W. (2010). Investigating diversity in the banking sector in Europe: Key developments, performance and role of cooperative banks. CEPS Paperbacks. Bellucci, A., Borisov, A., Giombini, G., & Zazzaro, A. (2019). Collateralization and distance. Journal of Banking & Finance, 100, 205–217. Bellucci, A., Borisov, A., & Zazzaro, A. (2013). Do banks price discriminate spatially? Evidence from small business lending in local credit markets. Journal of Banking & Finance, 37 (11), 4183–4197. Bénet, N., & Ventolini, S. (2019). L’identification organisationnelle au sein des banques coopératives-quels facteurs dans la construction de sens des collaborateurs? Revue Française De Gestion, 45(280), 9–27. Boot, A. W. A. (2000). Relationship banking: What do we know? Journal of Financial Intermediation, 9, 7–25. Bouwens, J., & Kroos, P. (2019). The effect of delegation of decision rights and control: The case of lending decisions for small firms. Management Accounting Research, 43, 29–44. Caldarelli, A., Fiondella, C., Maffei, M., & Zagaria, C. (2016). Managing risk in credit cooperative banks: Lessons from a case study. Management Accounting Research, 32, 1–15. Campbell, D. (2012). Employee selection as a control system. Journal of Accounting Research, 50(4), 931–966. Cornée, S., Fattobene, L., & Migliorelli, M. (2018). An overview of cooperative banking in Europe. In M. Migliorelli (Ed.), New cooperative banking in Europe: Strategies for adapting the business model post-crisis. Palgrave Macmillan.

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Dugdale, D. (2017). Management control systems: Theory and lessons from practice. In The Routledge companion to performance management and control (pp. 11–38). Routledge. Ferri, G., Kalmi, P., & Kerola, E. (2014). Does bank ownership affect lending behavior? Evidence from the euro area. Journal of Banking & Finance, 48, 194–209. Migliorelli, M., & Lamarque, E. (2022). The co-evolutionary nature of cooperative banks in Europe In M. Migliorelli & E. Lamarque (Eds.), Contemporary trends in European cooperative banking: Sustainability, governance, digital transformation, and health crisis response (pp. 1–27). Palgrave Macmillan. Mikes, A., & Zhivitskaya, M. (2017). Managing ambiguity: Changes in the role of the chief risk officer in the uk’s financial services sector. In E. Harris (Ed.), The Routledge companion to performance management and control (pp. 198– 206). Routledge. Ouchi, W. G. (1979). A conceptual framework for the design of organizational control mechanisms. Management Science, 25(9), 833–848. Poli, F. (2019). Co-operative banking networks in Europe—Models and performance. Palgrave Macmillan. San-Jose, L., Retolaza, J. L., & Gutierrez-Goiria, J. (2011). Are ethical banks different? A comparative analysis using the radical affinity index. Journal of Business Ethics, 100(1), 151–173. Stulz, R. M. (2015). Risk-taking and risk management by banks. Journal of Applied Corporate Finance, 27 (1), 8–18.

CHAPTER 6

When Cooperative Banks Are Dealing with One Cooperative Fintech Firm: What Can We Learn from the Sociology of Markets? Cynthia Srnec

and Philippe Eynaud

This article is the result of the TAPAS—There Are Platforms as AlternativeS—research project that was conducted at the University Sorbonne Paris Nord and coordinated by Professor Corinne Vercher-Chaptal. This article has benefited from the financial participation of the French Ministry of Labor as part of a program on the collaborative economy sponsored by DREES and DARES. C. Srnec Centre de Sociologie des Organisations, Sciences Po, Paris, France e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_6

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6.1

Introduction

The field of finance is undergoing profound changes as a result of digital transformation (Black et al., 2018; Gomber et al., 2018). Digital technology offers banks powerful tools to change the competitive landscape and profit opportunities (Ilievski & Delova-Jolevska, 2020). This has led to the emergence of new professions and new skills to accompany these changes (Caruso, 2018). As in other sectors of capitalist economies, the mechanisms of innovation are driven by large players who have the means to invest and small players who are competing with each other to distinguish themselves through innovation (Yadav & Brummer, 2019). Thus, most of the strategic movements are now played out in the regulation field between banks and fintech firms (Yadav, 2021). In Western countries, fintech firms are fostering the emergence of new trends and developing innovations. The challenge for all actors is to enable an ecosystem favorable to technological innovations and to investments for the future. If this organizational scheme is relevant for capitalist banks, it is questionable whether it is suitable for cooperative banks. Because of the application of their principles, cooperative banks indeed have specific features (Deville & Lamarque, 2014). Thanks to their ownership structure, they are more autonomous (Lamarque, 2018) and more stable (Venanzi & Matteucci, 2021). They also emphasize the roles of culture and social norms in the banking industry (Minto, 2016) and mitigate income inequality in local communities more than their commercial counterparts (Minetti et al., 2021). Therefore, it is possible to think that cooperative status and identity could lead to differences in terms of the sharing role regarding innovation. In practice, however, the difference is not significant. Cooperative banks seem to adopt the routines of capitalist banks toward innovation. However, a French example of cooperation between a cooperative bank and a cooperative fintech firm gives us the opportunity to study what is at stake in the relationship between two actors sharing both the will for innovation and the cooperative status. P. Eynaud (B) Sorbonne Business School, Panthéon Sorbonne, Université Paris, Paris, France e-mail: [email protected]

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The case study is about France Barter (FB), a cooperative fintech firm that has developed a digital platform to support intercompany barter transactions. The platform offers a complementary digital currency as a medium for B2B exchanges. In the course of its development, cooperative fintech firm proposes a joint cooperation project to cooperative banks. The deal is that the cooperative fintech firm will offer barter services to the clients of cooperative banks if in return the banks support the growth of the start-up. The analysis of this case study leads us to describe the cooperative game that is established between the two actors of different sizes. We seek to understand how cooperatives cooperate due to financial innovation strategy and the role played by the cultural relations between the actors. According to the sociology of market scholars, we question the idea that “economics could sufficiently make sense of what happens in markets ” (Fligstein & Dauter, 2007, 109) and we assume that “markets are social structures characterized by extensive social relationships ” (ibid.,105). These assumptions help us to analyze the cultural dimension of cooperation in cooperative finance and provide clues to academic contributions. In the first section, we recall the conceptual contributions of the sociology of markets. In the second section, the case study about a collaboration between cooperative banks and one cooperative fintech firm is developed. In the last section, we discuss the results of the study. We conclude with the contributions and limitations of this exceptional case study.

6.2 When Social and Strategic Action Fields Intertwine in Finance Markets as Fields of Social Action In the past three decades, economic sociology has developed a framework to understand the social embeddedness of markets and enterprises. Mark Granovetter’s (1985) foundational work settled the idea that economic action is embedded in social life. Markets can be understood as “social and political constructions reflecting a country’s culture, its history of class relations, and the various interventions its governments have carried out through history” (Fligstein & Calder, 2015, 5). The subsequent sociological theory of markets recognizes that social processes influence the characteristics and borders of

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markets. Thus, the emergence of new markets relies on social networks, existing regulations, cultural understandings, and codes. As Fligstein and Calder (2015) stated, in the starting phase of markets, the qualities of services and products must be defined. The roles of participants who already hold visible positions in the environment of new markets are crucial. They can promote the inclusion of new actors and facilitate dialog between stakeholders. Emergent markets can express organizational and technological innovations and may favor new firms. In contrast, established firms can be fixed to their routines and less likely to adopt innovations even if they count with indispensable resources (Grabher, 1993). In existing markets, dominant players try to reinforce their positions and can push out challengers. Dominant players are those that can impose their vision and settle the rules of interactions in the arena of the market. The capacity of “managers to push forward their vision depends on their relative power over other parties ” (Fligstein, 2006, 959). Transformations and redefinitions in markets can start in fields or niches where the role of networks of actors is relevant (Fligstein & Dauter, 2007). Thus, the study of markets as a field of action also introduces the capability of actors as a factor. Accordingly, attention must also be directed to the analysis of the social skills of actors that allowed them to establish contacts, create trust, and promote economic activity. The social skills of actors can be interpreted as their ability to motivate players to cooperate (Fligstein, 2001). In the context of a crisis or the emergence of markets, entrepreneurs can uphold new systems of meanings, such as by framing agenda setting. Entrepreneurs that can interpret ongoing changes and combine existing resources to create new services or arrangements (Aldrich, 2005; Schumpeter, 1926, 1961) are simultaneously pioneers and “translators” (Callon, 1986) between fields. This paper integrates the new institutional theory and the sociology of markets in order to integrate the emergence of innovative organizations and new markets from a dynamic perspective. Therefore, existing rules, resources, and the ability of actors are the key aspects of economic life. A local social order where economic activities occur can be labeled as a field (Bourdieu, 1997; Fligstein, 2001) or organizational field (DiMaggio & Powell, 1983; Scott, 2014). A field is an arena where “organized groups of actors gather and frame their actions vis-à-vis one another” (Fligstein, 2001: 108). This results in creating institutions that

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will support the rules as a pattern of behavior. Established actors, as traditional firms, and outside dominant forces as the state can frame the type of exchanges and products and limit access to the field. In the case of new fields, novel institutions rely on the capacity of actors using existing understandings to create new understandings and accepted practices. Finance as a Strategic Action Field From this point of view, finance can be comprehended as a “strategic action field”, in other words, as “a meso-level social order where actors (who can be individual or collective) interact with knowledge of one another under a set of common understandings about the purposes of the field, the relationships in the field (including who has power and why), and the field’s rules ” (Fligstein & McAdam, 2011: 3). Fintech can be analyzed as a niche that has been recently challenging the arena to become a new field of action (Fligstein & Dauter, 2007). Fintech firms interact with traditional actors in the finance field where cooperative banks also participate. As in any other economic field, influential actors take advantage of institutions to reproduce their privileged position, and they can restrain or shift changes. New fields such as fintech do not come from nowhere, and we should consider that “preexisting rules of interaction and resource distributions operate as sources of power and, when combined with a model of actors, serve as the basis by which institutions are constructed and reproduced” (Fligstein, 2001: 107). In this case, the traditional finance field controlled by banks may attempt to protect the actual allocation of positions and resources and prevent power redefinition. An economic field involves producers, suppliers (including technology contractors), clients, the labor force, worker unions, state agencies, and the legal framework (Fligstein, 2002). Informal networks can stimulate interactions and enclose the extent of connections with outsiders. In the financial sphere, previous studies have also highlighted the influential role of organizational culture in financial performance and connections with the latest financial crisis of 2018 (Minto, 2016; de Haan & Jansen, 2011). Over the last decades, the highly competitive and regulated banking market has challenged the role of values in cooperative banks: “the combination of regulatory requirements of the banking profession and the strengthening of cooperative principles clearly fit in opposition, often

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in contradiction”1 (Ghares & Lamarque, 2020: 28). Market economic competition has created field pressures for profits over social impacts: “the financial criteria are the priority and much more highlighted. (…) The value selection criterion comes after the economic criterion. The values come at the end of the process. They intervene once all other criteria are met”2 (Ghares & Lamarque, 2020: 21). This challenge has been boosted by the fintech revolution and its complementary but also disruptive effects throughout three dimensions: technology innovation, process disruption, and service transformation (Gomber et al., 2018). The sociology of markets can contribute to the understanding of the disruptive effects caused by the quick entry of new actors of the social and solidarity economy (SSE) with innovative technology in this field.

6.3

A Research Based on a Qualitative Approach

The empirical study is based on one instrumental case study (Stake, 1994) that was conducted between 2019 and 2021 in France as part of a larger research project (There Are Platforms as AlternativeS, TAPAS). The data collection methodology is based on interviews, observations on the ground, one participative focus group, and secondary data. The secondary data consisted of a firm’s internal documentation (activity reports, minutes, and strategic notes), communication records (websites and social networks), and press articles. We have conducted 10 semistructured interviews. They were based on guides established according to the different categories of actors to be interviewed: cofounders and managers, workers, users (entrepreneurs and companies), and partners (cooperative banks). The following themes were addressed: the respondent’s background, the platform’s history and activity, the platform’s technological policy, the financing and income of the activity, the role of the contributors (managers and workers) in the activity and the organization of work, the distribution of power and the sharing of resources, the privileged competitors in the field, the expected goals, and the development path. The interviews were recorded and thematically coded. The codes were built using an iterative approach based on what emerged from

1 Free English translation by the authors from the original in French. 2 Free English translation by the authors from the original in French.

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the fieldwork. The codes covered the following: the participation of the contributors and users in the governance of the platform, the ways that rules are drawn up, the relationship to the social and economic environment, and the relationship to data ethics.

6.4 Birth, Growth, and Transformation of France Barter (FB): A Cooperative Fintech Firm The Origin of the Project FB is a fintech start-up, created in 2014 as a cooperative of collective interest (in French “Société coopérative d’intérêt collectif ” or SCIC); and it is the result of a combination of two emergent French companies that promoted retail barter between small and medium businesses. Both young founders discovered the barter model while working abroad, and they were inspired by the advantages that it provided to large companies and small and medium enterprises. The two young entrepreneurs from Paris and Lyon met each other at the French Ministry of Finance when a report about the development of intercompany exchange platforms was presented (report PIPAME, 2013). The meeting gave birth to FB: “We decided to get together and create a cooperative called France Barter. That’s how I got into this. In addition, before that, I had heard about exchanges while working for Airbus in India, and we were doing compensation operations against purchases (…) That gave me the idea of doing this for SMEs ” (FB cofounder 2, 2019). The two cofounders agree on an alternative vision of finance that they have cultivated in nonmonetary exchange. Although they have no experience in the SSE world, they decide to adopt a cooperative form for FB. This choice puts them on the fringe of the usual fintech practices: “We have always had a slightly alternative vision of finance; and we thought that to support this and to establish it legally, it was better to opt for a cooperative structure. This has its good points and its bad points ” (FB cofounder 2, 2019). The advantage of cooperative status is that it allows its members to keep control of decisions through democratic governance, which restricts the power of financiers and limits the risk of a takeover. Cooperative status also has constraints in terms of financing the growth of a fintech firm. “In cooperatives, investors are always bondholders. Regardless of how well the company performs, they will obtain interest rates of 4–7%. (…). On the

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one hand, it is good because investors do not take control ” (FB cofounder 1, 2019). Investors can only intervene by using equity securities. They cannot therefore earn a return on the growth of the company or on its resale value. However, this choice gives them a strong identity that distinguishes them from an ever-growing number of players. The choice of structuring as a cooperative was made quickly and was presented as a necessary condition for founding confidence in the network to be formed: “We chose the legal formula of a cooperative because our main asset is our network of clients, and this asset will be better valued if the clients are in fact interested in the business ” (FB cofounder 1, 2019). The cooperative structure is also seen as a guarantee of independence: “Afterward, there is also an important point, which is that cooperatives cannot be bought out. In fact, one of the problems with all these participatory financing platforms is that many of them end up being bought out by a bank. In the end, even if they do things a little bit differently, it becomes a banking product, and our goal is to keep our independence from that. The cooperative status protects. You can’t buy out shares in a cooperative, and you can’t be bought out by a bank. However, that does not prevent us from working with the banks in partnership” (FB worker 1, 2019). This alternative vision of finance implies distancing oneself from the usual operating methods of fintech: “I think we are the only fintech company with cooperative status. That’s not done too much… [laughs], in general, fintech firms are rather good capitalist boxes. The aim of fintech in general, without making any judgment about it, is to set up a financial service that a bank does not know how to do, which is then sold to a bank” (FB cofounder 2, 2019). This choice of legal structure meets the values of cooperation, democracy, and social and environmental responsibility. Thus, FB appears at the crossroads of two worlds, the start-up and the SSE: “We decided to move forward in this field, which is really a new horizon for companies to enable them to work as a network with today’s digital tools (…). We are creating a community that is, by definition, linked by values: the value of cooperatives, the value of mutualism, and the will to do business in a network. This community is hyperresilient because it has shared governance with the status of an SCIC. This allows us to create a new use and a new way of doing business. In fact, we are saying we will trade differently by working in a network” (FB cofounder 1, 2019).

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The Governance of FB The FB charter emphasizes trust, mutual support, and sharing as guiding principles for action. The advantages of cooperative governance are numerous for an innovative project based on trust: “We said to ourselves that one of the best ways of involving the companies was to make them come to the cooperative as members so that they could come to the general assemblies and so that we could present our functioning to them. (…) It’s much more resilient to be a cooperative fintech firm. The genesis of cooperatives is to get together and to unite common forces in a principle of pooling resources and risks. We are more resilient that way” (FB cofounder 1, 2019). The cofounders have succeeded in realizing an organization that opens its doors and engages its members in its development. Joining FB implies, according to its leaders, being coresponsible, willing to share, and contributing to a collective process. The cooperative provided a nonspeculative model because it is grounded in coresponsibility among members. Members are engaged and contributing from its start because there are “legal provisions that one is obliged to constitute in a cooperative. This also made it possible to ensure the structure’s durability” (FB co-founder 2, 2019). There are 5 groups of actors in the governance bodies of FBs: 1— administrators and employees, 2—beneficiaries, 3—networks, 4—experts, and 5—others. Group 1 holds 50% of the votes, which allows the founders and employees to control decisions. The members of the cooperative are invited to participate in the general assemblies, validate the annual accounts, and vote on the strategy to be adopted to develop the network. In 2020, 278 enterprises were members of the cooperative, representing 23% of the network’s users, and 10% participated in the general assembly. Business-Oriented Platform FB is a B2B barter platform that allows companies to exchange goods and services with a complementary currency: the barter-euro. The exchange network is based on a clearing system validated by invoices. FB offers its members the opportunity to use their unused assets, stocks, or available resources as a means of payment. The barter currency comes as a system that guarantees the exchange and gives traceability. Cooperative members can buy from and sell to each other by invoicing each other in barter

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currency. Purchases and sales are barter transactions that do not result in cash outflows. This recourse to a complementary currency is an interesting solution for SMEs to cope with their cash flow tensions. Bartering allows certain unused or dormant assets to be valued and provides additional cash flow financing capacity. FB can open a barter credit line to new members entering the network. We have a very broad ecosystem. We are in the fintech world of startups. (…). We have our network (…), which is hyper plural: VTC, media group, printers, traditional companies, lawyers, chartered accountants, selfemployed graphic designers, etc. In addition, we are in contact with all the actors of the SSE. We have fairly good links with the CG SCOP, which does quite a lot of communication for us on a national scale. (FB cofounder 1, 2019)

In 2019, FB included 1,520 member companies and a trade volume of 4.7M euros of managed transactions. As FB is attentive to banking rules, it was able to obtain the trust of the cooperative bank “Crédit Coopératif ” and the support of the France Innovation competitiveness cluster. In 2019, it was awarded the finance innovation label by the Finance Innovation cluster, which certifies the best financial start-up projects. After the creation of the cooperative, FB launched a crowdfunding appeal in 2016 with Wiseed and succeeded in raising e170,000 in equity. In doing so, FB is the 2nd French cooperative to have been able to finance itself with equity securities over 7 years via a crowdfunding platform. This fundraising has given FB visibility while opening commercial and financial opportunities. The cooperative has even obtained the support of some users who have become members of the cooperative. The composition of its funds is completed by the following: the capital of the founders, financial support from Bpifrance (e200,000) via a 7-year 0% interest “innovation loan”, and several grants and new fundraising in 2018. Even if FB created four new jobs, its turnover is growing slowly and is insufficient to cover its expenses. To finance its operating needs, FB contacted the funds programs of the social economy ecosystem and of public organizations, such as the Caisse des Dépôts, France Active, MAIF, the Crédit Coopératif, and INCO. These contacts do not cover all the needs of FB, and managers are seeking other financial sources to invest in new technology and highly qualified employees.

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FB plans to establish partnerships with banks and to integrate their customers into its network. This action could multiply the size of its network and allow it to change scale. For FB, the business stakes are very high: “When you set up a barter network, the big difficulty is having the critical mass and having a sufficient transactional volume. This requires a certain amount of business expertise. You also need powerful tools to track all the connections. You need a highly motivated team to be behind each request, to see if you have the resources internally or if you need to conduct prospecting actions, and to go into the field. It’s quite a big job…” (FB cofounder 1, 2019). Without the strong expertise and close support of the team members, the platform could not exist. Indeed, its proper functioning requires knowledge of the world of companies, precise identification of network members, and the ability to update the list of their needs and opportunities on the network on a daily basis. Companies and entrepreneurs are submitted to an analysis of their suitability, potential customers, and financial accounts in order to be admitted as users and members. To estimate this overdraft threshold, the FB platform has developed an algorithm, but the final analysis relies on the business expertise of its sales team. Technology is not a substitute for strategic vision. Even if the platform offers effective tools to monitor and support the commercial activity of members, human skills remain key resources in the development of the FB network. If we have gaps in our activity, we will look for trading opportunities at the France Barter network. I think we all work like that. It’s the way we use it. (FB user, 2019)

Facilitating a Business Ecosystem The motivations of FB users are above all economic in nature. First, it is a question of improving the management of their company’s cash flows. Barter credit is an interesting operation compared to classic cash credit. A barter purchase allows you to offer a service that you would not necessarily have bought in euros. The purchase is generally not completely necessary to operate (e.g., press service, coaching, marketing advice, and photography) and not urgent (e.g., renewing a website, decoration, and business cards). FB allows companies to boost their low activity periods

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by consuming without cash. In this respect, FB has countercyclical potential. FB also allows companies to grow their commercial network and to make themselves known. “Joining the network is proof of a certain openness of mind. A member of the network is someone who possesses a logic of discovery. They want to discover something else to see how we can exchange with a parallel currency. The member is someone who is open, who is dynamic, and who is going to try new things for his business ” (FB trainee, 2019). FB represents the possibility of collective control and coconstruction of the funding line: “The barter is decided collectively. The credit lines are organized collectively. It’s a change in the way credit is distributed in a network” (FB worker 3, 2019). FB develops an alternative vision of mainstream finances: “Even if he hasn’t made any sales yet, we can give credit of 5 thousand barters to a wine producer because we know that we can be compensated very easily. In this respect, we are a form of alternative finance. In our network, we can allocate overdraft lines to companies that would not have been allocated funding by a bank. (…) The bank is not able to make this analysis because it does not have the information that we have” (FB cofounder 2, 2019). One of the key functions of commercial facilitators is building and consolidating a business ecosystem. “Our job is based on creating an ecosystem of local businesses because businesses are often looking for local services. It’s in their DNA to say the following: if I need an accountant, I prefer him to be in my geographical area. We were talking earlier about web referencing. These are service jobs that can be done remotely. However, at the end of the day, it’s still nicer and more human to be able to exchange, dialog and meet companies with which to collaborate” (FB cofounder 1, 2019). FB’s trade facilitators give priority access to businesses that offer the most popular services or goods on the network. This helps to better regulate the marketplace and facilitate access to exchanges for each member. You were asking me what your job is? Today, we really have three resources: animating the network, going out to find and bring out needs, and organizing events… (FB cofounder 1, 2019) One barter is equal to one euro. In fact, this is fundamental because it allows companies to make what we call multilateral exchanges. (FB worker 4, 2019)

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If they work in barters, even if they don’t have any cash coming in, it doesn’t matter. They have their references. They can distribute them. (FB user, 2019)

Companies can contact other companies via the platform themselves. However, this is not a common practice. Most of the time, user companies using barter expect direct contact with FB sales facilitators. The role of the latter is therefore decisive. It is often a telephone call, an exchange of emails, or participation in an exchange meeting (FB “lunches”) that is at the origin of a barter exchange. The role of FB in facilitating network users is crucial: “Therefore, would it run if there weren’t people facilitating? - Less well. They are in fact facilitators, people who must try to find opportunities (…). Therefore, yes, we need this intervention. I think you have to start the wheel. Once it is running well, there is perhaps less need to push it. That is, it can then be done with computers perhaps more easily. However, today, yes, there is a need for facilitators ” (FB user, 2019). Even though FB has national coverage, 80% of exchanges are performed locally. Bartering is favored by proximity. FB therefore has an interest in maintaining local ecosystems on which they can rely. The work of facilitation then passes through actions at the local level and meetings such as the “business exchange”. A Business Project with Human and Territorial Dimensions The FB team combines commercial and technical skills. The three commercial facilitators are members of the cooperative. Adherence to the values and interest in a responsible economy are the main reasons given by the cooperative’s employees: “I chose this company because I agreed with its project. Participatory financing is important, and the barter principle is interesting. I had training on the environment at the beginning of my career, and I know that bartering has a positive impact on limiting waste” (FB worker 4, 2019). “It is rewarding to see that our work has an impact on the real economy and in particular on the development of SMEs . It’s always nice to get feedback from a business owner who is aware that thanks to our tool he has been able to support his business and create wealth” (FB worker 3, 2019).

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The business strategy is based on slow growth, and development is closely linked to the territory: “Barters are intended to be quickly reinjected into the real economy and to participate in the development of a given territory” (FB worker 4, 2019). “With cooperative status, we have growth that I like to call organic growth (…) As a result, we have had growth that is not the growth of start-ups (…). We have slower growth” (FB cofounder 1, 2019). FB also promotes new entrepreneurs offering a community and expert advice: “For a company that is just starting out, it is very good to have customers, even if it does not earn any money. It gives them references and a network. It’s all good in fact ” (FB user, 2019). Sources of Income and Value Creation We focused France Barter’s value proposition on two issues: 1) Very few companies use 100% of their production capacity (…). For example, a hotel often has rooms available, and a lawyer has time to take on additional cases. 2) There are many companies that have difficulty financing their operating capital needs. We enable companies to make additional sales (…) without having to pay out cash. (FB worker 3, 2019)

FB has several sources of revenue. The first comes from the volume of exchanges. It receives a 5% commission from transactions on its platform. The second is the membership fee for joining the network. Each company that opens an account becomes a member of the cooperative (by taking a membership capital share 100e included in the membership general fee). In the long term, FB managers conceived a new source of income based on internal loans among network members such as the WIR Bank in Switzerland. Finally, the last source of revenue is the sale of white label technology. FB offers platform services to companies and B2B trading activities. For example, in the agricultural sector, FB is working very well because farmers used to share tools and equipment. The digital platform improves the exchanges and interactions among the community of actors: “We provided them with a technology because they already had the critical mass and they wanted to be networked” (FB cofounder 1, 2019). In order to be successful, the platform needs this critical mass of users that are accustomed to exchanging and working together.

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The Collaboration Project with Cooperative Banks After the success of the mutualized platform with farmers, the FB founders decided to develop a large collaboration project with cooperative banks. The idea was for FB to position itself as the technological partner of cooperative banks and to offer to their clients B2B (business to business) barter services. The white label proposition made the cooperative fintech transparent for the clients of the cooperative banks. The proposition was presented as a win-win strategy. FB was in need of a large partner: “We’re a small team, and it’s hard to manage a national network. (…) We really have a very large playing field, and it is better to be able to rely on a small network and small local communities. We can be helped by partners such as regional banks, a network of entrepreneurs, a cluster, and a large company. For us, relying on already existing ecosystems means delegating the coordination role to a network head…” (FB cofounder 1, 2019). Cooperative banks seem to be perfect partners. First, they shared cooperative status and the perspective to act differently on the economic landscape. Second, the two activities were complementary. The barter service could be presented to the clients of the cooperative banks as a unique extension of a service that no other banks were offering. Third, barter could be a way to deepen the client’s feeling of belonging to a community where sharing means something. Last, cooperation with FB was the opportunity for cooperative banks to know more about their clients. Indeed, FB was offering to facilitate and create new exchanges among the clients of some cooperative banks: “The big advantage for a bank is that our platform helps to build up customer knowledge. (…) We can tell them the following: there are so many companies in this and that sector, there have been X number of contacts, X number of transactions, and this volume… In addition, that is highly valued in a bank” (FB cofounder 1, 2019). For the moment, their offer did not materialize. For FB, collaboration was crucial because the cooperative banks had the means to support the development of the platform and to push it to a national (and maybe an international) level. After many months of negotiations and discussions, all cooperative banks refuse to go further in cooperation with FB.

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The End of FB as a Cooperative On 30 June 2021, a decree published in the official journal validates the exit of the cooperative status of SCIC France Barter. This decision was made following the request of France Barter’s associated managers and after the agreement of the public administration (the Conseil supérieur de la coopération). The decree mentions that “the cooperative status currently places FB in a situation of stagnation or serious deterioration of its activity, hindering or totally obliterating its development prospects ”. This mention puts the choice of the cooperative status in tension with the sustainability of the project. This decision to abandon cooperative status must above all be understood by the expectations of its managers in terms of the development of the activity. It is based on the observation that the FB project needs much more financial support than what could be provided by the participatory funds. Access to venture capital financing thus offers a wider margin of action and the possibility of more rapid growth.

6.5

When Sharing Cooperative Values Is Not Enough

FB abandoning cooperative status reveals interesting points about the weight of cultural dominant understandings and the influence of the way to do and to understand things in a field of action. First, this can be analyzed through the classic arguments of the rigidities of cooperative status (particularly exacerbated in the field of finance) and the reluctance of cooperative actors. This argument can be understood, but it does not explain all the complexities of this experience. FB has in fact remained under cooperative status for five years with a strong and assertive engagement of its managers in the social and economic project. Furthermore, FB’s decision to abandon cooperative status is not due to a lack of interest from cooperative banks. Most of them were enthusiastic. One of the bankers that has seen its origin stated the following: “I find supporting people who say ‘we are going to do operations without money’ very curious ” (Cooperative bank manager 1, 2021). The innovation was specifically recognized by the players in the field: “FB’s strength is that it has entered a segment where no other neo-bank has gone before” (Cooperative bank manager 1, 2021). A second explanation can therefore be given. This explanation consists of questioning the capacity of the major players in the SSE to support

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small innovative projects in their early growth phase. It is important to note that FB has established regular contacts with cooperative banks and that the latter have not succeeded in implementing concrete partnerships. The cooperative banking field seems to discourage the action of “field-level institutional entrepreneurs ” with the capacity to “create or significantly transform institutional frameworks of rules norms, and/or belief systems either working within an existing organization field or creating frameworks for the construction of a new field” (Scott, 2014, 117). To better understand this final result, the conceptual framework of the sociology of markets is fruitful. It posits that markets are not given but reflect “the social and political construction of each society, where the history and culture surrounding class relations and the various types of interventions by governments produced unique institutional orders ” (Fligstein & Dauter, 2007, 110). Following this proposition, we can discuss the case study. First, there is an inherent perceived limit of the cooperative model: “As the model is not capital intensive, it is very difficult to find people to put money in a start-up” (Cooperative bank manager 1, 2021). However, to support the rapid growth of a start-up in need of equity, a large amount of capital is needed in the initial period. To reach critical mass, fintech firms also have a pressing need for skilled labor. They need to be able to attract talent, i.e., people with a high professional background in financial technology. For this, an incentive mechanism is needed. With cooperative status, however, it is difficult to offer a share of capital. Indeed, the distribution of profits is limited, and primacy is given to the social project. Moreover, cooperative status limits the number and variety of financial tools available for development support. One interviewee stated the following: “Traditional bankers do not know how to handle start-up files (…) A traditional banker needs guarantees, and a start-up does not have any” (Cooperative bank manager 1, 2021). Becoming a funding partner and stakeholder of a project requires strong involvement from an investor, which seems difficult for a cooperative bank. In fact, FB’s growth has been long because a cooperative capitalizes as it goes along. This leads one to wonder whether there is not “a valley of death for coops?” (Cooperative bank manager 1, 2021). This phenomenon is accentuated by an unfavorable legal environment. The legislature has set prudential limits on the activity of banks. Since support for the real economy is conditional on counterparts in terms of equity, this commits banks to two choices: a speculative strategy and

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a risk-free strategy. The cooperative banking world, having chosen the second strategy, is limited in its support for the real economy and new projects. “Paradoxically, the more prudential standards are developed to protect clients, the more we will see speculative finance win” (Cooperative bank manager 1, 2021). Furthermore, the case law does not grant special advantages to cooperative banks, which are generally treated in the same way as capitalist banks. In addition, there is a trust deficit. Institutional theory also posits that “producing a market as a field is a social and political project that begins without stable relationships ” (Fligstein & Dauter, 2007; page 119). The banking field as a whole is wary of fintech firms, and this mistrust is not lost in the cooperative banking subfield. A cooperative banker clearly expressed this collective concern: “The underlying discourse on fintech is that these people are stealing our jobs (…) We are not going to finance those who are going to steal our business ” (Cooperative bank manager 1, 2021). This lack of trust is combined with a problem of compatibility between the two cooperation actors. Their difference in size determines the interests and objectives that are not necessarily congruent: “The grass does not grow under tall trees ” (Cooperative bank manager 1, 2021). Some actors note that cooperation is not self-evident in the cooperative world. This raises the following question: “Why do the big cooperatives no longer want to use the solidarity vector to enable small actors to grow?” (Cooperative bank manager 1, 2021). In terms of values, FB’s abandonment from cooperative status is therefore experienced by cooperative banks as a missed opportunity: “It’s not their failure, it’s the failure of the cooperative world” (Cooperative bank manager 1, 2021). It is also interpreted as a sign of a loss of cooperative values by the cooperative actors: “Cooperative banks are capitalist in their way of thinking ” (Cooperative bank manager 1, 2021). This shows to what extent cooperative banks are part of the larger field of action of finance and dependent on its rules and shared practices. Finally, the difficulty of advancing a cooperative partnership also reflects an organizational cultural and cognitive problem: “My teams have difficulty understanding what this thing is about ” (Cooperative bank manager 1, 2021). There is an absence of shared codes and unawareness of the new trends in other subfields that enhances the key role of “translators” (Callon, 1986) that is missed in this case. “It’s a new world that we don’t know well. It’s not the bank’s core business ” (Cooperative bank manager 2, 2021). Banking jobs have drastically changed in recent years,

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and understanding the new technical cultures and uses of resources is a major challenge in the cooperative banking environment: “The problem is that in the big French banks, there are no more engineers ” (Cooperative bank manager 1, 2021). Innovative financial projects are often too complex to be presented in the traditional field of cooperative banking and even more difficult to understand and adopt. A translator is needed, and this is not always present in the cooperative world: “The support is perhaps what was lacking ” (Cooperative bank manager 2, 2021). Faced with this problem of mutual understanding, inter-organizational cooperation ended up being difficult: “It is very cultural (…) They were not understood (…) They found themselves facing a wall ” (Cooperative bank manager 2, 2021).

6.6

Conclusion

Our work contributes to showing that the arrangement of market boundaries is a social process (Fligstein & Dauter, 2007). This authentic and unique case study about cooperation between cooperative banks and a cooperative fintech reminds us of the importance of the sociological perspective to better understand how power and social relations are structuring market relations (Pfeffer & Salancik, 1978). As shown by Stuart, the social dimension of markets affects the birth and death of small firms (Stuart & Sorenson, 2003; Stuart et al., 1999). Regarding the FB case study, its trajectory has to be followed from in and out of the cooperative finance field. Indeed, FB starts its project with a strong belief that cooperative status will be the key for success and finally abandons this status with the opposite belief. The sociology of markets shows us the strength and weakness of the cooperation between FBs and cooperative banks. The strength is based on the shared principles of the cooperative world and the idea of behaving as a social enterprise in a renewed economic landscape (Eynaud et al., 2019). This creates proximity between the actors of the cooperation. The weakness is mainly the fact that most actors in cooperative banks fear fintech actors as potential threats to their own activity. One of the major contributions of this article is the opportunity to learn about the complexity and barriers of the cooperation between cooperatives in the field of finance when the sector is disrupted by new technologies. Even if one organization has adopted innovative tools to improve its internal functioning, it does not guarantee that it will be

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approachable by adventurous actors with novel projects. This case underlined the lack of sufficient influence of the “translators” (Callon, 1986), leading actors with specific social skills in a strategic field of action (Fligstein & McAdam, 2011). The limits of this article are due to the uniqueness of the case study and its brief experience, which prevented us from acquiring additional observations of the interactions between the different actors of the cooperative banking field. Examining new cases for comparison and enlarging the analysis could help to better understand the cognitive and cultural codes in nonstandard SSE collaborations. However, the story could have gone differently. Currently, most cooperative banks face a governance problem: the members do not come to the general meetings. The strength of FB’s proposal is that it could have offered (among other things) an original way of facilitating the clients of the community of cooperative banks (as asserted by Cooperative bank manager 2, 2021). The barter activity could have created new links between them and deepened the cooperative members’ identity and commitment. French cooperative finance could have also broadened their set of financial tools and “adopt” innovations. According to the propositions of the sociology of markets, this can be done by working on the institutional and legal environment. For example, in Italy, a mutual fund called Coop Fond has been established Law n°59/92 (Fondo Mutualistico legacoop, Pezzini, 2015). It is based on the collection of 3% of the annual profits of all cooperatives and is used to support the growth of small cooperatives. Other examples show that in Europe, barter B2B services can be successful. This is the case for Sardex (a complementary currency) in Italy or WIR Bank, which is a Swiss nonprofit banking institution that issues its own currency to facilitate economic exchanges between its members (Blanc, 2018). Another perspective could have been offered by the cultural dimension. Cooperative banks, as dominant players in a field, can feel disoriented out of their traditional frame when facing the complexity of cooperating with new small but challenging cooperative actors. Therefore, in order to facilitate the required “translation” between these SSE actors, education and training on new technologies and emerging markets could be crucial to foster cooperation among them. Participative finance and crowdfunding, which provide a place and a role to grassroots actors, are also relevant perspectives. Indeed, they are based on social relations, work under a democratic system, and give strength to cooperation. Last, support from the state, public institutions, and public

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local authorities to cooperative finance is essential in order to distinguish between capitalist and cooperative banks.

Appendix: Table of individual interviews Organization

Position(s)

Expertise area(s)

Year(s)

France Barter

Cofounder 1

2019 and 2020

France Barter

Cofounder 2

France Barter France Barter France Barter IT Company

Worker 3 Worker 4 Trainee Freelancer and France Barter user Manager Manager

Management and commercial Management and commercial Commercial IT Management IT

2019 2019 2019 2019

Management Business operator

2021 2021

Cooperative bank 1 Cooperative bank 2

2019 and 2021

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CHAPTER 7

The Cooperative Difference in the Management Styles and Objectives: Phantom Effect of Credit Cooperative Jose Luis Retolaza

7.1

and Leire San-Jose

Introduction

When talking about banking in Europe and in the rest of the world, large merchant banking groups come to mind, some of which are now considered as systemic banks due to their size, in other words, their malfunctioning can drag the whole of the world economic system into a crisis. However, along with those clearly visible large banks, steered and governed by capital, there is another type of social banks, which are much less visible. However, it is true that credit cooperatives are not a residual

J. L. Retolaza (B) Deusto Business School, Bilbao, Spain e-mail: [email protected] L. San-Jose University of the Basque Country (UPV/EHU), Leioa, Spain e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_7

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phenomenon; there were 51 banks, 2 savings banks and 61 credit unions officially registered with the Official Credit Institute of the Bank of Spain (www.bde.es) as of 31 December 2020. In other words, there were more credit unions than banks. Germany has 1,800 credit institutions, 900 of which are credit unions and 385 savings banks. France is a different case, where two cooperative banks are among the country’s leading banks and provide more than 35% of the national credit, a figure that rises to 42% in the case of the Dutch Rabobank. In general, in Europe, there are 2,700 cooperative banks, with 87 million members and 233 million customers; over 25% of population of Europe is a customer (EACB, 2022) of a cooperative bank. A truly significant reality that, however, contrasts with the scarce presence of this type of banking institutions in the institutional and economic panorama. Ghosting in photography refers to images that appear to be moving or are not sharp, where only a blurred shape can be made out, in other words, a distorted image of the reality. That is what seems to largely happen with the image transmitted by the credit unions to the citizens, which is a ghosting of the institution instead of providing their sharp and faithful image. Or maybe not? Could that ghosted image really reflect the reality of the cooperatives? That is what we are going to consider in this research paper and we will seek to address the following point. Credit unions are a significant part of the financial system in Europe. However, that is not the situation perceived either by the institutions, or by the media, or by citizens in general. Therefore, it needs to be clarified whether that is the case because credit unions have been aligned as having the same purpose as the commercial financial institutions, but as a poor imitation of them, as reflected in the citizen’s perception of them; or, by contrast, their differential value is unknown as they have accepted to report in the same terms as traditional financial institutions. The first part of this chapter will analyse the specific characteristics that can differentiate the cooperative from the commercial bank in order to see whether a real difference exists; the second part considers the existing communication frameworks and the constraints of that communication for the cooperative banks. Before concluding, we will round off by proposing an alternative information system based on social accounting, which is much more in keeping with the purpose sought by the financial institutions of the social economy.

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Theoretical Specificity of the Credit Unions

The main difference of a credit union with a conventional bank is its dependence on capital. Commercial banking has been based on capital right from the outset and that would define its whole existence; however, cooperative banking started out with people as its base, which would also define its future existence, even though that has not always been the case. A cooperative is defined as “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” (International Cooperative Alliance—www.ica.coop), which means that they are companies belonging to their employees or users, which run and manage them together—everybody has the same vote—in pursuit of the common interest—equal division of profits. The ICA was founded in 1895. The Statement on Cooperative Identity was adopted at the Dublin Congress in 1995 and it identifies and defines the values shared by all entities of this type. They are known as Cooperative Principles and are as follows: (1) Voluntary and open membership; (2) Democratic member control; (3) Member economic participation; (4) Autonomy and independence; (5) Education, training and information; (6) Cooperation among cooperatives and (7) Concern for community. Apart from adhering to those general principles, cooperative banks have specific values (http://www.eacb.coop/en/cooperativebanks/key-values.html): trust, governance, resilience, proximity, social commitment and solidarity. What is important is that those values are not a complement of their commercial activity, but rather are embedded in the ways that cooperatives conduct their banking: (1) Trust is the keystone of the relationship between a bank and its customers. In the case of cooperative banks, that means that their operations are established to serve the customer’s interest. That is possible because profit maximisation is not the primary goal and it avoids agency conflict—that is always latent in banking—between the interests of the customer and those of the banking institution. (2) The customers and workers are involved in governing the bank; this diversity allows a multi-stakeholder governance that is consensusdriven and avoids the focus on a single stakeholder, inherent to capitalist governance, where capital holds all the rights.

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(3) Thanks to their local roots, they have a long-term orientation involving lower risk-taking. Furthermore, profit maximising does not mean necessary higher capital reserves. But, curiously, the companies with higher capital reserves are more resilient at times of crisis, as was seen in 2008. (4) By definition, they are closest to their customers, both from a physical and cultural perspective; their proximity is strengthened through their great social media participation and their active relationship with their local community. (5) Integration that is centred on social commitment to the community to which they belong, not only by improving the financial environment with their activity, but also by contributing to a good economic and social climate where part of the profits is allocated to actions benefitting local society. (6) Solidarity, taken to be the common good of society, is another of the undertakings, but by supporting entrepreneurship and by reinvesting capital at local level. In addition, the mutual guarantee systems among cooperative banks provide another form of solidarity at two levels, by means of transferring funds and mutual guarantees. The principles and values undertaken show that cooperative banking operates in a differential way to capitalist banking. The capitalist company is defined, as its very name indicates, by its dependency on capital. The legal subject is created by means of the contribution of the capital needed for its foundation and is in line with “The Trinity Formula of Capitalism”. The capital contribution to a company is, therefore, sufficiently and necessarily correlated with three fundamental rights: ownership, governance and marginal profit. In the case of credit unions, their origin is traced back to people, whether users or workers; the capital contribution is relatively equitable and limited in its amount, and does not lead to transferable property rights, although it does to the holding being returned within a previously established time period. Yet the most interesting, undeniably, is that cooperatives break the Trinity Formula that governs capitalism, namely % contributed capital = % ownership rights = % governance = % residual profit. Table 7.1 sets out these differences systematically. The question is that the credit unions are different, both in terms of their purpose and their very structure and organisation, from capitalist banking, but to what extent that impacts their functioning and

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Table 7.1 Traditional Banks versus Credit Unions

Foundation Interest Capital Ownership Ownership transfer

Profits Governance Trinity Formula

Traditional Banks

Credit Unions

Founded by capitalist partners Own Important capital contribution Anybody who can contribute capital Shares immediately negotiable on the market

Founded by users Collective Small capital contribution Users and workers

Unlimited, proportional to the capital According to the capital Alignment between capital contribution, ownership rights, governance and profit distribution

Non-negotiable holding on the market, recoverable within a set time period Limited, not necessarily linked to the capital One person, one vote Asymmetry between capital contribution, ownership rights, governance and profit distribution

Source Prepared by the authors

their performance remains a matter for discussion. In Spain, cooperatives were guarded until very recently about the information regarding their cooperative status. It was normal to replace the “cooperative” identifier by “caja” or “fund/savings bank”—Caja Laboral, Ibercaja, Caja Rural, for example—and their trading name included Caja without explicitly mentioning their cooperative status. Furthermore, social banking was regularly used instead of cooperative banking in communications. Why were they so guarded about their cooperative status? It could have been to give the impression that the institutions themselves perceived that differential aspect would deter rather than connect with customers, or even, with some important stakeholders, such as the banking regulator or the public administration. In any event, cooperative banks have sought on many occasions during recent decades to project an image that was not theirs, which is the ghosting that we are analysing. The question arises as to whether the source of the distortion of the ghosting lies in the communication or far deeper, in the bank cooperatives identifying capitalist banking as the benchmark of success, which is what we are going to consider in the following section. After all, that already occurred in

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Spain in the case of the savings banks, where we saw how their identification with capitalist banks led them practically to being on the brink of disappearing. Why is a bad copy needed when the original exists?

7.3 Real Distinction Between Traditional Banking and Credit Unions Before continuing, we are going to consider the differences between credit unions and traditional banking. At the start of the millennium, Cowton (2002) described how, even though the area of finance is considered an amoral field focused on risk and return, there was no reason to avoid focusing on the social and ethical aspects of finance. Thus, his research showed how three perspectives were necessary to include moral aspects in finances. The first, Integrity, that described that the institution would only develop systems of trust, which are considered necessary for the financial institution to survive, if it were faithful to the principles and codes followed (Caldarelli et al., 2016; Cowton, 2010; San-Jose et al., 2011; Vigano & Nicolai, 2009). Second, Responsibility thus ensuring not only trust but also developing banking that is responsible for its acts and facts, and, therefore, of the ensuing consequences, such as its credit policies. Thus, ethical banks report on the consequences of their actions. And, third, Affinity relating to the aspects directly related to depositors and borrowers, with emphasis on investment and the quality of the assets, for example. Costa-Climent and Martínez-Climent (2018) also show that they can be extrapolated to sustainable banking. Indeed, the research of San-Jose et al. (2011) focused on this third aspect, Affinity, to address the differentiation problems existing between ethical banking and the other financial institutions. Furthermore, one of the principles underpinning their work was the Demarcation Criterion (Edery, 2006) that offers the pillars to be able to differentiate the ethical actions in the other institutions. Thus, the principle highlights, precisely, the importance of the quality of the asset allocation referring to the whole investment by the institution and not only a marginal part of it, as profits. This affinity concept is selected as representing the main characteristics of this type of institution, as it refers to the responsibility of the financial institutions in the decisions regarding the final use of the deposited funds, which must be totally akin to the interests of the depositors and savers (Cornée & Szafarz, 2014; Cowton, 2010; San-Jose & Cuesta, 2019; SanJose et al., 2011).

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What finally achieved is a scale that allows the main aspects reflecting the affinity of the financial institutions to be integrated. Therefore, there are four aspects included and they have been developed based on different papers (Cowton, 2002, 2010; Edery, 2006 and Harvey, 1995) and were addressed for the first time in the research of San-Jose et al. (2011). They are as follows: 1. Transparency: Transparency is a value in general, and in particular, in banking, where its liability customers and other stakeholders need to be accurately informed of its actions and activities, explaining not only what it does with the profit, but also with all its assets. While transparency is a variable that is highly valued by society in general, it is very significant in banking, probably because it was part of the cause of the 2008 financial crisis. Thus, the transparency will set the difference among those banks that inform their depositors and their customers about what they do with the deposited funds. However, in general, information opacity or asymmetries in finance are part of the ruptures in the systems that profit one of the stakeholders. Thus, financial markets can be said to be characterised by information asymmetry. For example, even though the contracts between buyers and sellers in financial institutions are based on the information provided, in general the lack of complete information means customers assess the promises of the financial institutions as adequate (Neu Berger, 1998). Operations should be transparent, at least, based on ethical and social principles. That is as it should be and the affinity will need to be verified and the trust consolidated between the stakeholders based on the parties’ level of transparency. In particular, the key argument is that bank transparency increases bank sensitivity (Akhigbe et al., 2017; Andrievskaya & Semenova, 2016; Nier, 2005). The few previous studies (San-Jose et al., 2018) show that the transparency of the credit unions is the poorest of the financial system; and even though it may be true that that is due to the information circulating more easily through internal channels, it is also true that it does not help the public to better understand this type of institution. 2. Asset Allocation: In contrast to asset opacity, transparency regarding the allocation of the banks’ assets is underpinned by the idea that their social action is based on striving to serve the customers’ interests. The action does not only consist of safeguarding the deposits

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and increasing them, but also to do so in a socially responsible way. In other words, investing the customers’ funds in socially positive assets, which means guaranteeing that they are not invested in arms, prostitution or drugs, inter alia. The aim is even for the assets to have a further purpose and help to create a more responsible society (Harvey, 1995). In this line, for example, Guinnane (2001) highlights the importance not only of the information about the cooperatives, but also about the use that those cooperatives made of the funds regarding the development of the local community; in other words, the induced value of their financial activity. The problem of precedent lack of transparency prevents the induced value of the financial cooperatives in relation to their environment. Therefore, any assertion becomes a mere hope. Total transparency regarding fund allocation would be necessary, in the same way as ethical banking (San-Jose et al., 2018), along with subsequent information on the impact of the financing in the community by means of the activity of the financed institutions and individuals. 3. Guarantees: collateral guarantees are important as, on the one hand, they allow lender trust options to be increased and, on the other hand, the risk involved to be reduced. The more ethical or social banks seek to place their money (at least in theory) in more social projects, and they largely involve greater risk because they either come from individuals without resources or the projects are innovative, and the risk of failure has not been controlled. Fajardo (2011) reviews credit unions and their differences in Spain, but does not make any reference to the difference in guarantees. Similarly, the paper by Guermessa and Ndinda (2014) does not particularly stress the differences in their guarantees, despite describing the role of the loan guarantees and the lessons of the cooperatives. The difficulty that this innovative guarantee system may face to be taken into account is obvious, but it is also obvious that that needs to be achieved in order to be able to be different from traditional banking. Admittedly, if there is a commitment to offer equal opportunities to those people with greater financial problems, the guarantee system must be different and thus be able to reach those individuals or those more social projects, but a priori with greater risks or, at least, with different risks. In short, new guarantees need to be developed and priority thus given to ethical and social projects with greater risks, but in turn with greater social needs.

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4. Participation: The participation of the stakeholders, or what are also known as multi-stakeholders (Cuevas et al., 2006; Davis, 2001; SanJose et al., 2014) is considered a value in itself. It involves the relationship, discussion and subsequent decision-making between different stakeholders. The participation of the institutions’ shareholders and also their stakeholders is necessary to achieve the affinity in the social financial entities, not only in the traditional financial institutions where all the decisions are down to the shareholders. Thus, for example, all the benefits of women and other stakeholders participating in the governance of the financial institutions in developing countries have been proven (Bezboruah & Pillai, 2015). For example, cooperatives could harness the profits of a diverse governing body to ease poverty by addressing the social and economic needs of their community, or to engage with the real problems of society to thus provide a direct response, including establishing integration strategies in the different lines of the financial institutions. Even though traditional banks and cooperatives can behave in very different ways in terms of the value distribution, current information standards are not excessively sensitive for this type of analysis. A comparative analysis of the following figure (Retolaza & San-Jose, 2021a) shows a clear difference in the value distribution between the BBVA, a commercial bank, and Laboral Kutxa, Spain’s largest cooperative bank. The interpretation of the data continues to be ambiguous, as, even though it is true that the cooperative’s social contribution to the local community by paying taxes and donations outnumbers the BBVA by more than twice, the salary remuneration, with the ensuing taxes (Social Security contributions and income tax), is nearly double in the case of the BBVA than that paid by Laboral Kutxa. It provides a certain sense of balance. And where the BBVA performs higher than the cooperative is when it comes to the retained value, 22 points more, which is practically obtained from the 21 points of savings in purchases from suppliers. That being so, the impression is that the social contribution of both institutions is similar, but the BBVA’s generates much greater value for the institution itself (see Fig. 7.1). It is true that it is a single example, but it rather clearly reflects the popular feeling in relation to the value contributed by both types of institutions. The reason is that the metrics used do not correctly measure

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Fig. 7.1 Bank vs Banking Cooperative Distributed Value Comparison (Source Retolaza and San-Jose [2021a, pp. 593–613])

other significant aspects in the value distribution; and particularly that they do not contemplate the non-market value transfers, which in general are extraneous, except in their instrumental facet, to commercial banks, but central to cooperatives. Not only the spending in this section may possibly be greater, but also the return on the spending will also be much greater, given the link of the cooperatives with the local communities. Moreover, and not necessarily less important, the emotional value, taken as the surplus of the consumer for the stakeholders overall (customers and other production factors), may be a differentiation for the value generated by the financial entities. Although the emotional is relevant value as part of non-financial reports, even though it is not usually systematically included in the accountability, and even less so in a monetisation process.

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However, the main difference may not arise from the direct value, but rather from the inferred value through its financing, purchasing and remuneration processes in the local communities. It is not the same to participate in global speculative investments as in real investments in the environment; neither does buying from local suppliers with induced impact on employment and taxes have the same impact as purchasing from large international companies. Finally, the salary distribution balance systems have a very diverse social impact insofar as it is closer or further from the average salary. All those aspects, that are crucial to be able to assess the impact of the banks, go unnoticed with the current financial and non-financial information systems. In this vein, value creation through the financial intermediation process is where cooperative banks can obtain clearly differential results, results that can also be in line with their purpose (Cowton, 2002). That is the case of the banks specialising in sectors (Cowton & Thompson, 2001), population (Fraser et al., 2018), or activity (Flammer, 2021), all of which is more obvious in the sphere of credit unions, many of which started with a specific purpose.

7.4

Traditional Communication Deficit

Sustainability initiatives are known as standardised ethics initiatives (SEI). Gilbert and Rasche (2008) define them as global voluntary adherence standards and procedures to steer the behaviour of the organisations regarding social and/or environmental issues. Furthermore, as Elkington (1997) pointed out, the Triple Bottom Line aims to report on their economic and social and environmental dimensions. That same line of thought is used to develop the initiatives described below. We have analysed the five of all of the current initiatives that we have considered the most relevant after reviewing the literature in the vein of MartínezCampillo and Fernández-Santos (2017), Pérez and García (2013), and Pérez and Rodríguez (2012) where the five initiatives are mentioned. The information on the websites of the Spanish traditional banking institutions and the credit unions prior to the health crisis (COVID) were therefore reviewed. The five selected initiatives were the Equator Principles, the European Alliance for CSR, participation in the United Nations Capital Development Funds, having a social foundation or works and the Global Reporting Initiative. Equator Principles: The Equator Principles are one of the main specific social initiatives for the financial sector. They started as an initiative of the

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International Financial Corporation (IFC), associated to the World Bank. They are a series of principles that leading financial institutions voluntarily adopted on 4 June 2003 to manage environmental and social risk when financing projects. The main goal of the Equator Principles is to be an institutional benchmark for international financial institutions. The scope of the principles is global, in other words, they can be applied in all countries and economic sectors. Therefore, they can be taken to be a series of assessment, categorisation and management standards that analyse and identify the different environmental and social risks that may emerge from large investment projects for which financing is requested. European Alliance for CSR: On 22 March 2006, the European Commission (EC) published a communication entitled “Implementing the partnership for growth and jobs: making Europe a pole of excellence on corporate social responsibility”, where it announced the creation of a European CSR alliance. The alliance followed the same line of thought as the EU with respect to CSR: • Voluntary business engagement regarding social and environmental concerns of their economic activities • Commitment to sustainable development • Search for economic growth • Job creation • Dialogue with different stakeholders The EC sought to make Europe a pole of excellence on CSR and therefore set up the European Alliance for Corporate Social Responsibility, which any type of company could join provided that it was engaged in social actions proposed in the alliance. One of the main goals of the alliance was cooperation and sharing experiences to drive CSR. A series of laboratories were therefore set up as collaboration projects where different stakeholders, company representatives and the EU discussed different socio-economic challenges and prepared solutions to meet them. Four specific laboratories for the financial sector emerged. The first, Environment and the Financial Sector led by CECA (Spanish Confederation of Savings Banks), was a group that sought to better understand the indirect and direct impacts that the financial sector generated on the environment. Financial Sector Reporting was also led by CECA and was made up of different Spanish savings banks. Its main goal was to improve

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CSR communication in the financial sector following meetings between the members and the publication studies aimed at the general public. The Financial Inclusion: Sustainable Service for Underserved Potential Customers group was set up by Associazione Bancaria Italiana and the Fundazione Sodalitas. Its aim was to foster the idea within the sector that there was a real business opportunity in the financial inclusion of the social groups outside the financial services. The last laboratory is the Business Involvement to Enhance Social Inclusion at Local Level. This laboratory was driven by the European Savings Bank Group (ESBG) and put into practice by different European institutions, savings banks, NGOs and stakeholders. Its main goal was to expand financial services to the group left outside them, by giving impetus to micro-finances and providing finance to entrepreneurs. Three entities are tasked with coordinating and implementing those tasks: CSR Europe which is the international network of leading companies tasked with fostering CSR throughout Europe; Business Europe which is the European confederation of employers, whose Spanish members include Foretica, Spanish Confederation of Business Organisation (CEOE), Sustainability Club of Excellence, Spanish Savings Bank Confederation (CECA); the UEAPME which is the European federation of SMEs. The main goals of the European Alliance are to drive and foster the most important CSR actions, by stimulating the sharing of knowledge and experience, and facilitating cooperation between institutions, companies and shareholders. Global Compact: The UN Global Compact (1999) was an international initiative proposed by the United Nations (UN) to foster corporate social responsibility by means of ten fundamental principles based on the areas of human rights, labour, environment and anti-corruption. Those principles are derived from the Universal Declaration of Human Rights, the Rio Declaration on Environment and Development, the International Labour Organisation Declaration and the United Nations Convention against Corruption. The compact was driven by Kofi Annan, the UN Secretary General at the time, with the main goal of fostering corporate citizenship. In practical terms, this initiative is based on ten basic principles that the companies signed up to the compact must fulfil and embrace in their daily life. They include four types of categories related to sustainable development, human resources, labour standards, environment and anti-corruption.

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Social Work or Foundation: The foundations attached to the financial institutions are non-profit organisations. They have been set up to foster savings and run activities that directly or indirectly contribute to the development of their area of operation, particularly, social-charity work. While a bank is owned by its shareholders, the credit unions belong to their cooperative members. In the case of credit unions, the corporate purpose is to meet the financial needs of their cooperative members, who are the workers and customers, and to serve third parties, by means of carrying out the activities inherent to the credit institutions. Furthermore, in case of the credit unions set up as a rural savings bank [Caja Rural ], the development group must include, at least, one agricultural cooperative or 50 individuals owning agricultural holdings, in addition to the requirements to be established as a credit union. The banks distribute their profits among their shareholders, but the credit unions, after covering the losses from previous years, must allocate at least 50% to the Mandatory Reserve Fund, and 10% to the Education and Development Fund, and the rest will be at the disposal of the General Meeting. Their purpose is necessarily social and their main activity is focused on social works and the proper management of their participation in a credit institution. Global Reporting Initiative (GRI): The GRI is an independent and non-profit institution, set up as a joint project between the United Nations Environment Programme (UNEP) and the Coalition for Environmentally Responsible Economies (CERES). Based on the idea of achieving global sustainable development, this institution created the first global standardised framework to produce sustainability reports, for all those companies that wish to report their economic, social and environmental performance. They are based on the triple bottom line— economic, environmental and social—proposed by Elkington (1997). The first version was disseminated in the year 2002. The second update (G2) was published under the name of “Guidelines for preparing Sustainability Reports on the Social, Environmental and Economic Performance of the Company”. The third update, (G3) “Guidelines for Sustainability Information”, was published in 2006. The latest update was presented in two independent documents, principles for preparing reports & basic content and the application manual. G4 is easier to use than the earlier versions and is more focused on companies publishing matters of interest related to sustainability both for society and for their stakeholders. These guidelines were prepared with the main goal of any company in the world, regardless of its size, being able to apply them. A series of additional services and

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materials have therefore been produced so that the guidelines are easy for people, with no experience in preparing sustainability reports, and experts in the field to use. We are going to now briefly describe the principles for preparing reports which are divided into two groups: the principles to establish the content of the report and the principles to establish the quality of the report. One point was given for each initiative implemented and the results were thus as follows (see Table 7.2). The differences between those groups have been analysed and they have effectively been seen to behave in a different way as regards the number of initiatives that they assume. Thus, Table 7.3 shows that the difference obtained are statistically significant, which means that there is no similar policy regarding social and ethical actions. The five SEI studied in the research may not be the initiatives that most interest the credit unions and, where applicable, they may take part in more national and not as international initiatives as those analysed in the paper or they may believe that that type of initiative does not provide any type of benefit. Table 7.2 SEI Score: Traditional Banks vs. Credit Unions Type of Institution

Index

N

Min

Max

Total

Average

Standard Deviation

Traditional Banks Credit Unions

SEI

19

0

5

SEI

19

0

2

Variance

38

2.00

1.732

3.00

21

1.11

0.658

0.433

Table 7.3 Analysis of equality of measures between Banks and Cooperatives ANOVA IEE Analysis Between groups Within groups Total

Sum of squares

gl

Root mean square

F

Sig

7.605 61.789 69.395

1 36 37

7.605 1.716

4.431

0.042

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7.5 Social Accounting as the New Kirlian Camera for Cooperative Banking The fundamental problem is that the previously analysed information systems are not specifically aimed at the purpose and functioning of the cooperative institutions, but rather of the capitalist ones. That means that when the cooperatives apply them, the real value generated is lost and the outcome is a snapshot that only represents a faded image that, instead of highlighting the performance of this type of institution, blurs it until it disappears. They turn it into a spectre, whose existence we, even, doubt. When faced with this photo and the one provided by a commercial bank, which uses a reference framework created to showcase its contribution, everybody, in general, find the traditional bank’s image to be more attractive. At this point, credit unions need to find a new camera that manages to clearly photograph that ghosting and that new camera is provided by social accounting. The main characteristics of the type of information benchmarking is that it refers to KPIs related to the institution itself. While not denying that it may be of interest for areas such as governance, it is true that they indicate very little of the performance that financial institutions generate by means of their financing processes. If we accept the specificity of banking institutions as brokers in the maximising of the allocation of financial resources, we can conclude that the non-financial information on the results of the institutions is not sufficient to understand its social function. In this regard, the endogenous non-financial information needs to be completed with information relating to the impact of the asset customers linked to the financing processes and the value that they generate for society using the financing obtained. And here is where credit unions, attached to the real economy with a local impact, could produce a much more positive result than capitalist banking. In order to be able to report on those aspects, credit unions cannot only replicate the existing frameworks, but must develop or adhere to a new comprehensive framework such as social accounting multidimensionally aimed at stakeholders overall (balanced): stakeholder account aimed at the sectoral specific nature of banking, Bank Stakeholder Accounting (BSA). This non-financial information will serve the interests of the different stakeholders and shareholders for which the institution generates or destroys value, whether by action or by omission (case of the non-stakeholders) and shall be in keeping with the ten basic principles of accounting:

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entity, economic assets, monetary valuation, going concern, time period, full disclosure, prudence, matching, revenue recognition and materiality (Retolaza & San-Jose 2021b). Social accounting, at least in other sectors, already has an important good practice and methodological development, where credit unions could be included as a specific sector. The accounting provides the information in monetary terms on the integral value generated not only directly by the institution itself, but also induced by the financial activity in relation to other institutional, social and economic institutions, in the market, non-market and even emotional sphere. This system provides credit unionism with a much more powerful framework than the current ones and would allow it to provide a clear image and, possibly, of much better quality than the one offered by capitalist banking. The virtuality of that social accounting is what would allow not only the value generated through the market activity, which is the case of the economic-financial information, to be identified, but all the value transferred through non-market mechanisms, a specific option of banking cooperatives, and the emotional value; the latter, if not necessarily specific, does form part of the values and culture of this type of institution, and is decisive and not merely instrumental as is the case in commercial banking. In this regard, the main problem of the benchmark frameworks analysed is that they do not respond to the performance, but rather the constraints. They are able to correctly identify negative behaviours, but are not able to value the positive outcomes. For example, the ESG are able to identify which investment should not be socially acceptable, which may be useful for commercial banking, but are meaningless for cooperatives whose baseline is already above that threshold. The framework only manages to level the actions of those people at the acceptable limit and those who go much further. Insofar as the minimum required is set as the standard, it clearly acts to the detriment to those who have made a greater effort, as it leaves it unnoticed; and the criterion of excellence becomes the financialeconomic result, given those limits on negative social, environmental or governance impact. Progress should be made in the standardisation system to be able to generate trust among the different target stakeholders (customers—liabilities and assets—shareholders, regulators, public administration, workers, suppliers, citizens…). That should focus on four methodological aspects:

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1. A standardised methodology that allows the monetisation process to be developed; that is guarantee the traceability of the process, so that it can be seen there is a continuity of process from the stakeholder map to the final valuation, and which has followed the steps required by the methodology. 2. Explicit and documented intersubjective agreement on the fair value, reached by preparing vade mecums (long term). 3. Sectoral agreement (medium term), specialised external analysis (short term). 4. Transparency, which means that all the elements used for a certain valuation are known, replicating the analysis and calculation processes. As a corollary, external certification by a guaranteeing agency from outside the banking system and its interests—for example, a pool of universities—could give more credibility and could guarantee a correct application of the process for monetising the social value of stakeholders. As regards consistency, internal consistency, in terms of the results that the institution obtains over time, is imperative and easy to achieve. In turn, sectoral consistency is also necessary if the aim is for citizens to perceive an objective effort and not a mere greenwashing applied to the social. Something that is more difficult to achieve, as it requires the sector overall, or at least cooperative banking, uses similar criteria that enable comparability, it is true that it would be perfectly achievable for associations such as the European Association of Cooperative Banks.

7.6

Conclusions

The main conclusion is that credit unions are a significant reality in Europe, both given their specificity and the impact they generate in the community. However, the current non-financial and financial information framework do not provide a clear image of the social value contribution by that type of institution. A ghosted image reaches the stakeholders and the reality is not perceived properly. Nonetheless, there are many improvable aspects in the credit unions, as their practices in the four dimensions of the RAI (Radical Affinity Index) can be bettered. As regards transparency, cooperative banks are as, if not more, opaque than the commercial ones, which does them little credit and does not help to build a relationship of trust with the different

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stakeholders. It does exist in asset allocation, which must be one of its main differences, but is not seen due to the lack of information. The example of ethical banking, with great transparency regarding asset allocation, at least at local level, should be a good practice to be copied by credit unions. The current risk is that cooperatives can use the ESG framework to facilitate that information, as being a system of minimums does not foster the real commitment to environmental and social performance or governance, but rather does the minimum necessary; in this regard, it is a negative framework for the most committed institutions. In turn, the risk guarantee systems, perhaps driven by the regulators, have shifted to the right in rem, which prioritise the capital holders rather than the people who should be the main target of the cooperative action. Little ingenuity has been shown here to create alternative or complementary guarantee systems based on peer solidarity, on social media or on the transfer of risks to collective entities; the outcome is that the beneficiaries of the credit union projects may also be targeted by other commercial banks. Therefore, the price and the services are the sole aspects that determine their access to cooperative banks. Finally, as regards the governance system, where the difference is obvious between representations proportional to the capital compared to one vote per person, the cooperative institutions have again been unable to generate multi-stakeholder governance models to be as benchmarks. Quite the contrary, they are either opaque or dubious regarding compliance of good governance codes. It is true that the current benchmarks—among which the Equator Principles, the European Alliance for CSR, the actions of associated foundations, the Global Compact and the Global Reporting Initiative (GRI) have been analysed, and, to a lesser extent, the ESG and the Codes of Good Governance—are designed to highlight the efficiency of transnational capitalist institutions, as they only properly show the actions implemented with the profit, and not the financial management itself, a fundamental aspect of banking. The solution in Spain has not been considered in these terms, which only reinforces the doubt that can be had about the low social contribution of cooperatives to society. That has been the interpretation of some institutions that entered late or forced by the legislation relating to non-financial information. However, it is true that if those accountability benchmarks are not replaced by other more fruitful frameworks for cooperative banks, the outcome will be a poor public image of this type of institution, as, given they were developed

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for commercial banks, only provide a distorted image of the reality of cooperative banks, in other words, creating the aforementioned ghosting. The current benchmark that shows greater potential is Monetary Social Accounting, which allows the analysis of the distribution of the market value, including supplier impact, and the non-market value, inherent to the cooperatives, and the emotional, also intrinsic to them, to be included. The development of a bank specific model (BSA) that incorporates the induced impact by means of the banking process and, in particular, the result of third-party financing would be an ideal benchmark to compare with other financial institutions. Developing this model may be a titanic task if carried out alone, but it is very feasible if addressed collectively by the European Association of Cooperative Banks or from the World Council of Credit Unions.

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Retolaza, J. L., & San-Jose, L. (2021a). Stakeholder accounting for sustainability applied to nonfinancial information in banking. In L. San-Jose, J. L. Retolaza, & L. Luc van Liedekerke, Handbook on ethics in Finance (pp. 593–613). Springer. Retolaza, J. L., & San-Jose, L. (2021b). Understanding social accounting based on evidence. SAGE Open, 11(2), 21582440211003865. San-Jose, L., & Cuesta, J. (2019). Are Islamic banks different? The application of the radical affinity index. International Journal of Islamic and Middle Eastern Finance and Management, 12(1), 2–29. San-Jose, L., Retolaza, J. L., & Gutierrez-Goiria, J. (2011). Are ethical banks different? A comparative analysis using the radical affinity index. Journal of Business Ethics, 100(1), 151–173. San-Jose, L., Retolaza, J. L., & Pruñonosa, J. T. (2014). Efficiency in Spanish banking: A multistakeholder approach analysis. Journal of International Financial Markets, Institutions and Money, 32, 240–255. San-Jose, L., Retolaza, J. L., & Lamarque, E. (2018). The social efficiency for sustainability: European cooperative banking analysis. Sustainability, 10(9), 3271. Viganò, F., & Nicolai, D. (2009). CSR in the European banking sector: Evidence from a survey. In R. Barth & F. Wolff (Eds.), Corporate social responsibility in Europe: Rhetoric and realities (pp. 95–108). Edward Elgar.

CHAPTER 8

European Cooperative Banks and Sustainability Elisa Bevilacqua

8.1

Introduction and Perimeter of Analysis

The EU in the Context of the Paris Agreement and Sustainable Development Goals (SDG) The United Nations Conference on Environment and Development (also known as Rio Summit or Earth Summit) in 1992 gave birth to many initiatives that are still central to most global debates addressing climate change. The most significant one is the United Nations Framework Convention on Climate Change (UNFCCC), an international environmental treaty that aimed to limit global greenhouse gas emissions (GHG)

The author is writing with expert capacity, opinions are personal. They do not commit the European Association of Cooperative Banks. E. Bevilacqua (B) European Association of Co-operative Banks, Brussels, Belgium e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_8

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and that is still in force today. Starting from 1995, signatories of the UNFCCC met on a yearly basis, through the Conferences of the Parties (COP). However, 20 years later, with the COP 21, a major breakthrough was achieved with the signature of the Paris Agreement in December 2015. With this landmark international agreement, that the EU has been instrumental in brokering, world leaders committed to limit global greenhouse gas emissions with the objective to “holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C ”. To reach these ambitious objectives, appropriate mobilization and provision of financial resources, a new technology framework and enhanced capacity building were given specific and unprecedented attention. Article 2(1), point (c), of the Paris Agreement sets out the objective of strengthening the response to climate change by, among others, making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. This sets two key concepts for climate finance: aligning the capital flows with climate adaptation and climate change mitigation objectives. Article 9 of the Paris Agreement stipulates a number of commitments on climate financing, including global efforts of developed country. Parties are to take the lead in mobilizing climate finance from a wide variety of sources, instruments and channels. Such mobilization of climate finance represents a progression beyond previous efforts and aims to achieve a balance between adaptation and mitigation. A Standing Committee on Finance was put in place to conduct bi-annual assessment of climate finance flows. The Paris Agreement is signed by 191 countries globally and 195 Parties including the European Union (EU). Indeed, the Paris Agreement reflects the EU’s policy objectives to a great extent. The EU was successful in securing an international treaty, a five-year review cycle, mitigation commitments for all countries and a rules-based system ensuring “transparency and accountability” through reporting on and review of countries’ climate action. In addition, the EU can claim credit for enabling the progress made in the process leading up to the Paris Summit. The main thrust of the EU’s strategy was proactive coalition and bridge building at the multilateral negotiations and beyond (Oberthür, 2016). The EU consistently pushed towards an ambitious Paris outcome, including by submitting its own relatively high GHG emission reduction target of at least 40% by 2030 from 1990 levels early on in the process. The level of ambition was stepped up in December 2020, as the EU

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updated and enhanced the target to reduce emissions. The EU and its Member States, acting jointly, are committed to a binding target of a net domestic reduction of at least 55% in greenhouse gas emissions by 2030 compared to 1990. Another landmark agreement also adopted in 2015 by all 193 UN Member States is the 2030 Agenda for Sustainable Development that sets 17 Sustainable Development Goals (SDGs) (see Table 8.1), calling on all nations to combine economic prosperity, social inclusion and environmental sustainability with peaceful societies.1 The SDGs are intimately linked with the Paris Agreement on climate change, which is incorporated in SDG 13 (Climate Action). The SDGs and the Paris Agreement could be hence viewed as a package, with the SDGs oriented towards 2030 and the Paris Agreement oriented towards climate-neutrality by 2050, requiring major progress by 2030. The SDGs have the merit to clearly identify the priorities of the international community in the attempt to reach a sustainable society, highlighting the importance of protecting the environment, of ensuring decent living conditions for all human beings and limiting the negative impacts of economic development. Actually, the SDGs reflect all the three distinctive dimensions of sustainable development: the economic, social and ecological dimensions. As underlined by Lafortune et al. (2020), the SDG represent an affirmation of European values. European countries, and in particular the EU leadership, played a key role in the adoption of the SDGs and have committed to achieving them. In particular, the EU and its member states were critical in pushing for an integrated, universal agenda that continued the Millennium Development Goals (MDG) focus on extreme poverty in all its forms and adds critical issues of environmental sustainability, social inclusion, economic development and governance. As signatory of the both the Paris Agreement and the SDG, the EU has set for itself ambitious goals that have led to the adoption in December 2019 of the new European Green Deal (EC, 2019), in 2020 of the EU Green Deal Investment plan and in July 2021 of the new European Climate Law, setting the target for Europe to become the world’s first climate-neutral continent by 2050. The legislative proposals that have followed had the purpose to deliver on the targets agreed in the European Climate Law. The measures include the application of emissions 1 In addition, 169 targets and 242 global indicators were also set to monitor the progress towards the realisation of the goals.

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Table 8.1 Sustainable Development Goals (SDG) #

Sustainable Development Goal

Short description

SDG 1

No poverty

SDG 2

Zero hunger

SDG 3

Good health and well-being

SDG 4

Quality education

SDG 5

Gender equality

SDG 6

Clean water and sanitation

SDG 7

Affordable and clean energy

SDG 8

Decent work and economic growth

SDG 9

Industry, innovation and infrastructure

SDG 10

Reduced inequalities

SDG 11

Sustainable cities and communities

SDG 12

Responsible consumption and production Climate action

End poverty in all its forms everywhere End hunger, achieve food security and improved nutrition and promote sustainable agriculture Ensure healthy lives and promote well-being for all at all ages Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Achieve gender equality and empower all women and girls Ensure availability and sustainable management of water and sanitation for all Ensure access to affordable, reliable, sustainable and modern energy for all Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation Reduce income inequality within and among countries Make cities and human settlements inclusive, safe, resilient and sustainable Ensure sustainable consumption and production patterns Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy

SDG 13

(continued)

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Table 8.1 (continued) #

Sustainable Development Goal

Short description

SDG 14

Life below water

SDG 15

Life on land

SDG 16

Peace, justice and strong institutions

SDG 17

Partnerships for the goals

Conserve and sustainably use the oceans, seas and marine resources for sustainable development Protect, restore and promote sustainable use of terrestrial ecosystem, sustainably manage forests, combat desertification and halt and reverse land degradation and halt biodiversity loss Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels Strengthen the means of implementation and revitalize the global partnership for sustainable development

Notes Author’s elaboration based on the SDG description as given in the 2030 Agenda for Sustainable Development (UN, 2015)

trading to new sectors and a tightening of the existing EU Emissions Trading System (ETS), increased use of renewable energy, greater energy efficiency, a faster roll-out of low emission transport modes and the infrastructure and fuels to support them, an alignment of taxation policies with the European Green Deal objectives, measures to prevent carbon leakage; and tools to preserve and grow our natural carbon sinks. The EU, including the President of the European Commission (EC), have committed to achieving the SDGs in the EU through the European Green Deal and other policy instruments. In particular the European Green Deal recognizes that “climate change and environmental degradation are an existential threat to Europe and the world” and the need for a fair and just transition of energy systems and other sectors. The EU recognizes that it faces major challenges in achieving the SDGs and has committed to using the SDGs as a framework for its long-term strategy (Lafortune et al., 2020). The wide acceptance of the SDGs at the highest political levels represents an important success and a significant step forward for the

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recognition of sustainability as one of key issues to be solved in the interest of humankind as whole. The SDGs also provide a roadmap for a sustainable, inclusive and resilient recovery from COVID-19. Particularly relevant in the COVID-19 context, SDG 3 (Good health and well-being) calls for universal health coverage, increased access to and quality of care, and early warning, risk reduction and management of national and global health risks. In the EU context, the 2020 Annual Sustainable Growth Strategy and the Recovery and Resilience Facility are meant to guide and build a more sustainable, resilient and fairer Europe for the next generation in line with the SDGs. Sustainability and Sustainable Finance To achieve the SDGs, financing is necessary. The World Bank and the International Monetary Fund have repeatedly reported that an escalation of development finance is needed. With its “scaling finance for the Sustainable Development Goals ”, the World Bank highlighted the urgency of the efforts to realize SDG and encouraged financial innovation to move quickly. Besides domestic resources, the role of financial markets in financing sustainable development has been identified as crucial especially in the context of capital market role. Looking at the literature, a broad discussion exists about the relationship between finance and sustainability. Recent research results indicate that conventional finance is inadequate and unsuitable for financing SDGs as the three-dimensional perspective of sustainable development is not considered, leaving no room for environmental and social issues (e.g. Pisano, 2012). Sustainable finance considers how finance (investing and lending) interacts with economic, social and environmental issues (e.g. Migliorelli, 2021; Scholtens, 2006). A recent research of Ziolo et al. (2021) has concluded that the more sustainable the finance model, the better the achievement of SDGs in the group of analysed countries. The study has found a strong link between sustainable finance model and social sustainability (SDG 1, 3, 4, 5, 10, 16), environmental sustainability (SDG 11, 12, 13, 15) and economic sustainability (SDG 8, 9, 17), indicating that effective achievement of SDG requires an effective and integrated financial model based on the public and market financial systems, which are interdependent and related in terms of meeting the criteria of sustainable financing. This is why, according to

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the authors, governments should ensure parallel development and cooperation between public and market financial systems towards sustainability. In the same vein, Schoenmaker and Schramade (2019) highlight that finance can play a leading role in allocating investment to sustainable companies and thus accelerates the transition to a low-carbon, circular economy. They argue that in the allocation role, finance can assist in making strategic decisions on the trade-offs between sustainable goals. Moreover, investors can exert influence over the companies they invest in. Long-term investors can thus steer companies towards sustainable business practices. Next, financial firms have a moral or ethical responsibility to adopt sustainable lending and investment principles. A growing group of investors and depositors expect their asset manager or bank to invest and lend in a socially responsible way. Finally, finance is good at pricing risk for valuation purposes and can thus help to deal with the inherent uncertainty about environmental issues, such as the impact of carbon emissions on climate change (Bianchini & Gianfrate, 2018). Finance and sustainability both look at the future. Despite the evidence in literature of the role of finance to fully unlock the achievement of sustainable growth, current figures suggest that available finance is not channelled towards sustainable development at the scale and speed required to achieve the SDGs and the objectives of the Paris Agreement. Even though the financing for sustainable development is available, given the size, scale and level of sophistication of the global financial system—with gross world product and global gross private sector financial assets estimated at over USD 85 trillion2 and USD 225 trillion, respectively.3 The financing gap to achieve the SDGs hence remains very high. Developing countries face USD 2.5 trillion annual investment gap in key sustainable development sectors to achieve the SDG.4 The transition towards sustainable-development-oriented investment in developing economies is so far not happening at the necessary scale and pace. Addressing these challenges demands transformative initiatives and a big push to mobilize and channel investment towards the SDGs. Even though signatories to the Paris Agreement have drawn up National Determined Contribution (NDC) which set out those emission reduction goals for

2 Source of data: World Bank Databank. 3 Source of data: Allianz Global Wealth Report 2020. 4 Source of data: UNCTAD World Investment Report 2014.

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different sectors of the economy, in global terms the current NDC are still insufficient to meet the goals of the Paris Agreement to get on a net carbon–neutral path. The climate transition requires enormous efforts from public and private players, including banks. As indicated by Draijer and De Vries (2021), banks are already greening their own business operations, but their greatest potential contribution lies in the financing they provide their clients and in the intermediation and transformation function of banks in the economy. It is through banks that savings, investments and money from the capital markets find their way to projects and companies and to private investments in infrastructure. In the European Union, the European Green Deal establishes for Europe to become the first climate neutral continent by 2050 and to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990s levels. To reach these goals the EU will need an estimated EUR 350 billion in additional investment per year over this decade to meet its 2030 emission-reduction target in energy system alone, alongside the EUR 130 billion for the other environmental goals. Indeed, the EU also aims to strengthen its resilience to climate change, to reverse biodiversity loss and the broader degradation of the environment and to leave nobody behind in the process. As the financing gap scale is well beyond the capacity of the public sector, the main objective of the EU sustainable finance framework is to channel private funds into the relevant economic activities. With this in mind, the European Commission has adopted its first Action Plan on financing sustainable growth in 2018. Based on it, the EU has put in place three building blocks for a sustainable finance framework. These building blocks are: (i) a classification system or “taxonomy” for sustainable activities, starting with “environmental sustainable” and developing currently into “socially sustainable” and “extended environmental taxonomy” (transition), (ii) a disclosure framework for non-financial and financial companies according to the double-materiality principle (impact of the company activities on the environment and society and business and financial risks faced by the company due to its sustainability exposures and (iii) investment tools, including benchmarks, standards and labels. In the continuity of the Action Plan the Commission has released in July 2021 its new Strategy for Financing the Transition to a Sustainable Economy (EC, 2021). The new strategy is based on four pillars: (i) financing the transition to sustainability recognizing the efforts, extending the taxonomy and the labels and standards, (ii) inclusiveness, empowering retail investors and SMEs

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to access sustainable finance opportunities, including support to member states who want to redirect their national budgets to green priorities, (iii) financial sector resilience and contributions, including enhancing transparency and reporting around sustainability risks reflected in accounting standards and systems to monitor the transition of the financial system, (iv) fostering global ambition including support to low and middle income countries. According to the framework put in place by the EU, sustainable finance has a key role to play in delivering on the policy objectives under the European Green Deal as well as the EU’s international commitments on climate and sustainability objectives. It does this by channelling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and fair economy, as a complement to public money. Sustainability and Cooperative Values: Preliminary Considerations Cooperatives are values driven and principles-based enterprises, as the International Cooperative Alliance (ICA) defines them “cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointlyowned and democratically-controlled enterprise”. Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. These principles and values provide guidelines for a peoplecentred approach that differs from conventional capitalistic firms and seems aligned with the SDGs and the Agenda 2030. The UN has emphasized the role of cooperatives in sustainable development. The General Assembly Resolution 70/128 concludes that “cooperative enterprises have a strong potential to alleviate poverty and hunger, stimulate economic growth, create employment and decent work opportunities, build social capital, address inequality and empower women. Such power of cooperatives is particularly important for the achievement of the Sustainable Development Goals in the least developed countries ”. In addition, the International Labour Organization (ILO) considers that cooperatives meet sustainability per se, due their own principles and values, and are well placed to contribute to the triple bottom line of economic, social and environmental objectives. The ICA its document “Coops for 2030” insists in the idea that “through self-help and empowerment, reinvesting in their communities and their concern for the well-being of people and the world in which we live, cooperatives nurture

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a long-term vision for sustainable economic growth, social development and environmental responsibility”. The EU in its report on its strategy for international development for 2014–2020, the Agenda for Change, describes cooperatives as critical local private sector actors under the following ideas: “cooperative enterprises are a perfect fit with the EU2020 strategy that aims for a sustainable economy, putting people and responsibility first with a sustained fight against exclusion and a transition to a green economy”. Moreover, regarding sustainable development, the EU underlines “cooperatives are often important employers and contributors to the regional economy. They contribute to public policy objectives such as the development of human capital, the improvement of the competitiveness, and environmental sustainability”. In economic literature cooperativism is widely considered as an important element of a community’s economic development strategy (e.g. Gertler, 2009; Gordon-Nembhard, 2015). In particular, Zeuli and Radel (2005) indicate that, being controlled by people living in a community, they are more likely to be concerned with promoting local development than enterprises controlled by outsiders. In this line, Gordon-Nembhard (2015) concludes that their local character leads cooperatives to increase community economic development and sustainability and recirculate resources. For this author, cooperatives allow for the creation of a solidarity economy that provides communities with diverse types of social and human capital. A research (Dale et al., 2013) that mapped cooperative principles against sustainability concluded that “the cooperative values strongly represent the social dimensions of sustainability DNA” and that “a focus on community is the defining aspect of cooperatives with respect to sustainability”. According to the author, from this perspective cooperatives’ role is particularly key for SDG 8 promoting continuous inclusive and sustainable economic growth, full and productive employment and decent work for all, and for SDG 10 helping reducing inequalities. Cooperative enterprises recognize their key role in sustainability. In 2016, the international cooperative summit5 produced a response to the SDGs whereby cooperatives and mutuals recognized that they are in a position of influence in terms of being able to introduce sustainable development strategies and help resolve major world issues. The Summit declaration includes chapters on food security, development, economic 5 2016 Declaration—Cooperatives: the power to act on the United Nations Sustainable Development Goals.

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growth, employment and decent work, access to healthcare and social services, poverty and financial inclusions as well as climate change and sustainability.

8.2 European Cooperative Banks and Sustainable Finance: Current Approaches Cooperative Banks and Sustainability: Origins and Developments Cooperative banks share the values and principles of the other cooperative enterprises, one of it being “concern for community”. This principle materializes in the fact that cooperatives work for the sustainable development of their communities. Community empowerment is indeed a key feature of the cooperative banks business model since their origins. The cooperative banking movement was born in the nineteenth century in Europe to fight against the financial exclusion of social groups and alleviate the plight of rural population. Originally, cooperative banks were associations enabling their members to build up savings, to give access to loans and to create an independent livelihood, which was not possible with existing banking institutions, providing financial services almost exclusively to the upper class. The cooperative principles of self-reliance, personal responsibility and autonomy were at the origin of the movement. The community engagement materializes in the key principle of democratic governance. This ensures that local people are able to participate in the decisions and activities which affect their living environment, implement the long-term vision and establishes a fundamental concept of sustainable development, i.e. meeting our own needs without compromising the ability of future generations to meet their needs. From this perspective, the long-term approach that is inherent to the cooperative banks model corresponds to the very notion of sustainability from the origin. According to Preig and Greenham (2012), this sustainable approach is connected to the capital structure. Indeed, because stakeholders have no legal claim on profits or capital, but act more as stewards than owners, they take a longer-term view and a more prudent attitude to risk as they are less pressured to maximize short-term gains. The authors discuss evidence that cooperative banks provide better deals for customers, are willing to provide longer-term lending and lending to a broader range of non-financial sectors, have a social mission that includes financial inclusion, literacy and community investment, as well as support to local economic growth

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that focuses on SMEs and prevents capital drains from local economy thanks to a dense branch network reaching out the most remote areas ˇ in Europe. Similar findings have been discussed by Cepinskis (2013) according to whom due to their “one member – one vote” corporate management system, cooperative banks may develop a more sustainable lending model. They have the ability to develop more socially oriented business because of their legal statutory mandate, their ethical codes and the stakeholder-oriented governance, producing positive effect on economic development, economic growth, reducing financial exclusion and improving the value of entrepreneurial human capital. In the same vein, recent studies (Coccorese and Schaffer, 2018; Minetti et al., 2020) highlight how cooperative banks help maintaining employment opportunities in remote regions and contribute to guaranteeing the livelihood of communities. Furthermore those studies indicate that the reduction of income inequality produced by cooperative banks is mainly channelled by a reduction in depopulation and an increased turnover of local businesses. Especially in remote regions of certain European countries where cooperative banks have been operating for a long time, the number of thriving SMEs is larger than in regions with limited access to cooperative bank financing. The conclusion of the studies is that cooperative banks positively affect local economies by reducing income inequality and improving access to finance. This is even more relevant since the pandemic emergency has started. In fact, the COVID-19 pandemic has stressed the role of retail, regional, cooperative banks in providing finance to the real economy, to reduce inequalities and to serve both physically and virtually, citizens in urban and rural areas of the EU. COVID-19 loans have been considered as a new eligible social use of proceeds by ICMA in line with SDGs. A new research by Giuliani and Meggiolaro (2021) shows that cooperative banks have different behavioural patterns compared to the rest of the banking industry, in particular a behaviour that is very similar to the one of the ethical banks. The research compares the weight of credit activity on total assets between different types of banks. The result is that cooperative banks, tend in average to be more devoted to traditional banking (collection of savings and granting of credits) than the European banking sector as a whole. The authors argue that given that credit can be considered, to some extent, as a financing activity of the real economy, cooperative banks tend to operate very much in support of the real economy (production of tangible goods and services). The authors also analyse the patterns of other key performance

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indicators. They conclude that the cooperative organization model is a constant in the history of ethical finance, placing the human being at the centre. In almost 180 years, its principles have remained the same: free adherence, democratic control (“one person, one vote”, regardless of the number of shares owned), participation, training and collaboration. The authors highlight that cooperative banks have shown higher than average capitalization, good ROE and ROA even during tough times, and have consistently contributed to the real economy. In fact, cooperative banks have made efforts during the COVID-19 pandemic to ensure access to finance to those members of society, which were most hard hit: the social economy, small enterprise and the self-employed. We can therefore argue that the interaction between economic and societal goals have been at the core of cooperative banks business model since the origins thanks to a governance that is based on stakeholders engagement and democratic participation. The E (environmental), S (social) and G (governance) pillars of the current sustainability theories have been embedded in cooperative banks since their origins. Those arguments are confirmed by the EACB (2012, 2021) that illustrates how the specific operating models and cooperative principles take shape into the banks business activities as follows: • Democratic Governance: cooperative banks are effectively owned and controlled by their local members. Members actively participate in setting their policies and making decisions according to the funding principle “one person = one vote”. Cooperative banks are accountable to members, and are an expression of active stakeholdership. • Concern for communities: thanks to a dense network of branches (around 42.000 outlets in 20196 ) cooperative banks reach the most remote areas in Europe. Through the members, they are locally rooted and integral part of the community. Cooperative banks are dedicated to sustaining the real economy, they finance about one-third of EU SMEs and they create and foster local jobs. • Encourage economic and environmental sustainability: cooperative banks place the human beings at the centre of their activities, they pursue their goals in a responsible way, promoting mutual support.

6 Source of data: EACB key Figs. 2020.

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This leads to a sustainable approach aimed at responding to ecological and society-wide challenges. Cooperative banks are important players in the area of Socially Responsible Investment (SRI) products, and they have been frontrunners in issuing green bonds. In general, the cooperative banking model is based on maximizing members’ value in a long-term relationship rather than on shortterm profit maximization. Members acquire shares at face value. Share prices remain unchanged over decades, what excludes any speculation with cooperative shares. Moreover, remuneration of capital is limited. Usually the biggest part of the profit is transferred to the reserves of the cooperative bank (retained earnings) that is injected back in the local economy mostly to finance societal projects as collectively voted by members. • Solidarity and social commitment: cooperative banks foster self-help, responsibility and solidarity. They emphasize the common good of society. They were historically founded as an innovative answer to unequal access to financial services and the principle of mutualization was a mean to emancipation. Cooperative banks are significant actors for microcredit in Europe, providing loans to persons and small companies that would otherwise be financially excluded. They are engaged in funding local organizations and projects and take responsibility for the society and environment that they are active in. In general, they strive to provide inclusive services to the more vulnerable segments of the population. • Promoting knowledge and skills: cooperative banks encourage training, knowledge and skills in line with the cooperative principle that “cooperatives provide education and training for their members, elected representatives, managers and employees so they can contribute effectively to the development of their cooperatives”. This is considered crucial for an effective governance function. Cooperative Banks Current Practices in Sustainable Finance The EACB (2020) has issued a survey describing the engagement of cooperative banks in financing green and sustainable activities with examples of current practices in the various European countries. The local dimension of cooperative banks is emphasized as a powerful catalyser to accompany local actors such as SMEs and households in the green transition. The main findings of the publication are summarised hereafter.

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Cooperative banks play an active role in the distribution of services and sustainable investment as well as savings products within their networks. In this respect, renewable energy forms and energy efficiency real estate mortgage are an important part of the financing provided. For a”typical” cooperative bank, a relevant part of its activities (measured as a share of the lending book) is in line with the ICMA’s Green and Social bond standards and the United Nation’s Sustainable Development Goals, in particular to finance education, social housing, economic inclusion or social inclusion. Moreover, several cooperative banking groups have been closely engaged in the development of climate and environmental policies as founding members of relevant frameworks (e.g., Equator Principles, Green Bonds Principles). Cooperative banks are among the signatories of the main international initiatives (i.e. UN Global Compact, OECD Guidelines, PRI, TCFD) and support national initiatives (e.g. German Sustainability Code). At the launch of the new UNEP FI Principle for Responsible Banking (PRB) in 2018, several cooperative banks were among the early endorsers and to date more than 20 financial cooperatives, members of the EACB, have signed the Principles, developing internal classification systems and target settings. Some cooperative banks have established own non-financial reporting methodologies through their sustainability reporting, obtaining good scores in the ratings by ESG rating agencies. Several cooperative banks have been awarded recognitions in the field of sustainability in the past years. Many cooperative banking networks have decided to revise their governance structure, creating specific focus group on sustainability with the aim to strengthen the integration of sustainability in the strategic planning process and increase the efforts needed to achieve the transition targets envisaged by the organization. Climate commitments take various forms with regard to the corporate and investment bank and its large corporate clients. Like other banks, cooperative banks have sectoral rules for sensitive industries and rejection criteria for lending concerning, among the others, coal-fired power plants. Others have also established climate strategies or sustainability plans to make fast progresses in advancing sustainability policies across the environmental, social and governance dimension (including human rights charter and anti-bribery). It also emerges from the survey that cooperative banks are working on identifying social and environmental risks, as well as on carrying out actions aimed at implementing audits that assess these risks. ESG analysis has been developed as part of the assessment

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of corporate customers’ creditworthiness. This analysis examines businesses and projects seeking financing, including their effects and risks in terms of climate change, waterways or land use. As regards society and governance, ESG analysis examines elements such as employee well-being, board independence and transparency of taxation. The analysis seeks to identify material ESG risks and opportunities for the bank’s corporate clients, which supports to the traditional credit assessment. In terms of actions undertaken, according to the examples and best practices gathered by the EACB, it can be observed that many cooperative banks have put in place policies to help reduce greenhouse gasses emissions produced directly, but also the indirect emissions that arise from the company being supplied with and all other emissions within the limits of the system. In terms of financing, many cooperative banks are engaged in energy renewable financing, net zero mobility or energy efficient real estate loans. Many indicate that financing the transition to new energy sources implies a generalized approach in terms of consumption, economic models and regions. Thus they have elaborated specialized solutions for financing investment in water and waste management, heating networks, biodiversity and transportation. In particular for SMEs and households, they have developed specific products and advisory services. Some of the more advanced organizations in this field are also providing incentives for adapting to climate change consequences at local and regional level, developing products specifically designed and ad-hoc incentives according to the different needs of the territories. Finally, some cooperative banks are also leading issuers of green bonds and sustainability-linked bonds, a financing tool which fosters sustainable development projects and assets with an environmental and/or social purpose. So, beyond green, a large part of cooperative banks operations is devoted to social projects. The regional and the local cooperative banks are particularly engaged in the economic and social development of rural areas. Their business proposals are based primarily on searching for financial solutions geared towards local development, access to finance, supporting small and medium-sized enterprises and, in particular, developing the farming and agri-food sectors. Some cooperative banks include in their sustainability strategy financial literacy, local vitality of the communities they are embedded in (including affordable housing or healthcare) as well as the use of client’s data and information in the most responsible way. Some banks provide personal and professional microloans. These loans qualify as solidarity-based loans

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because their approval is not based on standard bank scoring criteria, particularly for project sponsors who are out of work or cannot put up personal collateral. They act in favour of a more socially responsible economy by promoting solidarity-based investments. Cooperative banks are also reinvesting profits in the donations and sponsorship of local projects via the so-called cooperative dividend. They support local associations, culture, sports and arts, donating millions of euros every year to those sectors that are essential for the territories in which they operate (EACB, 2020).

8.3

Challenges and Opportunities for Cooperative Banks to Deliver on Sustainability

Main Impact of Regulation in Fostering Sustainability Local anchoring and concern for the community are deeply linked with the cooperative banks approach to sustainability that connects economic, environmental and social well-being of their members. Whereby sustainability is considered a concept for a future proof economic model, for cooperative banks this is enshrined in their activities since the origins. The future developments of the cooperative banks approach to sustainability are likely to be influenced by the rapidly evolving sustainable finance framework. In this context, what will be the role of the new regulations and policies that are being introduced for tackling the unprecedented transformations linked to fight climate change, biodiversity loss, ocean deterioration and to achieve the SDGs.? Some considerations can be made in this respect. The first one concerns the global framework around climate financing emerged in the context of the Paris Agreement. This framework relies on the concept of the primary role of capital markets for closing the financing gap and mobilizing the appropriate private and public financial resources. This concept has been integrated in Europe via the first EU Action Plan for sustainable growth in 2018. The EU action plan has delivered valuable results to mainstream sustainability in Europe and it has established the necessary role of capital markets. However the role of local banks, communities, small businesses, households and the real economy could be further enhanced. Indeed, the European economy is based predominantly on bank intermediation and the industrial fabric is composed of

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SMEs that constitute roughly 99%7 of all companies in Europe. The new sustainable finance strategy (EC, 2021) makes an important step in this direction, as it purposely focuses many of its actions on the retail clients, small businesses and bank’s finance. This change is not neutral to the range of tools and the shaping of the regulatory framework; thus it may have important effects to enhance the cooperative banks approach towards increasing sustainable growth. This leads to the second consideration that concern definitions. The foundation of the EU sustainable finance framework is the establishment of a Taxonomy (Regulation (EU) 2020/852) on the establishment of a framework to facilitate sustainable investment) that defines which activities can be considered environmentally sustainable. This is a crucial pillar to ensure transparency and counter green washing. The taxonomy today results in technical screening standards that set best-in-class thresholds, concretely defining the “dark green” range of economic activities. This is a necessary step to ensure credibility, scientific basis and solidity of the framework. It is also a needed classification to guarantee the active choice in the selection of investment portfolios or infrastructure project that correspond to the highest standards. On the other hand, a number of recent studies estimate that when applying the current EU green taxonomy to financial assets (including core banking products, such as loans or mortgages), only a small percentage would qualify as taxonomy aligned, ranging between 1 and 5%.8 This underlines the need for an additional framework and tools. Local businesses, citizens and communities would rather need tools that allow them to assess their performance, defining step-by-step targets for progress and measure and track advancements. This would also be an important tool for cooperative banks—from the perspective that their role as members owned community banks would be to accompany their clients in the transition and support them in intermediate steps from lower to higher levels of environmental performance. It has to be considered that in many remote European regions cooperative banks are often the only player to provide finance and accompany local transition. In this context, the notion of an extended environmental transition taxonomy would be better placed as it entails a more dynamic and 7 Source of data: EU Commission Internal Market, Industry, Entrepreneurship and SMEs. 8 Source of data: Platform on Sustainable Finance, Report on Taxonomy extension options linked to environmental objectives (2021).

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forward-looking approach allowing for identifying and measuring incremental improvements in greening the local economies. Such an approach of “multiple shades of green” would enable the local players, in particular SMEs to establish decarbonization measures or set gradual targets for environmental sustainability that are easier to implement. Thus it would also enable their financiers, typically community banks, such as the cooperative networks to accompany those staged adaptation plans in an effective manner. The third consideration regards the framework and incentives necessary to ensure the sustainable finance’s uptake by retail clients and smaller companies that mainly rely on bank financing. Examples are new labels for products such as green loans or energy efficiency mortgages that could be accompanied by attractive rates or conditions or linked to fiscal advantages. This would include financing of clean transportations, recycling or reducing pollution or for example mortgages for renovating or purchasing environmentally performant real estates. Considering that 40% of current GHG emissions in Europe are associated to buildings, the latter are particularly relevant to stimulate households or communities to achieve high standards in energy efficiency of their buildings. Recent studies have also shown that, from a risk perspective, lower capital requirements may be justified on the basis of an increased value of the underlying asset and reduced energy costs that improve the financial assessment of the borrower (Bilio et al., 2021; Guin & Korhonen, 2020). Considering that for retail banks and cooperatives in particular real estate loans constitute a significant portion of the balance sheets, there seems to be a significant potential to channel the changes. A fourth consideration concerns the assessment of the ESG performance and the management of ESG risks. Appropriate public tools would have to be developed to ensure that the local players, SMEs, households or communities are enabled to assess their ESG performance and take appropriate actions towards climate resilient strategies or to integrate sustainability considerations in their business. Such tools may include awareness raising on the impact of climate change or biodiversity loss on the business strategy for an SME or the value of immovable property for households. Following the identification, adaptation measures for smaller companies or households also require substantial investments. It could be argued that while for relative larger players the financial and capacity building effort to measure, track and improve environmental performance is relatively affordable, for the wider spectrum of the smaller, grass-roots

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players the thresholds may result too high to try. In other words, they may face a relative disadvantage in integrating sustainability considerations in their business operations. Since the grass-roots local players are also the core client group of cooperative banks this may reflect is a relative disadvantage for this group of banks. This leads to the fifth and final consideration that concerns the reporting. According to the new sustainable finance framework, banks will have to produce a number of new ESG reports established under the supervisory pillar, the new taxonomy regulation, the new sustainable finance disclosure regulation or the forthcoming Corporate Sustainability Reporting Directive (CSRD). To do so they will need the underlying client’s data of the loan and investment portfolios. However, while for larger corporates sustainability data exists (as they fall in the scope of the Non Financial Reporting Directive) or are likely to be partially available in the near future due to the new CSRD, for the small businesses data are not available or very limited. This risks to put cooperative banks whose clients are for a vast majority SMEs at a disadvantage. They may face difficulties not only in fulfilling the regulatory requirements, but also in their mission to accompany the green transition or their SMEs clients or investment portfolios if simplified tools are not provided by public authorities to those sectors. The end result could be that larger banks with loan books or investment portfolios composed of large corporates may result more green or sustainable in their reporting or better at managing climate risk purely because of greater ESG data availability of their larger corporate clients. This could be partially overcome if public authorities would provide simplified schemes or proxies for the smaller companies to be able to report on their sustainability performance or if they would provide public tools for the assessment of climate physical risks such as unified heat maps that would facilitate both companies and financial institutions. In conclusion, the way forward for cooperative banks in sustainability appears to be much linked with the way forward of their main clients, that is SMEs, households and communities. Provided that the legislative framework is adapted in the direction of facilitating inclusiveness of smaller companies and retail clients the cooperative banks approach to sustainability may constitute an important opportunity for future developments.

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Supporting Local Development and Climate Goals: Opportunities and Challenges for Cooperative Banks Local anchoring means that cooperative banks are deeply rooted in the economic, social and industrial structure of the regions they belong to. When those regions are dependent on industries that are environmentally harmful or non-performant, or subject to higher climate physical risk because they are based in areas that are subject to heatwaves or climate disaster for example, this may represent both a challenge and an opportunity. The opportunity stems from the fact that cooperative banks in those regions may be in a position to help their clients towards the sustainability path. It also means that cooperative banks may be facing negative impacts, as they finance activities that are confronted with environmental or climate risks. Adaptation and mitigation strategies would be powerful tools in this regard. Adaptation implies taking necessary precautions to help protect the economy and society and make it more resilient for natural risks. This may imply choices such as where to build houses, how to build them, which crops to grow in food and agri-sector and where to expand or diminish economic activities. Those actions may require coordinated community actions including from public authorities. The strong connection between the developments in the territories and the cooperative banks also means that cooperative banks are part of the local fabric and remain in the territory as an economic and social anchor, changing along with the local economy. The tremendous transformation needed for the alignment with the Paris climate goals risks to be even more challenging in the remote or less urbanized regions of Europe where cooperative banks may often represent an important point of access to finance or investments, thus have a responsibility and an opportunity in accompanying those communities in the decarbonization path. Taking the example of the new obligations introduced by the Taxonomy Regulation (Delegated Act art. 8), financial institutions will have to report the percentage of their assets aligned with the EU taxonomy (green asset ratio), that also includes the percentage of real estate loans aligned with the taxonomy criteria (green real estate loans). Cooperative banks are often the main lenders for real estate, including in less urbanized or rural areas. In these areas the starting positions can be very different, and depending on the country, a large amount of the buildings stock is likely not to meet the level of energy performance set

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in the taxonomy. The local banks (typically cooperatives, but not only) situated in those areas may reflect in their portfolios lower levels of green real estate compared to financial institutions (cooperative or not) situated in areas where buildings have a higher level of energy efficiency performance (i.e. newly built buildings or office spaces). In order to achieve the necessary transformations for improving the least energy efficient buildings and incentivize the owners, concerted actions seem necessary. The role of governments would seem particularly relevant. In particular, in less urbanized regions that face the double challenge at the environmental and social level. In those regions, cooperative banks may act as catalyser for local employment, reducing income inequality and depopulation flows. But how far can they go in accompanying the energy efficiency transformation? In such circumstances public incentives like guarantees or fiscal benefits would constitute an important stimulus. That may translate in more favourable terms and conditions of the offering by the local banks, allowing a shared burden and inclusiveness in the green transition process of those less advantaged territories. The current rapid regulatory changes also introduce new reporting obligations and the integration of ESG considerations in banking activities. Those obligations may result particularly challanging for banks, especially so for smaller decentralized (cooperative) banks, as well as for their core client groups such as SMEs and households. The case of the requirements for banks to report their GHG scope 3 emissions is particularly relevant. The GHG Protocol Corporate Standard, issued already in 2011, classifies GHG emissions of a company as follows. Scope 1 are direct emissions of the bank from its own or controlled sources. Scope 2 are indirect emissions from purchased energy. Scope 3 emissions comprise all indirect emissions in the value chain of the bank’s activities. The GHG protocol Guidance for the financial sector (GHG Protocol Financial Sector Guidance, Scope 3 accounting and reporting of greenhouse gas emissions 2013) has clarified that banks activities include lending, investing and advisory activities. The calculation of the GHG Scope 3 emissions constitute a challenge for entire banking sector because, as underlined by Teubler and Kühlert (2020), scientifically sound evaluation methods and data required for this purpose have not yet been sufficiently developed and standardized. For decentralized cooperative banks the challenge may result to be even bigger because of the nature of their operations and the core clients that they finance.

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Indeed, cooperative banks mainly focus on traditional intermediation activities, with loans representing a large percentage of their books. Figures (Groeneveld, 2020) show that between 2011 and 2019 cooperative banks granted the non-financial private sector (corporates) 28% additional loans. In comparison, the credit volume of other banks was 3% higher than in 2011. Thus, cooperative banks have provided in general a larger amount of loans compared to other banks. However, large portions of those loans are associated with smaller and medium sized companies that do not have the means or the knowledge to estimate their own company’s carbon footprint. As a consequence, the burden of the computation would remain with their financial partner, typically cooperative banks who would have to make important investments in human resources, IT tools or consultancy services in order to estimate the GHG emissions of those portfolios. Similar considerations are developed in a recent paper by Gischer and Herz (2021) who highlight that while SMEs play a crucial role in the fight against the climate crisis implemented in a decentralized way, to successfully play this role, they depend on local banks who are their main financiers and generally provide better credit conditions and guidance. However, the authors warn that for regional, cooperative banks the possible changes induced by the Green Deal may result particularly burdensome. For example, in the credit worthiness assessment besides the risk parameters, they will have to consider the new ESG obligations introduced by the EU, the EBA and the ECB. Thus, having to assess if the loan is “sustainable” according to the taxonomy. In addition, the authors argue that besides the operational difficulties linked to the detailed prescription of the taxonomy criteria, banks may also face new dynamics in the capital requirements whereby the supervisory approach could provide incentives versus green loans and potential additional capitals mark up for non-green loans. According to the authors, the consequence could be a reduction in bank’s loan portfolio and an increase in operational costs particularly for regionally operating banks with limited opportunities to adopt alternative business strategies. The authors conclude that the EU’s Green Deal can only be implemented via the regional level and thus depends on an adequate financial infrastructure that can channel the funds to SMEs, including local cooperative and saving banks. These argumentations may need a deeper look into the case and abilities for change, but they provide elements to be explored on

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how to get every actor along in the transition and to take on board local concerns and limitations. In conclusion, the local dimension of cooperative banks offers important opportunities and several challenges for channelling and accompanying the SMEs and local communities in the journey towards the Green Deal. Cooperative Banks and Social Goals: Is This a Specific Pillar of the Cooperative Banks’ Contribution to Sustainability? The societal dimension is a key feature of cooperative banks and it stems from the governance and specific operating principles. As underlined by Fici, “some Constitutions around the world attribute a social function to cooperatives (Greece, Italy, Malta, Spain and Portugal )”. In Europe, cooperatives are recognized in Article 54 of the Treaty on the Functioning of the European Union. The Council Regulation (EC) No 1435/2003 on the Statute for a European Cooperative Society (SCE) provides a specific European company statute for cooperatives. The SCE-regulation points out that “Cooperatives are legal entities with particular operating principles that are different from those of other economic agents ”. Those principles could generally be summarized as follows: (i) the main mission of a cooperative bank is the satisfaction of its members’ needs and/or the development of their economic activities. This intrinsically places the human being at the centre of the banks business operation (ii) membership is open to all citizens living in the business area of the cooperative bank. Typically, cooperative banks are deeply rooted in their local communities. A delocalization is hardly possible; (iii) in most cases, membership requires the acquisition of a (limited) amount of capital. By consequence, the shareholder structure of cooperatives is characterized by a very high number of micro-holdings of capital. Cooperative banks count about 85 Million members in the EU; (iv) members take decisions on the basis of the democratic principle (one member, one vote). There are no “lead shareholders” that drive the policy, but the policy is determined by the community of member/customers; (v) members acquire shares at face value and that value remains unchanged over the years, so in case of withdrawing members only get back the face value. Any speculation can be excluded with cooperative shares; (v) the generation of profit is a basis—like for any other undertaking—but not the primary purpose. Thus, maximization of profit is not an objective per se,

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rather the maximization of members value; (vi) remuneration of capital is limited. Usually, the largest share of profit is transferred to the reserves of the cooperative bank (retained earnings), thus allowing for a long-term vision, not subject to market pressure. Via member representatives in governance bodies, cooperative banks possess precious and valuable networks in society. This social capital differentiates cooperative banks from banks with other ownership structures. With sufficient member participation in democratic processes, cooperative banks create loyalty in society and legitimacy of aiming at social purposes. “Achieving one’s goal is better together than alone” has always been the fundamental idea of cooperatives. This also implies that decisions on business policy or product range take in due consideration the long-term impact of such choices on the (wide) membership base. The specific approach to sustainability of cooperative banks also materializes in the type of activities financed that include, the financing of the local economy and the SMEs, the support to the more fragile segments of the population, the reduction of inequalities through specific training programme or financial support measures, the financing of social housing, economic inclusion or social inclusion. The COVID-19 pandemic has stressed the role of regional, cooperative banks in helping to provide finance to the real economy and reduce inequalities in both urban and rural areas. COVID-19 loans have been considered as a new eligible social use of proceeds by ICMA in line with SDGs. From this perspective, the current work of the EU sustainable finance Platform to extend the definitions of the Taxonomy Regulation to the socially sustainable activities may constitute an important opportunity for cooperative banks as many of the activities that they finance are likely to follow in the new “socially sustainable” categories. Whether this evolution represents an opportunity or a challenge will however depend on the actual metrics that will be determined in the EU work. For example, from the perspective of determining criteria for social sustainability at entity level the EACB (2021) has underlined that it would be important to include on the following: (i) how much the entity supports the local economies by serving decentralized areas and in particular the rural areas, and municipalities with no (or less) other alternative access to investment and financing (in line with SDGs 8; GRI G4 FS13; ISO2600 6.8) and (ii) the democratic nature of the governance, ensuring representation of different economic/social sectors in

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boards (cooperatives), stakeholders and community engagement (in line with GRI 102–40; OECD II.7; ISO 26000 5.2/0.3/7). Should on the other hand criteria be developed in a form that is either too complex, different from current definitions or opposed to key cooperative principles, this may rather cause harm to cooperative banks in terms of being able to measure and report about their specific social capital and contributions to social sustainability and long-term governance.

8.4

Conclusions

An unprecedented transformation of the European economy and society is needed to achieve the goals of the Paris agreement, the new EU Green Deal and the UN SDGs. This transformation requires channelling massive public and private financing. To this end the EU has established a number of initiatives in the framework of its Action Plan for financing a sustainable growth and in the new strategy for sustainable finance. Several studies illustrate that cooperative banks—as members owned, democratically controlled, value based and community oriented banks—have combined the environmental (E), social (S) and governance (G) model since their origins. They may therefore be well positioned in seizing the opportunities of the sustainable transformation. Moreover, the Green Deal and climate transition need to happen at local and regional level to be effective. Due to proximity, cooperative banks could play an important role in providing the adequate funding to SMEs and households. The social dimension and the notion of inclusive transition are also important. The chapter reviews the opportunities but also the challenges, bringing forward a number of considerations on how current and future developments in sustainability may affect cooperative banks. The main conclusion is that the way forward for cooperative banks in sustainability appears to be much linked with the way forward of their main clients, that is SMEs, households and communities. Provided that the legislative framework is adapted in the direction of facilitating inclusiveness of smaller players, facilitating and incentivising their sustainability engagement and including the societal dimension, the cooperative banks approach to sustainability may constitute an important opportunity for the future.

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References Bianchini, R., & Gianfrate, G. (2018). Climate risks and the practice of corporate valuation. In S. Boubaker, D. Cumming, & D. K. Nguyen (Eds.), Research handbook of finance and sustainability. Elgar online. Billio, M., Costola, M., Pelizzon, L., & Riedel, M. (2021). Buildings’ energy efficiency and the probability of mortgage default: The Dutch case. Journal of Real Estate Finance and Economics, 1–32. ˇ Cepinskis, J., Vytautas, Ž., & Sandra, Ž. (2013). Financial Cooperatives as Drivers for Sustainable Development, in Knowledge Economy. Coccorese, P., & Shaffer, S. (2018). Cooperative banks and local economic growth. Centre for Applied Macroeconomic Analysis, Australian National University. Dale, A.., & Duguid, F., et al. (2013). Co-operatives and sustainability: An investigation into the relationship. Community Research Connections and International Co-operative Alliance. Draijer, W., & de Vries, B. (2021). Greening the economy: The role of banks in the climate transition and challenges. In A. Dombret & P. S. Kenadjian (Eds.), Green Banking and Green Central Banking. Institute for Law and Finance Series. Energy Efficiency Data Protocol and Portal. (2020). Final report on the correlation between energy efficiency and probability of default. European Association of Cooperative Banks (EACB). (2012). CSR in Cooperative Banks. Brussels. European Association of Cooperative Banks (EACB). (2020). Cooperative banks’ engagement to green and sustainable finance. Brussels. European Association of Cooperative Banks (EACB). (2021). Answer to the Platform on Sustainable Finance’s draft proposal for a social taxonomy. Brussels. European Commission (EC). (2019, December). Communication (COM(2019) 640 final). The European Green Deal. European Commission (EC). (2021). Strategy for Financing the Transition to a Sustainable Economy (COM(2021) 390 final). Gertler, M. (2009). Rural Cooperatives and Sustainable Development. Centre for the Study of Cooperatives, University of Saskatchewan. Gisher, H., & Herz, B. (2021). Current challenges for SMEs and regional banks in the European Union. Institute of European Democrats. Giuliani, E., & Meggiolaro, M. (2021). 4th Report ethical and sustainable finance in Europe. Gordon-Nembhard, J. (2015). Understanding and measuring the benefits and impacts of cooperatives. In L. Brown, C. Carini, J. G. Nembhard, L. H. Ketilson, E. Hicks, J. Mcnamara, S. Novkovic, D. Rixon, & R. Simmons (Eds.), Cooperatives for sustainable communities; tools to measure cooperative impact and performance. COOPs.

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Groeneveld, H. (2020). European cooperative banks in 2019: a concise assessment. Tilburg University. Guin, B., & Korhonen, P. (2020). Does energy efficiency predict mortgage performance? (Staff Working Paper No. 852). Bank of England. Lafortune, G., & Schmidt-Traub, G. (2020). Using the Sustainable Development Goals to guide the Covid-19 recovery. Apolitical. Migliorelli, M. (2021). What do we mean by sustainable finance? Assessing existing frameworks and policy risks. Sustainability, 13(2), 975. https://doi. org/10.3390/su13020975 Minetti, R., Pierluigi, M., & Valentina, P. (2020). Not all banks are equal. Cooperative banking and income inequality. Economic Inquiry. Oberthür, S. (2016). Where to go from Paris? The European Union in climate geopolitics. Global Affairs, 2, 119–130. Pisano, U. (2012). Resilience and Sustainable Development: Theory of resilience, systems thinking. European Sustainable Development Network (ESDN). Prieg, L., & Grenham, T. (2012). Cooperative banks: International evidence. New Economic Foundation. Schoenmaker, D., & Schramade, W. (2019). Investing for long-term value creation. Journal of Sustainable Finance and Investment, 9(4), 356–377. Scholtens, B. (2006). Finance as a driver of corporate social responsibility. Journal of Business Ethic, 68(1), 19–33. Teubler, J., & Kühlert, M. (2020). Financial carbon footprint: Calculating banks’ scope 3 emissions of assets and loans. ECEEE Industrial summer study proceedings. United Nations (UN). (2015). Transforming our World: The 2030 Agenda for Sustainable Development. Zeuli, K., & Radel, J. (2005). Cooperatives as a community development strategy: Linking theory and practice. Journal of Regional Analysis & Policy, 35, 43–54. Ziolo, M., Bak, I., & Cheba, K. (2021). The role of sustainable finance in achieving Sustainable Development Goals: Does it work? Technological and Economic Development of Economy, 27 (1), 45–70.

CHAPTER 9

How Do Cooperative Banks Consider Climate Risk and Climate Change? Giorgio Caselli

9.1

Introduction

Recent years have seen sustainability-related frameworks such as sustainable finance, green finance and climate finance receive increasing attention within the political and societal debate, particularly after the adoption of the United Nations (UN) Sustainable Development Goals (SDGs) and the signing of the Paris Agreement in 2015.1 The SDGs, which underpin the UN’s 2030 Agenda for Sustainable Development, are a collection 1 This chapter follows the categorisation proposed by Migliorelli (2020), who considers

green finance and climate finance as key components of the broader sustainable finance landscape. While green finance refers to the financial stocks and flows directed at addressing the environment-related SDGs, climate finance corresponds to the subset of green finance concerned with climate change mitigation and adaptation.

G. Caselli (B) Centre for Business Research, Cambridge Judge Business School, University of Cambridge, Cambridge CB2 1QA, UK e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_9

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of 17 interlinked goals aimed at addressing global challenges including poverty, hunger, inequality, climate change and environmental degradation. Climate change is also the focus of the Paris Agreement, a legally binding international treaty that sets the target of limiting global warming to well below 2 °C compared to pre-industrial levels. These initiatives, together with a growing awareness by civil society of the profound effects that a changing climate can have on people’s lives, have been setting a new agenda for international institutions and governments across the world. At the European level, an ambitious package of measures has been introduced by the European Commission since 2018 to support the transition towards a more sustainable economy and make Europe the first climate-neutral continent by 2050. Among these measures is the launch of the European Commission’s 2030 Climate Target Plan at the end of 2020, which requires the EU to cut its greenhouse gas (GHG) emissions by at least 55% by 2030 relative to 1990 levels. The recovery from the COVID-19 pandemic may itself offer an opportunity to accelerate the transition to a low-carbon economy. Finance is regarded by many as a key factor in enabling the transition to a greener world, suggesting that cooperative banks and other financial intermediaries can offer a major contribution to reaching the EU’s climate and environmental targets. Along with other sustainability-related issues, digital transformation and COVID-19 health crisis, climate change represents one of the major trends that have been affecting cooperative banks in recent times. Indeed, climate change is often regarded as the biggest sustainability issue of our time (Ramani, 2020). However, as pointed out elsewhere in this book, climate change-related trends and their implications for cooperative banks have not yet been sufficiently discussed by the literature. The aim of this chapter is to establish the current state of knowledge about the implications of climate change for the cooperative banking sector. To this end, it examines what impact climate-related risk factors might have on the European cooperative banking industry and how some of the largest European cooperative banks are responding to the risks and opportunities posed by a changing climate. The chapter is structured as follows. The next section provides a typology of climate-related risk factors as first proposed by former Bank of England’s Governor Mark Carney. Section 9.3 identifies the main channels through which climate change may give rise to financial risks for

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banks and reviews some of the evidence available to date on the significance of climate-related risks for the banking industry. The implications of climate change for cooperative banks are addressed in Sect. 9.4. The first part of the section discusses four key features of the cooperative banks’ business model that are likely to determine the impact of climate change on the cooperative banking sector. The second part of the section presents the main climate-related management practices that have been adopted by some of the largest European cooperative banking groups. Section 9.5 offers some concluding remarks and proposes some avenues for future research.

9.2

Climate-Related Risk Factors

Climate change could create significant risks for financial stability. A typology of climate-related risk drivers was first proposed by Mark Carney in a famous speech given at Lloyd’s of London in September 2015 (Carney, 2015, p. 4), when he described climate change as the ‘Tragedy of the Horizon’: Climate change is the Tragedy of the Horizon. We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors—imposing a cost on future generations that the current generation has no direct incentive to fix.

The typology proposed by Mark Carney, which has since become the standard approach to categorising climate-related risks, identifies three main channels through which climate change may affect the stability of the financial system2 : • Physical risks: they refer to the direct losses caused by changes in climate patterns or extreme weather events. Changes in climate patterns include increases in average global temperatures, precipitation and sea levels (i.e. chronic physical risk factors), while floods, storms and droughts are all examples of extreme weather events (i.e. 2 Given their prominence in the current debate over the implications of climate-related risk factors for the banking sector, the focus of this chapter is on the first two of these channels (i.e. physical and transition risks).

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acute physical risk factors)—whose frequency and magnitude are set to increase within a warmer climate. Changes in climate patterns and extreme weather events are closely intertwined and are largely driven by human emissions of carbon dioxide, as explained in more detail in Box 9.1. Along with causing damage to property and infrastructure, physical risk factors may have profound consequences for the real economy as they have the potential to disrupt trade and hit supply chains. • Transition risks: they identify the economic and financial consequences associated with the transition to a low-carbon economy. The shift away from fossil fuels necessitates a set of policy, technology and market changes that could prompt a reassessment of the value of a vast range of assets. The sectors most exposed to this type of risk are those that are directly concerned with the extraction or production of fossil fuels, but businesses in the utility and other infrastructurerelated sectors that currently rely on fossil fuels are equally likely to be affected. Transition risks also exist in relation to a number of products and services that make use of fossil fuels (e.g. business and residential properties with limited insulation or non-electric cars). • Liability risks: they relate to the effects that can materialise in the future if parties who have suffered losses from climate change-related events seek compensation from those who are held responsible. An example is a company’s failure to comply with regulations on reducing pollution, which may prompt claims against current or past firm owners by employees and other individuals whose health has been harmed.

Box 9.1. Human emissions of carbon dioxide and climate change: some numbers.

It is now largely acknowledged that the global climate has changed compared to the pre-industrial period and that human activities are behind many of the changes in climate that have occurred in the past decades. According to data from the National Oceanic and Atmospheric Administration (Lindsey, 2020), the amount of carbon dioxide in the atmosphere has increased by 25% since the late 1950s and by 40% since the Industrial Revolution—with CO2 levels today

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Fig. 9.1 Global emissions of carbon dioxide and temperature anomalies. Source Author’s elaboration based on data from the Global Carbon Project and the National Oceanic and Atmospheric Administration (NOAA). Notes Carbon dioxide emissions include emissions from fossil fuel combustion, cement production and gas flaring. Temperature anomalies are deviations of annual global surface (land and ocean) temperatures from the twentieth century average

being higher than at any point in the past 800,000 years. Carbon dioxide concentrations are rising mostly as a result of the fossil fuels (e.g. coal and oil) that people are burning for energy. After rising slowly to about 5 billion tonnes per year during the mid-twentieth century, human emissions skyrocketed to over 36 billion tonnes in recent years as illustrated in Fig. 9.1. Insofar as global demand for energy continues to grow and to be met predominantly with fossil fuels, the amount of CO2 in the atmosphere is projected to exceed 900 parts per million by the end of the twenty-first century—more than twice the current levels. As a greenhouse gas, carbon dioxide absorbs and radiates heat. The increase in atmospheric carbon dioxide accounts for approximately two-thirds of the total energy imbalance that is behind the rise in Earth’s temperature. That extra heat is responsible for the

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regional and seasonal temperature extremes that have been observed in recent times. Since the 1970s, annual global surface temperature has been higher than the twentieth century average (Fig. 9.1). The 10 warmest years in recorded history have all occurred since 2005, with 2020 as the hottest year on record so far (Lindsey & Dahlman, 2021). One of the consequences of global warming is a reduction in sea ice extent, that is, the area of ocean with at least 15% sea ice concentration. The area covered by sea ice in the Arctic at the end of summer has shrunk by about 40% since the late 1970s, which equals to a declining trend of 13.1% per decade relative to the 1981–2010 average (Lindsey and Scott, 2021). In turn, global mean sea level has risen about 21–24 cm since 1880, accelerating from 1.4 mm per year throughout most of the twentieth century to 3.6 mm per year from the mid-2000s (Lindsey, 2021). Added water in the ocean from more melting of sea ice and thermal expansion of seawater as it warms are the major contributors to sea level rise. In urban settings located along coastlines, rising sea levels may increase the risk of flooding, hazards from storms and shoreline erosion, potentially threatening major infrastructure such as road and rail links, bridges, water supplies and power stations. Climate change is likely to exacerbate these and other weather-related events, as rising temperatures and more humid air create more extreme weather conditions. Data from the Emergency Events Database (EM-DAT) maintained by the Centre for Research on the Epidemiology of Disasters (CRED) points to a considerable increase in the number of natural disasters worldwide, particularly floods and extreme weather events such as tropical and convective storms (i.e. thunderstorms with tornadoes, floods and hail). According to the Swiss Re Institute (Bevere & Weigel, 2021), natural catastrophes and man-made disasters caused USD 89 billion of global insured losses during 2020—mostly due to a record number of severe convective storms and wildfires in the United States. Available estimates show that physical damage from climate change could reach one-tenth (or even one-fifth) of global GDP by the end of this century, amounting to USD 8–17 trillion of current global output (ESRB, 2020). The combined value of

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climate change-induced economic damage in the United States is approximately 1.2% of GDP per +1 °C on average and tends to increase quadratically in global mean temperature (Hsiang et al., 2017). Substantial economic losses are also found for the European Economic Area (EEA), where analyses by Munich Re and the European Environment Agency indicate that climate-related extremes caused a total of EUR 446 billion economic losses between 1980 and 2019—with the cumulative deflated losses accounting for approximately 3% of EEA countries’ GDP. These figures are even more significant if one considers that the bulk of the economic damage from climate change is likely to be experienced outside of the United States and Europe.

9.3 Impact of Climate Change on the Banking Sector Climate-Related Financial Risks for Banks Although the banking literature concerned with the financial risks from climate change is still in its infancy, there tends to be agreement that climate-related risks do not give rise to a self-standing category of financial risks. Instead, they represent a range of factors that have the potential to increase financial risks already faced by banks, namely credit, market, operational and liquidity risks (e.g. Bank of England, 2018; Basel Committee on Banking Supervision, 2021; Migliorelli & Marini, 2020). This view is confirmed by the findings of a recent survey by the Basel Committee on Banking Supervision (2020), where central banks and other regulatory authorities pointed out that climate-related financial risks should be embedded into existing risk categories rather than being regarded as a new category of risk. Physical, transition and liability risks from climate change are likely to influence banks’ financial risks in several important ways.3 3 The main channels through which climate-related risk factors may translate into different types of financial risks for banks and other financial intermediaries are examined at greater length by Caselli and Figueira (2020).

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The quality of banks’ credit portfolios might be affected by climate change insofar as it impairs households and businesses’ ability to meet their debt obligations. An example is physical risks arising from hurricanes or changes in precipitation patterns, which could decrease borrowers’ production capacity to the detriment of their revenues. As a consequence, banks could experience a higher probability of default and loss given default on their loan books (ESRB, 2020). Climate change might also harm banks’ credit risk by leading to a fall in collateral values and a write-off of assets situated in areas with a significant exposure to climate risks. In addition to their effects on credit risk, physical risks are a potential source of market risk for banks. Acute weather events such as floods or tornadoes could cause substantial and continued damage to national infrastructure (e.g. rail links and electricity transmission lines), possibly slowing down economic growth and increasing sovereign risk. Inasmuch as higher levels of sovereign risk are reflected in the repricing of national or local government’s debt, the value of securities held on banks’ balance sheets might fall (Basel Committee on Banking Supervision, 2021). Operational risk is a third major type of financial risks that could be affected by climate-related physical risks. Severe weather events or adverse changes in climate trends might disrupt banks’ business by causing direct damage to office buildings, energy supply or IT infrastructure, while weakening employees’ productivity and well-being. Greater volatility in the prices of key inputs such as energy, water and insurance might also exert additional impact on banks’ operations and performance (Bank of England, 2018). The transition towards a low-carbon economy could itself create financial risks for the banking sector by leading some assets to become stranded, with negative effects on the value of banks’ loan portfolios. This may be particularly true for corporate clients whose business models are not in line with the targets set in the Paris Agreement, since their business operations and profitability will most certainly be the most impacted by the transition (FSB, 2020). At the same time, climate-related policies such as stricter energy efficiency standards might have a bearing on banks’ credit risk due to changes in property values (Monnin, 2018). In turn, tighter policies aimed at accelerating the shift away from carbon-intensive sources of energy, which might spur a repricing of equities, corporate bonds and derivatives related to energy and commodities, have the potential to give rise to material market risk for banks.

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To the extent that transition policies trigger a changing sentiment towards climate change within society at large, including higher demand for green loans or investments and greater pressure to divert capital away from fossil fuel companies, banks’ operational risks could also be impacted through heightened reputational risks (Bank of England, 2018). Although physical and transition risks tend to represent the two main sources of financial risks for the banking sector, the quality of banks’ credit portfolios might be compromised further by increasing liability risk. Borrowers’ rising costs for climate change-related compensation could weaken their financial situation and ensuing ability to repay their debt, transmitting to banks’ credit risk via an increase in default rates. Liability risks are likely to aggravate operational risks for those banks that must pay fines or penalties related to the consequences of climate change, or that are perceived to be failing to address climate changerelated issues. These and other climate risk drivers could also exacerbate liquidity risk by putting pressure on banks’ liquidity buffers, for example by hindering their ability to raise funds or liquidate assets and by prompting their counterparties to withdraw deposits or draw on credit lines in response to a natural disaster (Basel Committee on Banking Supervision, 2021). Evidence on the Impact of Climate-Related Risk Factors on the Banking Sector Despite the growing understanding of the channels linking climate risks with financial risks for banks, quantitative evidence on the impact of the physical, transition and liability risks of climate change on the banking industry is still limited. However, estimates from forward-looking scenario analyses and other simulations available to date suggest that climate change could have sizeable effects on banks and other financial intermediaries. Among the seminal contributions is Battiston et al. (2017), who perform a climate stress test of the financial system based on data for the top 50 listed European banks by total assets. Their results show that the magnitude of banks’ losses in equity is somewhat limited, since EU banks have little equity holdings relative to their balance sheets (3.8% of total assets and 48% of capital). Therefore, they conclude that none of the largest banks would default solely as a consequence of their exposures to climate-policy-relevant sectors. Nevertheless, banks’ loan exposure

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to climate-policy-relevant sectors as a share of banks’ capital is 281%, suggesting that climate policies have the potential to cause substantial volatility of large portions of banks’ assets relative to their capital. A similar approach is followed in a study by the Dutch central bank in 2018 (Vermeulen et al., 2018), who conducts a stress test on over EUR 2,000 billion of assets held by banks, insurers and pension funds located in the Netherlands.4 Their analysis reveals that Dutch banks’ losses range between 1% (‘technology shock’ scenario) and 3% (‘double shock’ scenario) of total stressed assets, with a considerable portion of banks’ losses arising from a change in the risk-free interest rate (40% of total losses in the ‘double shock’ scenario). In turn, losses on exposures to carbon-intensive industries account for between 20% (‘confidence shock’ scenario) and 50% (‘double shock’ scenario) of total non-interest rate losses, while the (CET1) regulatory capital ratio of banks could drop by approximately 4% in the ‘double shock’ scenario. The implications of climate change for the banking sector are examined further by Lamperti et al. (2019) using a global agent-based integrated assessment model. They establish that climate change will increase the frequency of banking crises by between 26 and 248%. Climate-induced bank bailouts will cause an additional fiscal burden of around 5–15% of GDP per year and increase the debt-to-GDP ratio by a factor of 2. Their estimates indicate that about 20% of these effects will be caused by the deterioration of banks’ balance sheets brought about by climate change. A recent simulation analysis by the European Systemic Risk Board (ESRB, 2020) also shows that banks’ losses for selected exposures to high polluters who experience a credit rating downgrade following shifts in market sentiment could be significant. A credit rating downgrade of one notch for banks’ exposures to the highest-emitting firms within sectors, particularly those in manufacturing and electricity, might lead to credit losses that are up to 10% of total assets.

9.4

Cooperative Banks and Climate Change

Within the context of a changing climate, cooperative banks have a central role to play in helping policymakers mainstream a new way of doing finance that hinges on sustainability-related matters, for example 4 Banks’ assets are made up mainly of loans to large, medium and small non-financial corporates.

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by reorienting investments towards businesses and technologies with lower impact on the environment. Sustainability issues are already at the heart of the cooperative banks’ business model, in that the generation of profits tends to be neither their primary nor their exclusive objective but instead coexists with social goals (e.g. Ayadi et al., 2010; Ferri et al., 2014; Llewellyn, 2017). It follows that cooperative banks are well positioned to provide the finance needed to catalyse the low-carbon transition and accomplish SDG13, the goal of the 2030 Agenda for Sustainable Development with an emphasis on climate change mitigation and adaptation. In turn, climate change is likely to offer a series of opportunities for the cooperating banking sector. Cooperative banks could capitalise on their strengths and act as leading financiers and arrangers of financial solutions for disruptive technologies in the areas of circular economy, renewable energy and climate-smart agriculture, thereby supporting innovation and the wider economy. The societal and policy movement towards a more sustainable and low-carbon world might also provide a platform for cooperative banks to communicate some of the distinctive and sustainability-related features of their business model, while emphasising their key contribution to sustainable and equitable local economic development. Impact of Climate Change on the Cooperative Banking Sector There is virtually no empirical evidence to date on the impact that climaterelated risk drivers might have on the cooperative banking sector. This section considers four main factors that are intrinsic to the cooperative banks’ business model and that are likely to shape the implications of climate change for financial risks faced by cooperative banks. Some of these factors may help mitigate the financial impact of climate risk drivers, while others may present some considerable challenges for cooperative banks as they adapt their business strategies and operations in line with the transition to a greener and more sustainable economy. Collectively, these factors unveil the potential role of cooperative banks as mitigators of the negative consequences of climate risks for a range of financial and economic outcomes, particularly in those financial systems

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characterised by a critical mass of cooperative banks operating alongside other bank types.5 The discussion presented hereinafter suggests that cooperative banks could help alleviate climate-induced market failures, for example by facilitating a more correct pricing of climate-related financial risks and by reducing financial exclusion in the aftermath of climaterelated natural disasters—with positive effects on financial stability and the real economy. As more data on climate-related financial risks becomes available, future empirical research could test these theoretical predictions and advance our understanding of this important field of research and policy. Relationship Banking and Soft Information Small banks, like many cooperative banks, tend to have a comparative advantage over large banks in lending based on soft information that is typically available through personal contact and observation. The literature on relationship banking suggests that small banks specialise in lending to informationally opaque borrowers by collecting soft information about them, which requires a physical presence in the market to reduce the costs necessary to collect this information. In their seminal paper, Petersen and Rajan (1994) show that relationships between a firm and its creditors are valuable and operate more through quantities rather than prices. Drawing on data from a survey of small firms by the US Small Business Administration, they find that the establishment of close ties with a firm’s creditors increases the availability of funds. Similar findings are reached by Berger et al. (2005), who provide evidence consistent with small banks being better able at collecting and acting on soft information than their larger competitors. They establish that large banks lend primarily to firms who are larger or have stronger accounting records (i.e. hard information), while the physical distance between a firm and the bank’s branch increases with the size of the bank. Their results also reveal that firms tend to do business with large banks in more impersonal ways and that bank-firm relationships are generally stronger, that is, more long-lived and exclusive, when the firm borrows from a small bank. More recently, Ergungor (2010) considers data on Ohio’s low- to moderate-income neighbourhoods and finds that 5 A quantification of cooperative banks’ contribution to the diversity of ownership types in the banking systems across 17 Western European countries is provided by Caselli et al. (2020).

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mortgage originations for low-income borrowers whose access to credit is limited by their poor credit histories increase and interest spreads decline when there is a bank branch located in a low- to moderate-income neighbourhood. Importantly, these effects are stronger when the branch is located closer to the neighbourhood. Support exists in the literature for the adverse effects associated with the risk of natural disasters being partially offset by specialist knowledge available to local banks. A case in point is Koetter et al. (2020), who use the 2013 flooding of the river Elbe and its adjacent tributaries in Germany as an exogenous shock and find that local banks (i.e. small savings and cooperative banks) extend corporate recovery lending to firms affected by adverse regional macro shocks. Local banks who are domiciled in unaffected counties increase their lending to firms located in affected counties by 3% (compared with an average pre-flood loan growth rate of 5%). This increase in bank lending does not come at the cost of higher default risk, greater loan impairment rates or rent-skimming from small firms struck by the disaster. Taken together, these findings emphasise the important role played by local banks in mitigating disaster risks and assisting with the recovery of disaster-struck SMEs. By pursuing local relationship-based strategies aimed particularly at SMEs, cooperative banks tend to acquire more private information on their customers compared with their larger, nationally active competitors. It follows that cooperative banks might face lower information asymmetries when assessing borrowers’ ability to repay their debt obligations in the aftermath of an extreme weather event (Koetter et al., 2020). Similarly, the dense branch networks that characterise many cooperative banks imply that they may be able to source information on borrowers’ exposure to transition risks more easily. Cooperative banks’ use of soft information could hence allow for a more precise assessment of borrowers’ creditworthiness, alleviating the effects of climate-related risk drivers on credit risk. In turn, better pricing of climate-related financial risks might mitigate the negative effects of mispricing on systemic risk and financial stability, at least in countries where cooperative banks have considerable market shares. Branch Networks and Decentralised Decision-Making A related feature of the cooperative banks’ business model, which further characterises them as local banks, is that the deposits they collect are typically used to finance the local economy and support the communities

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within the area where they operate (Porretta and Benassi, 2021). For example, among the main regulatory requirements for Italian cooperative credit banks (Banche di Credito Cooperativo) is that a minimum of 95% of their loans must remain in their home territory. For this reason, cooperative banks tend to operate by means of extensive branch networks and decentralised decision-making processes (Cornée et al., 2018), with decisions about loan approval and deposit rate setting partly reflecting elements of proximity and knowledge of local economic conditions. Cooperative banks’ dense branch networks and decentralised decisionmaking processes might have a bearing on their ability to respond to climate-related risks. There is evidence in the literature suggesting that households and businesses affected by physical risks may satisfy their increased demand for liquidity by either drawing on credit lines or withdrawing deposits, with potential implications for banks’ liquidity buffers. A major contribution in this area is put forward by Brown et al. (2021), who examine firms’ use of credit lines when confronted with a liquidity shock arising from abnormally heavy winter snowfall. Their results show that bank borrowers, particularly financially solvent small firms, rely extensively on credit lines to manage these cash flow shocks—on average, every USD 1 reduction in annual cash flow leads to an increase in annual credit line draws by approximately USD 0.5. The results are strongest for firms with less than USD 100 million in total assets and for firms located in close geographical proximity to their lenders. Findings from the literature also show that the impact of physical risks on bank liquidity depends on the extent to which deposit rates are set locally. Using natural disasters in the United States over the period 1999– 2014 as shocks to local economies, Dlugosz et al. (2021) explore whether deposit rate decision-making delegation influences how banks respond to these events. Following a natural disaster, local rate setters (i.e. banks that set rates in the county where the branch is located) appear to offer deposit rates in the affected county that are 2 to 5% higher compared with nonlocal rate setters. Higher deposit rates result in deposit balances in affected counties that are 1 to 2% higher for branches whose rates are set locally relative to other branches. Evidence is also found for mortgage lending to affected areas growing faster at banks with a larger share of branches that set rates locally, which mitigates house price declines in the aftermath of natural disasters.

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Overall, the evidence available to date implies that local delegation of loan approval and deposit rate setting decisions, which is an important feature of many cooperative and other local banks, could alleviate the adverse effects of physical risk drivers on liquidity risk. At the same time, this feature of the cooperative banking model could have positive implications for aggregate credit supply at the local level, suggesting that cooperative banks might buffer the impact of climate-induced liquidity shocks on access to credit. Bank Capital and Lending Supply Climate-related risk drivers such as extreme weather events or abrupt transition policies could create significant losses for the banking sector, with potentially negative effects on banks’ capital buffers. According to Noth and Schüwer (2018), weather-related disasters in the United States over the period 1994–2012 harmed bank stability, as captured by—among others—lower Z-scores, larger shares of non-performing assets and lower equity ratios. Findings by Schüwer et al. (2019) also indicate that independent local banks situated in areas hit by Hurricane Katrina in 2005 attempted to mitigate bankruptcy risks by increasing their risk-based capital ratios after the hurricane. Furthermore, several studies find that natural disasters cause affected banks to restrict their credit supply even in areas not directly hit by the disaster, with these effects being less severe for better capitalised banks. Ivanov et al. (2020) examine the extent to which bank corporate lending networks propagate natural disasters during the period 1992– 2014. Among the consequences of natural disasters is an increase in corporate credit demand in affected regions, which lead banks to curtail their loan supply to unaffected regions by approximately 3% in order to meet this higher credit demand. However, they establish that capital constraints influence the magnitude of these effects, in that banks with lower regulatory capital ratios tend to propagate disasters to unaffected regions to a greater extent. Similar results are obtained by Rehbein and Ongena (2020) by exploiting the widespread flooding that provoked considerable damage and loss of lives in Central Europe in June 2013. They find that firms connected to a significantly disaster-exposed bank with low bank capital curtail their borrowing by 6.6% and their tangible assets by 6.9% relative to similar firms tied to a well-capitalised bank. This reduced borrowing generates negative spillover effects on regional GDP and unemployment.

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Cooperative banks are generally required to add their profits to their reserves rather than distributing them to their owner-depositors. There also tends to be an awareness among cooperative banks’ managers that bank capital has been accumulated over time and cannot be easily replaced in the event of sudden and substantial losses. Therefore, a distinguishing feature of the cooperative banks’ business model is their strong capitalisation ratios, which are some of the highest among European banking institutions (Groeneveld & Llewellyn, 2012). The challenges for cooperative banks to build capital can be regarded as a disciplining factor that makes them less inclined to risk-taking compared with their shareholder-oriented counterparts, who usually face less obstacles in raising external capital. For example, data from a sample of 253 European banks (including 68 financial cooperatives) reveals that large cooperative banks tend to exhibit lower systematic risk, higher capital adequacy ratios and better asset quality compared with other bank types (Venanzi and Matteucci, 2021). The relatively high capitalisation ratios exhibited by cooperative banks suggest that they should be better able to absorb climate-induced losses than their less capitalised competitors. In addition, insofar as they are perceived as less risky on the interbank lending market, cooperative banks might be able to finance new loans in response to external shocks such as a natural disaster without having to reduce loans elsewhere. However, this depends crucially on the size of the shock. Since raising external capital is often difficult for cooperative banks, unexpected and large climate-related shocks could force them to raise funds by cutting back on other lending— particularly if the shock reduces the distance between a bank’s capital ratio and the regulatory threshold materially. Market Shares in Loans to the Agricultural Sector Another important feature of the cooperative banking model that is likely to shape the impact of climate change on cooperative banks’ financial risks is the weight of the agricultural sector within their business. Although differences exist across countries, European cooperative banks tend to have considerable market shares in loans to the agricultural sector. Key examples are Crédit Agricole in France, Rabobank in the Netherlands and Iccrea Group in Italy. The agricultural sector is among those that are most exposed to climate-related risks. Acute physical risk factors such as droughts, hails and

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heavy snowfalls could lower crop yields, with potentially negative consequences for agricultural firms’ income. Extreme weather events might also cause damage to land and property, impairing the value of cooperative banks’ collateral. In a similar vein, chronic physical risk factors associated with structural shifts in climate patterns could cause losses and disrupt trade for agricultural firms. Available studies project a drop in agricultural yields as average global temperatures rise (Hsiang et al., 2017), with the ensuing adverse effects on borrowers’ revenue likely to increase their probability of default. As a result, cooperative banks might be confronted with higher credit risk. In turn, the transition to a low-carbon economy could entail material costs for firms in the agricultural sector, which is among those responsible for substantial GHG emissions—up to 22% of total GHG emissions according to IPCC (2014) data. A recent survey by the UK Prudential Regulation Authority covering 90% of the UK banking sector (Bank of England, 2018) revealed that banks consider companies operating in the agricultural sector—together with those in the energy, transport and property sectors—as the most exposed to transition risks, since a range of transformative changes will be needed in agriculture in order to reduce the use of fossil fuels. Cooperative banks’ exposure to loans for agriculture implies that a significant portion of their assets is at risk of becoming stranded, particularly if the shift towards a low-carbon economy happens late and disorderly. Therefore, transition risks associated with financing agriculture might increase the level of credit risk faced by cooperative banks. At the same time, the transition to a low-carbon economy gives cooperative banks the opportunity to finance novel and more environmentally sustainable agricultural processes, with the potential to consolidate their role as market leaders in a segment that is bound to gain increasing importance in the time to come. Some of the evidence reviewed in the next section suggests that European cooperative banks have already taken several key initiatives aimed at supporting the transition of farming practices towards a more sustainable model. Climate-Related Management Practices of European Cooperative Banks There are increasing expectations from regulatory authorities for cooperative banks and other financial intermediaries to actively identify, quantify and manage their climate-related financial risks, while stepping up their support for a decarbonisation trajectory. Cooperative banks across Europe

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have made a commitment to help accomplish the SDGs and the targets set in the Paris Agreement. They are also signatories to important sustainability- and climate-related frameworks such as the UN Principles for Responsible Banking and the Equator Principles. The remainder of this section discusses five main sets of practices that have been adopted by some of the largest and most representative European cooperative banking groups to address climate-related risks. The perusal of their non-financial statements, climate-related strategy documents and websites confirms that European cooperative banks do not regard climate risk as a new type of financial risk, but instead as a set of factors potentially impacting the standard categories of financial risks. Along with addressing climate-related financial risks, the evidence presented hereinafter reveals that cooperative banks across Europe are getting ready to take advantage of the opportunities that will be brought about by the transition to a low-carbon economy. Adapting Existing Governance Structures The growing significance of climate-related risks has prompted the largest European cooperative banking groups to adjust their existing governance structures. Progress has been made to address climate-related risks at the group strategy level rather than simply as a concern of the Corporate Social Responsibility (CSR) function. Climate change is not conceived of purely as a reputational risk to be examined as part of the Environmental, Social and Governance (ESG) agenda, but as a source of financial risks that must be incorporated into risk management frameworks. This long-term approach to climate risk management is reflected in greater efforts by European cooperative banks to define, identify and measure climate-related financial risks. To this end, existing governance frameworks have been enhanced to accommodate dedicated committees tasked with climate risk management. An example is the Crédit Agricole Group, who recently adopted a group-wide climate strategy that will allow for the gradual reallocation of the Group’s assets, loans and investments in favour of energy transition. The climate strategy is among the risk strategies that are analysed by Crédit Agricole’s Risk Committee, the body responsible for reviewing the overall strategy and risk appetite of the Group, before proposing their adoption to the Board. The setup of a dedicated governance structure, which is expected to help Crédit Agricole reconcile regional economic development with climate change targets, is one of the main

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tools identified by the Group to put its strategy into practice. Among the main changes in governance is the creation of a Societal Engagement Committee, which comprises executives of both the entities and Regional Banks and has the responsibility to ensure the alignment of the climate strategy with the Paris Agreement. An information system aimed at monitoring the Group’s climate-relevant data is also being designed. It will be used by a Scientific Committee, made up of independent academic climate experts, to assist Crédit Agricole with setting its objectives and revising its sectoral policies in the light of scientific knowledge. A similar approach has been taken by Rabobank, where responsibility for climate- and other sustainability-related matters rests with the Managing Board. Although climate risks have not yet been structurally embedded into its risk management framework, a dedicated Rabo SDG Banking Committee and Climate Program was established in 2020 to manage and oversee Rabobank’s ambitions in the areas of climate and sustainability. This Committee is chaired by a member of the Managing Board and involves participation from the Climate Risk Team, a group of experts seeking to integrate climate-related risks into risk management frameworks and models. The Board has ultimate accountability for all climate change-related issues also at Nationwide Building Society. Climate risks are discussed twice a year at the Board Risk Committee and every quarter at the Executive Risk Committee. In addition, Nationwide has striven to strengthen its approach to climate risk management by forming a Climate Change Risk Committee. This body, which is chaired by the Chief Strategy and Sustainability Officer and meets on a monthly basis, is responsible for overseeing progress against Nationwide’s plan to meet the requirements of the UK Prudential Regulation Authority’s Supervisory Statement 3/19 (SS3/19) and more broadly for ensuring appropriate management of climate-related risks. Reducing Direct Carbon Footprint The most immediate action that cooperative banks and other financial intermediaries can take to contribute to climate change mitigation and accomplish SDG13 is to reduce their direct carbon footprint, for example by improving the energy efficiency of their office premises and supporting environmentally friendly ways of transport by their employees. The last few years have seen many European cooperative banks rolling out initiatives aimed at lowering carbon emissions caused by their business

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operations. Available evidence suggests that these initiatives have already made a material impact on cooperative banks’ direct carbon footprint. In 2018, the DZ Bank Group committed to cutting its aggregate CO2 emissions by at least 80% by 2050 as part of its group-wide climate strategy. To date, the Group has already lowered its carbon emissions by more than 50% relative to 2009 levels, largely reflecting the switch to green electricity as well as efficiency improvements in the generation and distribution of heat (DZ Bank, 2021). Alongside these energy efficiency measures, the Group has undertaken to reduce the carbon footprint of its vehicle fleet and business trips, as testified by DZ Bank AG’s recent launch of an electric vehicle pilot project. Consistent with the principles underpinning the Group’s Environmental Policy, Cassa Centrale Banca’s non-financial statement for 2020 pointed to strong results for the Group in terms of direct impacts on the environment. While the share of energy obtained from renewable sources increased from 64% in 2019 to 75% in 2020, CO2 emissions fell by 27% compared with the previous year (Cassa Centrale Banca, 2021)—partly benefiting from the increase in remote working due to the outbreak of the COVID-19 pandemic. Similar trends are observed for the other major cooperative banking group in Italy. Iccrea Group’s total energy consumption over the course of 2020 decreased by 2% relative to 2019 and its GHG emissions were cut by 17% (Iccrea Group, 2021). In turn, the share of energy obtained from renewable sources rose from 64% in 2019 to 72% in 2020. OP Financial Group has set itself the goal to be carbon negative by 2025. Carbon emissions from the Group’s own operations have fallen by approximately 49% since 2011 (OP Financial Group, 2021). This trend has been driven by OP Financial Group’s increased use of renewable electricity and installation of solar power plants in its buildings. For example, OP Real Estate Asset Management installed 14 new solar power plants and implemented various energy-efficient solutions during 2020, bringing emissions from energy consumption down by 51% over two years (OP Real Estate Asset Management, 2021). Similarly, OP’s Vallila offices will shortly be heated by zero-emission recovered heat, that is, 100% recycled and refined waste heat. Emission-free heating is expected to reduce net emissions for the whole OP Financial Group by approximately 4.6% (OP Financial Group, 2020). The year 2020 witnessed a decline in Rabobank’s CO2 emissions from its own operations, primarily as a result of energy efficiency measures

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(Rabobank, 2021a). Rabobank has been striving to cut its carbon emissions per FTE by 10% since 2013 and has committed to curbing its emissions by 20% on 2018 levels by 2023. In 2012, Raiffeisen Switzerland set itself the target of lowering its own CO2 emissions by 30% by 2020, which was reached as planned after the Group saw its emissions fall by 12% in 2020 (Raiffeisen Switzerland, 2021). Raiffeisen Switzerland has committed to achieving net-zero carbon emissions by 2050 at the latest. Nationwide cut its CO2 emissions by 90% since 2010 and achieved carbon neutrality during the course of 2020 (Nationwide, 2021). Moreover, 100% of Nationwide’s electricity has been supplied from renewable sources since 2018. Reducing the Carbon Footprint of Financing and Investment Activities Although the reduction of their direct carbon footprint will produce positive effects on the environment, the most significant impacts of climate change for European cooperative banks are likely to materialise indirectly through their financing and investment activities. Cooperative banks’ exposure to industry sectors currently exacerbating atmospheric carbon dioxide concentration is bound to give rise to considerable financial risks, potentially jeopardising their financial solidity. For this reason, the largest cooperative banking groups across Europe have introduced measures to gradually decarbonise their lending and investment portfolios. A first set of measures aim at increasing the share of low-carbon financing within loan portfolios while supporting customers’ ecological transition. Crédit Agricole’s climate strategy envisages the Group doubling the size of its green loan portfolio to EUR 13 billion by 2022, while consolidating its position in the renewable energy market by financing one in three renewable energy projects in France. Among the schemes that have been launched are a EUR 625 million package to help farmers finance agricultural transition projects and a EUR 160 million proprietary fund to facilitate regional transition in energy, agriculture and food processing. Similar initiatives have been adopted by the Groupe BPCE, who was allocating EUR 11.3 billion to the financing of the energy transition in France at the end of 2020 (Groupe BPCE, 2021). The Group is a major player in the zero interest rate eco-loan, which helps borrowers finance energy renovation work on housing. It has designed specific

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products—such as the AUTOVair solutions by the Banque Populaire banks and the Ecureuil Auto DD products by the Caisses d’Epargne— to encourage green mobility on the part of their clients. The Group is also supporting the ecological transition of its business customers, for example through a loan scheme that allows businesses to finance projects directed at improving the energy efficiency of buildings and machinery. In March 2021, Banque Populaire started offering a promotional rate on Agrilismat, an integrated loan scheme for agricultural machinery, with the aim of developing the financing of eco-friendly agricultural equipment. This initiative is part of Banque Populaire’s goal of awarding new green loans worth a total of EUR 1 billion by 2024. With its involvement in 55 projects for an overall exposure of EUR 2.4 billion, Rabobank is one of the top ten global lenders in renewable energy and the market leader in Europe and North America (Rabobank, 2021b). In 2020, Rabobank partnered with Windpark Zeewolde B.V. and Vestas to build the largest onshore wind farm in the Netherlands and the largest community-owned wind farm in Europe. Rabobank will provide both the junior and senior debt financing required for the project, for a total of approximately EUR 500 million. European cooperative banks’ activities in the field of renewable energies have also been supported through the substantial amount of funds raised with green bonds. For example, DZ Bank placed its second green bond in December 2020, giving investors the opportunity to contribute to the Group’s projects in the area of onshore wind power generation in the United States and Canada. DZ Bank expects these projects to play a major role in helping curb the region’s current level of GHG emissions. In turn, it is estimated that renewable energy related assets included in OP Corporate Bank’s Green Bond Register helped avoid 199,600 tonnes of carbon dioxide equivalent (tCO2e) as at the end of 2020 (OP Corporate Bank, 2021). To further accelerate the decarbonisation of their lending portfolios, European cooperative banks have introduced tighter exclusion policies based on the borrower’s sector. Credit applications by companies engaged in the extraction, refining or combustion of coal, the most polluting fossil fuel with the greatest adverse effects on climate (as discussed in Box 9.1), are generally rejected. A number of European cooperative banks have put together a timetable for their complete withdrawal from thermal coal by 2030, including Crédit Mutuel Alliance Fédérale and Crédit Mutuel Arkéa—the two entities of the Crédit Mutuel Group with exposure to

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the coal industry—and Natixis, the investment banking subsidiary of the Groupe BPCE. Similar exclusion measures have also been applied when screening investments. At the same time, there is evidence that ESG factors have started to be incorporated into evaluations of borrowers’ creditworthiness. The Groupe BPCE has devised a methodology to integrate ESG criteria into risk analysis up to the granting of credit. By the end of 2020, six of the Group’s entities had carried out interviews with their customers on ESG criteria with the purpose of enriching their customer files. In a similar vein, Rabobank uses Client Photo as a criterion informing the credit application process. This scoring system allows relationship managers to assign a sustainability rating to each client with an exposure greater than EUR 1 million. Over the most recent years, growing attention has been devoted by European cooperative banks to the energy efficiency of their mortgage portfolios. Among Nationwide’s climate change ambitions is for at least 50% of homes in its mortgage portfolio to have an Energy Performance Certificate (EPC) rating of C or above by 2030, against a 2020 figure of 36% (Nationwide, 2021). In turn, Rabobank aims to have an average energy label of A within its mortgage portfolio by 2030. The energy label ratings of the Group’s mortgage portfolio improved during 2020, reaching its target of 25.05% A-labels (Rabobank, 2021a). Specific targets have also been put in place to reduce the carbon intensity of investment portfolios. An example is provided by Rabobank, who aims for its investment funds to have a 50% lower CO2 intensity compared with worldwide indices by 2024. Similarly, a review of investment risks and opportunities arising from climate change recently released by OP Asset Management showed that, in the last two years, OP’s funds have seen their average carbon intensity drop by 6% (OP Asset Management, 2020). Furthermore, Crédit Agricole’s climate strategy sets out to promote sustainable investment by applying ESG criteria to 100% of the open funds actively managed by Amundi—the leading European asset management firm operating as a subsidiary of Crédit Agricole. The Group’s strategy aims to double green investment portfolios to EUR 12 billion for institutional clients and triple those for retail clients to EUR 10 billion.

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Developing Analytical Tools for Assessing Physical Risk Exposure The results of a survey of central banks and other regulatory authorities by the Basel Committee on Banking Supervision (2020) unveiled operational challenges in assessing climate-related financial risks, including lack of granular climate-related data, inadequate methodologies and difficulties in mapping transmission channels. Progress with respect to climate risk measurement is hampered by a paucity of data that banks can use to assess their exposure to physical risks arising from climate change. The lack of granular data on the geographical location of banks’ exposures to the non-financial sector is often cited as one of the most critical measurement gaps in relation to climate change (e.g. Aubert et al., 2019). To address some of these gaps, the largest European cooperative banking groups have been developing analytical tools to quantify their physical risk exposure. Crédit Mutuel has started to measure the average vulnerability of its loan portfolio to physical risk by including an ESG component in the Group’s country limits—which set a ceiling on the levels of exposure to counterparties that the Group will accept for each country. This ESG component refers to the Notre Dame Global Adaptation Index (NDGAIN), a widely used measure of the climate adaptation performance of each country from 1995 to the present. It summarises a country’s vulnerability to climate change and other global challenges, paired with its readiness to address these challenges. Crédit Mutuel’s calculations of country limits are dynamic and are revised at least annually to reflect the updates to the ND-GAIN Index. Another example is Rabobank, who has recently constructed a rich dataset with detailed information on the physical risks of its Dutch mortgage portfolio. This dataset, which combines data from several sources, provides a forward-looking estimation of the climate-induced risks of damage to the foundations of residential real estate in the Netherlands up to 2050. After identifying a gap in property risk data, which hindered its ability to assess environmental risks to the property prior to issuing the mortgage offer, Nationwide partnered with Airbus and JBA Risk Management— a global leading consultancy in flood risk management—to launch the Property Risk Hub. This tool enables Nationwide to make better decisions about what constitutes suitable security for mortgage lending, along with establishing the implications of changing climate and environmental factors over a typical mortgage term of 25–40 years. For example, the

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Property Risk Hub helps to evaluate the current flood risk of properties used as security for lending and to model its financial impact on the mortgage portfolio under alternative long-term climate scenarios. A similar tool is being introduced by the Scottish Building Society, who recently announced a ground-breaking project to examine how its mortgage portfolio could be affected by climate change. The project, which runs in partnership with climate change and natural hazard analytics consultancy Ambiental, aims to estimate the potential impact of flooding and coastal erosion events on its GBP 400 million mortgage portfolio. Different scenarios will be examined over a 50-year period drawing on Ambiental’s flood modelling algorithms and predictive data analytics. Estimating Climate-Related Financial Risks with Scenario Analysis A report published by Mazars and the Official Monetary and Financial Institutions Forum (OMFIF) in May 2020 (Kamdem-Fotso et al., 2020) explored how 30 among the largest banks across the world consider climate-related financial risks. It found that nearly all banks acknowledge the materiality of both physical and transition risks, with their focus being on evaluating the impact of transition risks on credit risk. Banks pointed to scenario analysis as the most challenging area of climate-related risk management. These findings are corroborated by an analysis conducted by PwC (2020), who surveyed 17 UK banks and building societies to establish their progress vis-à-vis regulatory expectations on climate-related risk management. Only half of the banks surveyed have been able to perform scenario analysis, while many identified stress testing as one of the areas where greater clarity from regulators is needed. In addition, over 80% of respondents have stated that their climate risk programmes have been delayed by the COVID-19 pandemic, with scenario analysis being the most disrupted workstream for three out of four banks. Consistent with these findings, climate scenario analysis emerges as an area that is still underdeveloped among European cooperative banks. However, some noticeable exceptions are represented by the largest financial cooperatives in France and the UK. The Autorité de Contrôle Prudentiel et de Résolution (ACPR), France’s supervisory authority for the banking and insurance sectors, recently conducted its first climate stress test exercise covering 85% of the total balance sheet of banks and 75% of the total balance sheet of insurers. The exercise, which run from July 2020 to April 2021, assessed the potential

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effects of physical and transition risks on banks and insurers under a range of scenarios broken down by economic sector over a 30-year horizon. Among the institutions who participated in the exercise are leading French cooperative banks Groupe BPCE, Crédit Agricole and Crédit Mutuel. Although the projected impacts of climate-related risks appear to be moderate across the modelled scenarios (Clerc et al., 2021), the stress test allowed the three cooperative banking groups to identify the industries that are most vulnerable to changes in climate and reflect on possible mitigating actions. It also spurred internal discussion and crossdisciplinary collaboration over the main challenges associated with climate risk measurement, while equipping the three cooperative banking groups with internal skills in climate risk modelling. As part of its 2021 Climate Biennial Exploratory Scenario (CBES), the Bank of England will explore the resilience of the largest UK banks and insurers to the physical and transition risks arising from climate change. Participants will be required to measure the impact of alternative climate scenarios on their end-2020 balance sheets, with the focus for banks and building societies being on the credit risk associated with the banking book. Since expertise in modelling climate-related risks is currently limited, the Bank of England views the CBES as a learning exercise that will enhance both its capabilities and those of participants. Ahead of the CBES, Nationwide conducted a climate change scenario analysis for physical and transition risks. The results revealed that physical risks should have a moderate impact on its mortgage portfolio over the next 30 years (Nationwide, 2021). For example, only 95,000 properties securing prime and buy-to-let mortgages will suffer non-negligible flooding, out of a total portfolio of approximately 1.5 million properties. In turn, the effects of transition risks vary depending on the policy scenario. In an early policy action scenario, energy costs will go up for all properties over the 30-year period, with the most energy-efficient homes still witnessing a 50% increase. Energy costs will escalate rapidly in a late policy action scenario, leading to an increase in annual fuel and climate tax charges by up to four times their existing levels for EPC G rated homes by 2050. Learnings from its climate change scenario analysis will be informing Nationwide’s strategy and lending policies.

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Concluding Remarks

The overview of climate-related management practices presented in the previous section reveals that European cooperative banks have made progress in addressing climate-related financial risks. Climate change is increasingly regarded as a strategic issue, which represents at the same time a source of risks and opportunities for their business. However, cooperative banks have to step up their efforts if they are to play a central role in supporting the transition towards a low-carbon economy. There is evidence that disclosure of climate-related financial risks in accordance with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD)—a set of recommendations published in 2017 to help firms across sectors and jurisdictions disclose climate-related financial information—is only at its seminal stages. In addition, physical, transition and liability risk drivers are not yet fully incorporated into existing risk management frameworks, largely because of scarce and incomplete information on climate risk exposures and the challenges of translating climate risks into standard financial risk categories. The profound impacts of climate change are materialising at a time when cooperative banks and other financial institutions across the world are still confronted with the unprecedented challenges brought about by the COVID-19 pandemic, which has once again highlighted the interconnectedness and fragility of global financial systems. Although European cooperative banks are well placed to help overcome these twin challenges, available data point to an overall decline in the number of existing cooperative banks due to mergers, consolidations and demutualisations (ICBA, 2020). In turn, the ongoing shift towards digital banking has led to a gradual decline in the number of cooperative banks’ branches across Europe (EACB, 2021). These negative trends could hinder the ability of the cooperative banking sector to mitigate some of the adverse effects of climate change, including mispricing of climate-related financial risks and financial exclusion, some of which have been exacerbated by the outbreak of the COVID-19 pandemic. Climate change mitigation is a collective endeavour that requires banking supervisors and other regulatory authorities to create the conditions for cooperative banks and other financial intermediaries to act as catalysts for the low-carbon transition. The evidence reviewed in this chapter suggests that a critical mass of cooperative banks operating alongside other bank types is critical to mobilising the finance required for

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the ecological transition, while potentially alleviating some of the most significant climate-induced market failures. For these reasons, greater competition between different bank types, each with meaningful market shares, should be encouraged. Attention should also be devoted to ensuring that the business models of smaller and less systemically significant institutions like many European cooperative banks are not impaired by disproportionate regulatory barriers. With global emissions and average global temperatures still rising, the list of questions that could be explored by future research is virtually endless. Besides testing empirically the theoretical predictions advanced in this chapter, future research might provide a quantification of the physical, transition and liability impacts of climate change on the cooperative banking sector. This analysis could include a comparison with other bank types across countries to gauge the relative scale of climate-related financial risks for cooperative banks. Another fruitful research avenue might be to study how the impact of climate-related shocks, such as those caused by an extreme weather event or a policy shift, on systemic risk and financial stability varies depending on the relative size of the cooperative banking sector. The answers to these and other related questions will cast light on cooperative banks’ contribution to tackling some of the most pressing challenges associated with climate change.

References Aubert, M., Bach, W., Diot, S., & Vernet, L. (2019). French banking groups facing climate change-related risks. Banque de France Analyses et Synthèses, 101. Ayadi, R., Llewellyn, D. T., Schmidt, R. H., Arbak, E., & De Groen, W. P. (2010). Investigating diversity in the banking sector in Europe: Key developments, performance and role of cooperative banks. Centre for European Policy Studies. Bank of England. (2018). Transition in thinking: The impact of climate change on the UK banking sector. Prudential Regulation Authority. Basel Committee on Banking Supervision. (2020). Climate-related financial risks: A survey on current initiatives. Bank for International Settlements. Basel Committee on Banking Supervision. (2021). Climate-related risk drivers and their transmission channels. Bank for International Settlements. Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., & Visentin, G. (2017). A climate stress-test of the financial system. Nature Climate Change, 7 (4), 283–290.

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Berger, A. N., Miller, N. H., Petersen, M. A., Rajan, R. G., & Stein, J. C. (2005). Does function follow organizational form? Evidence from the lending practices of large and small banks. Journal of Financial Economics, 76(2), 237–269. Bevere, L., & Weigel, A. (2021). Natural catastrophes in 2020: Secondary perils in the spotlight, but don’t forget primary-peril risks. Swiss Re Institute. Brown, J. R., Gustafson, M. T., & Ivanov, I. T. (2021). Weathering cash flow shocks. Journal of Finance, 76(4), 1731–1772. Carney, M. (2015). Breaking the Tragedy of the Horizon—Climate change and financial stability. 29 September 2015, Lloyd’s. Caselli, G., & Figueira, C. (2020). The impact of climate risks on the insurance and banking industries. In M. Migliorelli & P. Dessertine (Eds.), Sustainability and financial risks: The impact of climate change, environmental degradation and social inequality on financial markets (pp. 31–62). Palgrave Macmillan. Caselli, G., Figueira, C., & Nellis, J. G. (2020). Ownership diversity and the risk-taking channel of monetary policy transmission. Cambridge Journal of Economics, 44(6), 1329–1364. Cassa Centrale Banca. (2021). Consolidated non-financial statement 2020. Cassa Centrale Banca. Clerc, L., Bontemps-Chanel, A.-L., Diot, S., Overton, G., Soares de Albergaria, S., Vernet, L., & Louardi, M. (2021). A first assessment of financial risks stemming from climate change: The main results of the 2020 climate pilot exercise. Banque de France Analyses et Synthèses, 122. Cornée, S., Fattobene, L., & Migliorelli, M. (2018). An overview of cooperative banking in Europe. In M. Migliorelli (Ed.), New cooperative banking in Europe: Strategies for adapting the business model post crisis (pp. 1–27). Palgrave Macmillan. Dlugosz, J., Gam, Y. K., Gopalan, R., & Skrastins, J. (2021). Decision-making delegation in banks. Unpublished manuscript. DZ Bank (2021). 2020 Sustainability report. DZ Bank. Ergungor, O. E. (2010). Bank branch presence and access to credit in lowto moderate-income neighborhoods. Journal of Money, Credit and Banking, 42(7), 1321–1349. European Association of Cooperative Banks (EACB). (2021). Key statistics— Financial indicators. European Systemic Risk Board (ESRB). (2020). Positively green: Measuring climate change risks to financial stability. European Central Bank. Ferri, G., Kalmi, P., & Kerola, E. (2014). Does bank ownership affect lending behavior? Evidence from the euro area. Journal of Banking and Finance, 48, 194–209. Financial Stability Board (FSB). (2020). The implications of climate change for financial stability.

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Groeneveld, H., & Llewellyn, D. T. (2012). Corporate governance in cooperative banks. In J. Mooij & W. W. Boonstra (Eds.), Raiffeisen’s footprint: The cooperative way of banking (pp. 19–35). VU University Press. Groupe BPCE (2021). 2020 Universal registration document and annual financial report. Groupe BPCE. Hsiang, S., Kopp, R., Jina, A., Rising, J., Delgado, M., Mohan, S., Rasmussen, D. J., Muir-Wood, R., Wilson, P., Oppenheimer, M., Larsen, K., & Houser, T. (2017). Estimating economic damage from climate change in the United States. Science, 356(6345), 1362–1369. Iccrea Group. (2021). Dichiarazione Consolidata di Carattere Non Finanziario 2020. Intergovernmental Panel on Climate Change (IPCC). (2014). Climate change 2014: Synthesis report. IPCC. International Cooperative Banking Association (ICBA). (2020). Regulation and sustainability of cooperative banks: A cross country study. International Cooperative Alliance. Ivanov, I. T., Macchiavelli, M., & Santos, J. (2020). Bank lending networks and the propagation of natural disasters. Unpublished manuscript. Kamdem-Fotso, L., Ngouadje, A., & Ermeneux, M. (2020). How banks are responding to the financial risks of climate change. Mazars. Koetter, M., Noth, F., & Rehbein, O. (2020). Borrowers under water! Rare disasters, regional banks, and recovery lending. Journal of Financial Intermediation, 43, 100811. Lamperti, F., Bosetti, V., Roventini, A., & Tavoni, M. (2019). The public costs of climate-induced financial instability. Nature Climate Change, 9(11), 829–835. Lindsey, R. (2020). Climate change: Atmospheric carbon dioxide. Lindsey, R. (2021). Climate change: Global sea level. Lindsey, R., & Dahlman, L. (2021). Climate change: Global temperature. Lindsey, R., & Scott, M. (2021). Climate change: Arctic sea ice. Llewellyn, D. T. (2017). Conversion from stakeholder value to shareholder value banks: The case of UK building societies. In J. Michie, J. R. Blasi, & C. Borzaga (Eds.), The Oxford handbook of mutual, co-operative, and co-owned business (pp. 550–569). Oxford University Press. Migliorelli. (2020). The sustainability-financial risk nexus. In M. Migliorelli & P. Dessertine (Eds.), Sustainability and financial risks: The impact of climate change, environmental degradation and social inequality on financial markets (pp. 1–29). Palgrave Macmillan. Migliorelli, M., & Marini, V. (2020). Sustainability-related risks, risk management frameworks and non-financial disclosure. In M. Migliorelli & P. Dessertine (Eds.), Sustainability and financial risks: The impact of climate change, environmental degradation and social inequality on financial markets (pp. 93–118). Palgrave Macmillan.

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Monnin, P. (2018). Integrating climate risks into credit risk assessment: Current methodologies and the case of central banks corporate bond purchases. CEP Discussion Notes, 4. Nationwide. (2021). Annual report and accounts 2021. Nationwide. Noth, F., & Schüwer, U. (2018). Natural disaster and bank stability: Evidence from the U.S. financial system. SAFE Working Paper Series, 167. OP Asset Management (2020). OP Asset Management issues new review of climate-related risks and opportunities of investments in line with TCFD recommendations. 17 June 2020. OP Corporate Bank. (2021). Green bond report. OP Financial Group. (2020). OP transitioning to emissions-free heating. 10 June 2020. OP Financial Group. (2021). OP financial group’s year 2020. OP Financial Group. OP Real Estate Asset Management. (2021). OP Real Estate Asset Management published their Sustainability Report 2020—The roadmap to carbon neutrality shows concrete measures. 3 March 2021. Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending relationships: Evidence from small business data. Journal of Finance, 49(1), 3–37. Porretta, P., & Benassi, A. (2021). Sustainable vs. not sustainable cooperative banks business model: the case of GBCI and the authority view. Risk Governance and Control: Financial Markets and Institutions, 11(1), 33–48. PwC. (2020). Rising to the challenge: Climate risk in the UK banking sector. Rabobank. (2021a). Annual report 2020. Rabobank. Rabobank. (2021b). Our impact in 2020. Rabobank. Raiffeisen Switzerland. (2021). Rapporto di Gestione 2020. Raiffeisen Switzerland. Ramani, V. (2020). Addressing climate as a systemic risk: A call to action for U.S. financial regulators. Ceres. Rehbein, O., & Ongena, S. (2020). Flooded through the back door: The role of bank capital in local shock spillovers. Swiss Finance Institute Research Paper Series, 20-07. Schüwer, U., Lambert, C., & Noth, F. (2019). How do banks react to catastrophic events? Evidence from Hurricane Katrina. Review of Finance, 23(1), 75–116. Venanzi, D., & Matteucci, P. (2021). The largest cooperative banks in Continental Europe: A sustainable model of banking. International Journal of Sustainable Development and World Ecology, 1–14. Vermeulen, R., Schets, E., Lohuis, M., Kölbl, B., Jansen, D.-J., & Heeringa, W. (2018). An energy transition risk stress test for the financial system of the Netherlands. DNB Occasional Studies, 7 .

CHAPTER 10

Profitability and Digitalisation: The Effects on Cooperative Banks and Their Governance Eric Meyer

10.1

Introduction

Cooperative banks currently face several challenges. First, regulatory changes after the financial crises have put additional burden on banks. Cooperative banks are especially exposed to these new regulations, because of the highly regressive effects of these regulations. The fixed costs of installing the required bureaucracy for reporting to the regulators is a special challenge for smaller banks having lower numbers of total assets and correspondingly lower operating income (Schenkel, 2016). Second, the ongoing low interest rate environment has squeezed bank profits. Again this is a special challenge for cooperative banks, since their business is anchored in the real economy. Thus, their main income is derived from the net interest income handing out loans to their customers (Meyer, 2018). Third, digitalisation is challenging the operations of banks

E. Meyer (B) Institute for Co-Operative Studies, University of Muenster, Muenster, Germany e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_10

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in general including cooperative banks. In contrast to the other two challenges there are different ways, how digitalisation might influence the cooperative banks profitability. On the one hand, increasing competition from new competitors like Fintechs or large providers of information technology like Google will decrease the income of cooperative banks. On the other hand, digitalisation may reduce the costs of cooperative banks or the application of new digital technologies for providing new solutions may increase income and therefore their profitability could increase. This contribution will explain how digitalisation could influence cooperative banks profitability. Moreover, it will especially contribute to the profitability impact on cooperative banks and which mechanisms apply in shifting profits between the local banks and central banks of the group, which results in a new balance of the banks internal structure. Section 2 presents the development of profits and the structure of profits during the past decade. Where appropriate numbers are available it analyses the internal structure of profits within the groups, which depend on the inner organisation of the groups. Section 3 explains how cooperative banking groups are organised and how their governance can be classified. This will be the basis for the analysis of the effects, that digitalisation will have on cooperative banks and cooperative banking groups in Sec. 4. It will be shown, that digitalisation not only influences the overall profits of cooperative banking groups, but that the structure of income and expenses will be affected by the new digital technologies.

10.2

Profitability of Cooperative Banks

For the analysis cooperative banking groups from Germany, France, the Netherlands, Austria and Finland have been selected. These groups exhibit a rather wide range of different organisational and institutional structures. Rabobank from the Netherlands is a highly centralised organisation after merging all the local banks on the central bank in 2016. In a similar way OP Financial Group from Finland centralised many activities, but still has independent local banks operating within the group. In Austria Volksbanken Group reorganised its business after its crisis following the financial market crisis. Now one of the local banks (Volksbank Wien) operates as the group’s central bank but still maintains its regional retailing activities in the Vienna area. In contrast the German Cooperative Banking Group retains a rather decentralised structure with about 800 local banks that operate independently, but cooperats in the

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group. Similarly, Austria’s Raiffeisen Banking still operates numerous independent small local Raiffeisen banks. But in contrast to the German model they still have a three-tier system (local banks, Raiffeisenlandesbanken, central bank), which makes the accounting of the individual profitability more complicated. French groups Credit Agricole, Credit Mutuel and BPCE have a consolidated system with larger individual banks on a regional level. In Groupe Credit Agricole and in Groupe Credit Mutuel there are numerous (very) small banks which then own the regional banks. In BPCE the members directly own the regional Banques populaires and Caisses d’Epargne. These significant differences in organising the group influence the profitability of the individual (local) banks (or units) and the organisations on the central level. Nevertheless, the overall performance on a group level should be comparable. It will depend on the types of business that the cooperative banking group operates and by the efficiency of the internal organisation of each group. When comparing the profitability of cooperative banks and cooperative banking groups it has to be taken into account, that—in contrast to joint stock companies—profitability is not an end in itself. Cooperative banks primarily serve their members (and therefore their members’ profitability), which is limiting exceeding individual banks’ profits. But members will also be willing to leave money from retained profits within in the bank, because they are relying on a long-term relationship with their banks. Moreover, cooperative banks are regionally anchored, i.e. part of their business is promoting the regional economic development which then again fosters and promotes their members’ economic well-being and profitability. In consequence, for each group and for each bank profitability will depend on the kind of membership policy and on the members attitudes limiting the comparisons that could be made between cooperative banking groups and between cooperative banks and other types of banks. In the past decade, the cooperative banking groups profitability has been volatile but there is a tendency for slowly decreasing profits over time (see Fig. 10.1). Austria’s Volksbanken Group exhibits strong fluctuations which are mainly due to the group’s reorganisation after its crisis. Austria’s Raiffeisen Banking group (on a high level) and Rabobank (on a lower level) have rather stable profits, while all other groups show a slowly decreasing profitability. This decrease is mainly due to the cooperative banking groups shrinking total operating income (see Fig. 10.2). Both of the Austrian groups still operate on a rather high level of operating income which is

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Fig. 10.1 Profitability of cooperative banking groups (Pre-impairment operating profits/total assets) (Data source Author’s elaboration on data FitchConnect)

Fig. 10.2 Cooperative banking groups, total operating income/total assets. Author’s elaboration on data FitchConnect

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partly offset by the two groups’ higher levels of expenses. All other groups follow a downward trend in their operating income, which has accelerated since 2017. The downward development is driven by the groups’ net interest income (see Fig. 10.3). Due to their business model in financing the real economy by providing loans and credits to the local economy, most cooperative banking groups have a rather large share of customer loans in their assets. Thus, interest income and interest developments significantly influence their income and their profitability. The ongoing low interest rate environment has successively eroded parts of the banks interest income. At the beginning of the low interest rate period, the banks were able to benefit from swiftly adapting interests on deposits and liabilities for refinancing the loans, which increased the net interest income. The longer low interest rates persisted the more (high interest bearing) loans came due and had to be substituted by lower rate loans. This continuously decreased the net interest income of banks heavily relying on their business of financing the real economy. The net interest income splits cooperative banking groups into two sub-clusters. On the one hand, there are groups with high net interestcome (Raiffeisen Banking Group, Volksbanken Group, German Cooperative Banking Group and Rabobank, on the other hand, there are the three French groups (Credit Agricole, Credit Mutuel and BPCE) and

Fig. 10.3 Cooperative banking groups, net interest income/total assets (Data source FitchConnect)

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the Finnish OP Financial Group with a rather low net interest income. Unsurprisingly, this split coincides with the banking groups’ reliance on customer loans. The Austrian groups’ share of customer loans exceeds seventy percent, and Rabobank has a share of about 66%, while the German cooperative banking group has a share of slightly above sixty percent. The three French groups have shares of customer loans between 52 and 54% and OP Financial Group operates at 58 per cent. Rabobank shows a remarkable development by moving from the low net interest income group to the high-income group by keeping its net interest income rather stable and not losing interest income as its previous peers from the low net interest income group did. For some groups more detailed data is available showing how the group structures may influence the profitability and the distribution of the profit components. Table 10.1 presents some structural data on four selected groups by showing the shares that the local and/or regional banks have in the totals of the cooperative banking group. For Austria’s Raiffeisen group, which operates a full-fledged three-tier system, data for the local Raiffeisen banks and the regional Raiffeisenlandesbanken are presented. For Germany the data shows, that the share of local banks in total assets and in customer loans as roughly the same, but that the local banks contribute more to the net interest income and to the total operating income. For the French regional banks of Credit Agricole, the share in the group’s customer loans exceeds the share in total assets indicating that the Credit Agricole central bank is operating in other businesses, too. Nevertheless, the share in the interest income is significantly below the share of the customer loans. For BPCE it is a reversed situation. The Table 10.1 Share of local or regional banks in the groups’ totals in 2020. Author’s elaboration on data FitchConnect

Total assets Customer loans Net interest income Total operating income

German cooperative banks (%)

Raiffeisen banks/RLB (Austria) (%)

Credit Agricole banks (%)

BPCE banks (%)

63.2 65.2 74.2

34.3/47.4 31.9/ 30.5 32.9/ 22.4

34.6 59.1 38.1

56.0 73.1 85,2

73.6

30.3/ 30.3

40.3

59,2

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share of the customer loans also exceeds the share of total assets that the regional banks have in the group’s totals indicating the higher relevance of customer loans for the regional banks. The regional banks contribute even more than their share in customer loans to the group’s net interest income. In a similar way, we could compare a selection of performance indicators on the group level and for the average of all local or regional banks. For the two French banking groups and for the German cooperative banks the regional or local banks have a higher net interest income and a higher total operating income. For the German banks and Credit Agricole, this also applies to the net fees and commission income. For the Austrian Raiffeisen banks, it is just the other way around. Here the local banks indicators are smaller than the numbers that are generated on the group level (Table 10.2). The numbers above show the high diversity of European cooperative banking groups and of the structure of their incomes. Thus, the internal organisation and the governance significantly influence the performance of the individual banks. Comparing local banks across borders is therefore highly challenging, since the numbers not only reflect the banks’ organisation and efficiency but also decisions within the groups how to share and assign the banking activities between the local and the group level. Table 10.2 Comparison income variables/total assets for cooperative banks and cooperative banking groups in 2020. Author’s elaboration on data FitchConnect

Net interest income Net fees & commission Total operating income

German cooperative banking group

Raiffeisen (Austria)

Credit Agricole

BPCE banks

banks (%)

group (%)

banks (%)

group (%)

banks (%)

group (%)

banks (%)

group (%)

1.46

1.25

1.53

1.59

0.98

0.90

0.98

0.64

0.57

0.50

0.67

0.75

0.72

0.43

0.64

0.64

2.16

1.86

2.29

2.59

1.76

1.52

1.65

1,56

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10.3

Profitability and Group Governance

The previous chapter has shown the differences in the profitability numbers of cooperative banking groups, which in part may be attributed to the internal organisation of groups. Due to their history most cooperative banking groups operate a multi-tier system. Very often the current group systems originated from a three-tier system starting from the local level, where members established their local cooperative banks. Liquidity requirements then led to the foundation of regional banks within the system, which then founded a joint national central bank. The Austrian Raiffeisen Banking Group still operates on all three levels. The French cooperative banks formally still have three levels. In Germany the regional level disappeared over time by merging the regional banks with each other and with the central bank. Similarly, Finlands OP Financial Group and Austria’s Volksbanken Group operate on two levels, too. After merging the central bank with its local bank, the Dutch Rabobank now operates a unified one-tier system (For a general classification see Lamarque [2018, 146]). As for every cooperation the collaboration within a cooperative banking group implies giving up economic and entrepreneurial leeways in order to achieve the benefits of cooperation especially by generating economies of scale on a central level. Therefore, cooperative banks have to decide on which activities are carried out on a local level and which activities are forwarded to a central level or carried out jointly. By interpreting entrepreneurial leeway as the opportunity to make decisions Lamarque (2018, 148) identifies some areas in which decisions have to be made and for which the cooperative banks have to allocate the decision. Since we want to explain the relationship between organisational governance and the profitability of groups and group members, we focus on the activities of banks along the value chain. Of course the banks’ activities could be described in much more detail, but the basic pathways how governance structures influence the profitability of the cooperative banks will be sufficient for our purposes (Fig. 10.4). At least five areas will have relevant influences on the banks profitability: Production and product development: Most of the cooperative banks are free to determine their basic deposit and credit products, and therefore, they will collect money and hand it out for credit in order

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Fig. 10.4 Banks’ value chain. Author’s elaboration

to carry out their basic banking operations. Holding deposits and loans determines parts of their profitability by generating their net interest income. But even for these rather simple products different relations to the group are conceivable and implemented. Smaller banks are not able to provide larger loans to larger customer because of the accumulation of risks in their balance sheet. Therefore, such customers are forwarded to group institutions like the central banks to provide these loans. Consequently, the income of the local bank is shrinking while the income of the group institutions is increasing. This effect can be even more complicated, if there are agreements how the forwarding of customers is rewarded for the local banks. Then group rules co-determine parts of the distribution of profits within the group. In a similar relationship group institutions offer consumer credits that can be offered by local banks. Here local banks swap parts of their net interest income for fees that they receive for selling the loan from the group institution to the customer. In addition the credit is no longer part of the local bank’s balance sheet but is shifted to the group institution. The income is therefore determined by the rules on the fees for selling the consumer credit. For other products like mutual funds or insurances economies of scale clearly apply and therefore they are either produced by group institutions or local banks buy such products from other partners in the market. The implementation of some other products like online banking has been heavily discussed in cooperative banking groups.

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There are different implementation options that again will decide on how assets and profits are distributed with the group. Online banking could be organised in a separate unit on the group level that competes with local bank activities. This will shift profits from the local banks to the group level online bank. As a subtype the profits from this (central) unit could be redistributed to the local banks according to the customer’s residence which mitigates the redistribution. Another organisational option is the joint operation of the online banking backbone, but the access to the online banking will be provided by the cooperative bank. Thus, the customers stay with the local bank and no assets or liabilities will be redistributed and they will be able to derive profits from the customers, but have to pay for the additional IT infrastructure provided by the central institution. Summing up, for the use of group products again the fees that local banks pay and the group institutions pay will determine the distribution of income and expenses between the different levels of the bank. Pricing: As independent entities local banks may select the prices for their products on their own, which then influences their profits. But again there could be group rules that regulate the pricing behaviour. Such pricing rules apply in the banks’ relationships to their customers and to the pricing of products and services within the group. Especially the pricing within the group (interest rates on deposits and credits at the central bank) and the fees and commissions that central level institutions pay for selling their products but also the fees that local banks pay for using services provided by group institutions influence the profits of central and local levels within cooperative banking groups. Pricing of loans and deposits also correlates with the risk appetite of local banks, for which there are limitations within the groups. Risk taking and institution protection: Although banks may have some leeway in setting prices and conditions, they are also part of a group that has a jointly implemented institute protection scheme. Thus there exists some risk sharing between the group members and the banks’ activities are monitored. Excessive risk taking will result in additional payments to the protection scheme and could be sanctioned by the group depending on the group’s rules. Therefore, there are limitations in creating the own prices.

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Infrastructure: There are certain infrastructure elements that are provided by the local banks (e.g. buildings, branches, etc.). But other infrastructures especially concerning the data produced by the operations of the local banks are not reasonably processed in infrastructures provided by the local bank. Here groups provide the infrastructure (computing centres, group software etc.), that has to be paid for by the group’s central institutions and the local or regional banks, which increases their expenses and decreases the profits. Similarly the banks may join forces in providing joint solutions in after sales services. These processes do not provide much scope for differentiation in the market but significantly contribute to the banks costs. Thus, joint after sales services will provide scope for joint cost reductions that have to be redistributed among the participating banks. Summarising the above mentioned points, the internal stipulations of the cooperative banking groups on how the activities are allocated to the central level and to the local level of cooperative banks influence the profitability of the cooperative banks and the group institutions. The decision for allocating these tasks is determined by the properties of technologies and by the competences that are available on each level. Thus, it is to be expected that digitalisation will have significant effects on the internal structure and governance of cooperative banks and consequently for the distribution of profits.

10.4

Digitalisation and Banks Characteristics of Digitalisation

There are different approaches for describing the characteristics of digitalisation—each having its own shortcomings. For the purpose of the following analysis, we will focus on two types of characteristics: available technologies determining the digitalisation and the economic effects of digitalisation. Since digitalisation is coined by the way we deal with data, the technologies that have so tremendously promoted digitalisation are data generation, data processing, data exchange and data storage, which mutually benefit each other. When moving to digitalising activities data must somehow be available, i.e. data must be generated. By its very nature banking business

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is producing masses of data, which made banks to be forerunners in digitising their data and in operating large computing centres. But data generation does not stop at data that is already produced as numbers. Data generation has also been accelerated by new sensor technologies that allow the identification of new types of data and by recording data that is produced by users of digital technologies (e.g. monitoring the behaviour of users in using technological devices, software). This exponentially increased the amount of available data which allowed the development of other new digital technologies. The newly created data then benefits from improvements in data processing. On the one hand, the speed of processing data has accelerated during the past decades. On the other hand, new technologies and software have been developed to operate with this data in order to generate new products increasing the users’ utility. Closely connected to the improved data processing are new and better technologies for information exchange—namely the internet and mobile access to communication and data. Improved data exchange allows better data recombination and recombining data then allows the development of new insights and products. Moreover, mobile data access has created the ubiquity of data use significantly extending the applicability of data processing technologies and software. Finally, data storage has extended to options for data analytics and for searching for patterns in existing data. These technological developments interact and digitalisation is a combination of all these technologies. The economic effects have recently been described by Goldfarb/Tucker (2019). They identify five relevant economic effects of digitalisation. 1. Reduction in search costs: Better access to information and better processing of information allows to reduce previously existing information asymmetries. As a result, offerings are much easier to compare and markets will become more transparent. Consequently, margins will be reduced or the previously existing margins will shift to the providers offering the search technologies. In addition, the internal search costs of companies may also be affected, as it becomes easier to compare efforts and performances within companies. 2. Replication costs of digital goods are zero: Replicating data is easy and usually creates no additional costs. Therefore, there is almost no rivalry in using the data, which makes business models based on digital goods challenging. But the replication costs of zero are

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subject to existing hardware and software. Replicating the data became costly, if for each data delivery new hardware had to be purchased and installed. Thus, the replication costs of zero also lead to economies of scale, because larger instalments of hardware will run with lower costs per unit of data that is processed or stored. 3. Lower transportation costs: Replication costs of zero have been accompanied by lower transportation costs by transferring data on the internet. Transporting additional units of data does not incur any per unit costs, i.e. data can be used and recombined almost everywhere. Therefore, digital goods—like banking services—become ubiquitous and are disconnected from the banks’ branches. 4. Lower tracking costs: Data processing, data transfer and data storage combined also allow better tracking of the user’s data generation. Thus, tracking users has become easier and personalised products can be created, that exactly fit to the customers needs. Despite the fact that this raises the concerns on data privacy and customers may dislike being tracked it is also creating a new (informational) proximity of sellers and buyers that could benefit customers as long as their privacy concerns are carefully taken into account. 5. Reduction of verification costs: In order to carry out business, it is necessary to verify the identity of buyer and seller. That is no problem in businesses relying on the presence in a shop. For digital transaction esp. payments verification is one of the main challenges. The technologies for data generation, data exchange and data storage have provided solutions for the verification problem in recent years facilitating any online transaction. Besides these economic effects any new digital technology is also subject to some pre-conditions from the business perspective. First, digitalisation requires precise knowledge and design of processes in companies. Only if the companies’ processes are well known, they can be mapped into the digital processes. Data generation, data processing and data storage can only work in companies that exactly know which information they generate and how information flows within the company. Actually, digitalisation forces companies into process thinking, because the digital technologies cannot be applied, if the processes are not known or ill-designed. Second, companies need “information awareness”. When implementing digital solutions companies have to identify how and where they can generate data. This could be data, that has been previously used,

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but it could also be new data sources, that allow better performances later on. Afterwards companies have to be able to describe their information flows, i.e. transfer of information, their processing of information, i.e. how to generate more value from the generated data, identify responsibilities, i.e. who owns the data, and determine the storage of data. Finally, digitalisation implies more cooperation for companies. Digital technologies are dynamic and often require highly specialised knowledge or the technologies exhibit economies of scale that many (smaller) companies cannot produce. Therefore, companies need cooperation partners that provide the digital knowledge or economies of scale, i.e. they must acquire new knowledge how to manage interfaces of their own processes to these partners and how to work with partners that operate in areas they once perceived as some of their core activities. The Effects of Digitalisation on Banks’ Activities By their very nature banks run a highly information prone business. Banks originated as information intermediaries by collecting information on borrowers in order to hand out credits from depositors or investors that did not possess the information or were unable to acquire the relevant information. This remains one of the banks’ main activities and evidently this is highly influenced by new information technology providing competing techniques that help to collect the information, produce relevant recommendations from the information and bring together lenders and borrowers. Besides their role as information intermediaries banks run a second information business: information accounting, transferring and storage. The information on credits and deposits, on assets and liabilities has to be accounted for and has to be reliably stored, so that customers always could access their funds that they handed to the bank. It is also the basis for payments or any transfer of financial claims between banks. In order to do so banks have to verify the identity of the person or the company that deposits money or is granted a loan, it has to implement a system, that records all its customers transactions and in order to allow transfers of funds it has to rely on the same processes and activities of other banks or transaction partners. It can be easily seen that these activities are revolutionised by new information technologies and new competitors providing these technologies. First, more powerful data analytics will substitute for personal knowledge

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in providing loans to customers and will allow easier access to investment information and therefore will broaden access to investments in shares or funds. The improved data analytics will also improve the credit decision processes which will reduce the margins that are generated in these processes. Thus, the banks’ role as an information intermediary may erode. Alternatively, if banks are able to use the new technologies for themselves, they will be able to offer more customised solutions to suit their customers’ preferences. Second, due to the replication costs of zero for information, which applies to the information in the banks’ processes but also to the “information product” software, there are strong economies of scale for the information processes of the bank. Thus, larger banks or new competitors will be able to increase their benefits from digitalisation. Third, since digitalisation requires strictly designed processes, focussed banks and focussed suppliers of banking services will benefit most from digitalisation, because their processes will be easier organised allowing them to benefit most from digitalisation. The emergence of specialised players in the banking market will split up the banking value chain and will allow these specialised suppliers to generate economies of scale for themselves, since they are able to aggregate the demand of many banks for their technologies. The Effects of Digitalisation on Cooperative Banks’ and Cooperative Banking Groups’ Profitability The profitability effects of digitalisation on cooperative banking groups will split up in the general effects that will apply to all banks, and those effects that on the internal structures of the groups and the distribution of profits within the groups. For the general effects some peculiarities of the cooperative banking model have to be taken into account that is less relevant for other banks. The general effects are driven by the factors briefly outlined in the previous chapter. Cooperative banks will experience more pressure on their margins due to increasing competition. Digitalisation will intensify competition by increasing the market transparency and by a growing number of new competitors that will offer specialised and tailored products for their customers. Such areas could be peer-to-peer lending, AI-based asset management and of course payments. Although each of these new competitors is—at least at the beginning—rather small, they will all gnaw on the cooperative banks customer base and consequently on

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their profits. Although these specialised new competitors are not covering all the financial services, they will nevertheless move into the established relationships of cooperative banks and their customers. Once a customer relationship is created this will give them the opportunity to extend their business to other areas. On the other hand, cooperative banks will be able to implement efficiency-increasing digital solutions themselves, helping them to reduce their expenses especially in the back-office staff. It will be one of the main challenges for cooperative banks to reap the efficiency gains of digital solutions, and by the same token maintain their established relationship with their customers that is usually based on personal advisory. But these organisational changes will then influence the internal structures of cooperative banking groups. Thus, the effects on the group internal distribution of profits are more relevant for the cooperative banking groups. Theoretically, cooperative banking groups are well-positioned for tackling the challenges of digitalisation since they are able to unite the advantages of centrality (economies of scale) with the proximity to the markets. But in practice the identification of the appropriate interfaces between the local and the central level and thus determining the right degree of centrality is an ongoing challenge. The art of managing cooperative groups is to identify the activities and the rights that local banks and central group institutions have and to balance these rights and activities. As mentioned above digitalisation exhibits economies of scale and therefore these technologies will be best allocated on a central level. Therefore, on the central level, there will be decisions on the software that banks jointly develop and use. Thus, costs will be incurred on a group level and have to be later recovered by charging fees for the use of the software or by other means, which again influences the profit distribution between the group’s members. Moreover, the use of group software and applications limits the leeway of the banks at a local level. Even worse, if the software does not fit to the customer needs or if it is flawed, the effects of the central activity of developing the software will be experienced on the local level by customer dissatisfaction and decreasing income from the customers. Digital solutions could also lead to a shift of assets and liabilities within the group. In asset management digitalisation allows investments in mutual funds for very small amounts of money. Thus, securities account can be used much easier and keeping large amounts of money in deposits in order to provide liquidity is no longer necessary, so deposits and saving

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accounts could be reduced and the funds would be shifted to the central level. This will have an impact on the funding of loans for the local banks and will affect the interest income that they are generating, but it will also affect the fees that the local banks will receive. In order to make the group software and applications work, the group institutions and the local cooperative banks have to agree on joint processes that do not allow for any deviations, in order to make the group’s software work seamlessly. Any special implementation or additional process steps will increase the error rate and the costs of the processes. Joint processes will benefit the group’s overall efficiency but it will also limit the cooperative banks freedom in adapting to their local needs, which could reduce the market-responsiveness and thus their income that they could generate in their region. In the best of all digital worlds, it would be possible to combine economies of scale by having joint technologies and at the same time individualised solutions that fit to the needs of a cooperative bank’s local customers. Cooperative banks provide a large pool of data that could be used to derive customised solutions for their customers, if they are brought together on a central level. Data could be analysed and new solutions could be developed from the data of the whole group for purposes of the individual bank. In this case, there would be additional efforts and expenses on the central level and additional benefits on the local cooperative banking level again moving incomes and expenses within the group. The increasing relevance of central institutions due to the digitalisation’s economies of scale and the unification of group processes has to be reflected in the groups’ governance. If more relevant decisions are made on the central level, that influence the business of the local banks, the local cooperative banks need additional control and monitoring rights allowing them to further participate in the design of these new digital solutions.

References Goldfarb, A., & Tucker, T. (2019). Digital economics. Journal of Economic Literature, 57 (1), 3–43. Lamarque, E. (2018). The governance of cooperative banks: Main features and new challenges. In M. Migliorelli (Ed.), New cooperative banking in Europe— Strategies for adapting the business model post crisis (pp. 141–161). PalgraveMacmillan.

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Meyer, E. (2018). The new economic scenario and its impact on the cooperative banking business model. In M. Migliorelli (Ed.), New cooperative banking in Europe—Strategies for adapting the business model post crisis (pp. 29–45). Palgrave-Macmillan. Schenkel, A. (2016). Kosten der Compliance-Regulierung - Eine empirische Untersuchung am Beispiel der deutschen Genossenschaftsbanken. Arbeitspapiere des Instituts für Genossenschaftswesen Münster, No. 169.

CHAPTER 11

How Do Cooperative Banks Build Their Own Proximity Type in the Social Media Nathalie Veg-Sala, Valérie Zeitoun, and Géraldine Michel

11.1

Introduction

Customer-brand proximity has been proven to facilitate long-term engagement and a behavioral loyalty (De Wulf et al., 2001; Fournier, 1998). The search for this proximity is therefore central for all companies, and particularly for those whose core business is intrinsically linked to interactions with their customers. Banking entails interpersonal relationships. Beyond relational marketing the bank advisor is the one who

N. Veg-Sala (B) Université Paris-Nanterre, Nanterre, France e-mail: [email protected] V. Zeitoun · G. Michel Panthéon-Sorbonne, IAE Paris-Sorbonne, Université Paris, Paris, France e-mail: [email protected] G. Michel e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_11

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provides the service. Proximity is thus first and foremost human. For cooperative banks, human proximity could be a differentiating factor. Indeed, they have been built on relationships of familiarity, knowledge, and trust with local borrowers. In this sense, cooperative banks do have the ability to stand out in terms of proximity because of their territorial anchorage, unique political model, and system of values coming from the social and solidarity economy. However, despite these valuable and distinctive structural strengths, cooperative banks still need to recall and sustain their identities to stimulate and/or nourish their customer relationships (Gorlier et al., 2018). Banking relationships are going digital and are characterized by immediacy (remote services, online banking…). Moreover, this cultural evolution has been drastically accelerated due to the worldwide Covid-19 pandemic which has forced brands and companies to invent a more virtual, digital relational dynamic. Research has demonstrated that social media has the capacity to “humanize” the company by creating a personalized customer experience around trust and transparency, which in turn should facilitate a positive customer-brand relationship (Harter et al., 2010). Thus, in this new relational context, how can cooperative banks enter a digital paradigm of proximity and develop their specific proximity types while characterizing themselves? The chapter explores how cooperative banks can build or cultivate their clients’ relationships through digital channels. How do they use digital support to express themselves and nourish their customer-brand proximity? In what way and to what extent can digital channels help the cooperative banks to propose a specific type of proximity related to their distinctive brand identity? To answer these questions, we relied on research into proximity in social psychology (Aron et al., 2001; Kelley et al., 1983, 2000) and marketing (Mende & Bolton, 2011, Mende et al., 2013; Paulssen, 2009; Swaminathan et al., 2009; Thomson & Johnson, 2006). Our analysis is based on a semiotic analysis of cooperative banks’ communications on Instagram. Based on the above theoretical research and the empirical study, we present our conclusions and possible recommendations.

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11.2 Defining Proximity and Identifying Its Different Facets Defining Proximity Proximity seems to be an established term today, favored by brands, whether in their communication with customers or their employees. Proximity is a subject that is particularly challenging in the digital era: What are the strategies implemented by brands to create proximity with their customers on social networks? How are they perceived by customers? This question calls for more answers as proximity is often presented as a factor sought by customers. The various rankings of the French people’s favorite brands indicate that customers prefer “the closest and most unifying brands”. It is accepted that proximity is a “key to trust” and that physical proximity creates an irreplaceable link (Gorlier & Michel, 2020). In all these studies, even if the consequences always seem to be positive, the term proximity covers various realities. Indeed, the concept of proximity is multidimensional: French economists (Gilly & Torre, 2000; Boulba-Olga & Grossetti, 2008) highlighted two foundational aspects of proximity: spatial, reflecting a physical distance, and non-spatial, reflecting a social and economic distance. The non-spatial aspect is essentially relational. For cooperative banks, the concept of proximity is often used in its spatial aspect and it is geographical in terms of regional development and local anchorage. This aspect is crucial, but just one of many. Moreover, proximity and distance are two different things: Proximity is an individual’s perception of nearness, according to their own criteria and personal context. Proximity is therefore qualitative and expresses a subjective feeling, whereas distance is quantitative and measured by objective standards. Proximity is thus both a relational state and a feeling, whose components contribute to building close relationships and processes that lead to assessing the relationship, and thence to a sense of proximity (Laut, 1998). Identifying the Different Proximity Types Beyond the definition, the academic literature shows that the construction of proximity can be based on different factors.

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Proximity Based on the Frequency of Interactions According to this theory, proximity between two individuals depends on the frequency, diversity, and strength of their interactions (Agnew et al., 1998; Berscheid et al., 1989; Kelley et al., 1983, 2000). According to this approach, it is a matter of reinforcing interactions and perceived similarity to ensure maximum reciprocal influence. The customer can perceive a proximity with the brand from the frequency of interaction with it. The more frequent, diverse, and strong the customer perceives the brand’s interaction with them, the greater the proximity of contact. According to Kelley and his colleagues (1983, 2000), interaction is indeed a striking aspect of relationships in which each person affects, stimulates, and influences the other. The regularities of interaction are a second prominent aspect. The interactional regularities that characterize a relationship at any given time are, in fact, central to any understanding of close relationships. Interaction can thus be seen as a sequence of interconnected events between two people (Kelley et al., 1983, 2000). Proximity Based on a Perceived Similarity According to the theory of similarity-attraction (Nass et al., 1995), the customer can perceive an identity proximity with the brand. This identity proximity is based on a perception of similarity: the more the customer perceives that the brand resembles them, the closer they feel to it and the more they feel a certain sympathy or even attraction for the brand. Interpersonal similarity, that constructs proximity, is thus one of the main causes of the attraction felt. Proximity Based on a Perceived Enrichment From another angle, in accordance with the theory of Self-Expansion (Aron et al., 2001), the customer can perceive a proximity with a person if this person has different resources that can enrich them. The process of self-expansion is based on the search for new experiences and relationships, the acquisition of new knowledge and possessions, and the strengthening of one’s personal development. This motivation encourages individuals to build relation with people to obtain these experiences and resources. Thus, the more the customer perceives the brand as a means to increase their knowledge and acquire new experiences, the closer they will feel to the brand.

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Proximity Based on a Perceived Social Recognition According to a relational benefits approach (Gwinner et al., 1998), the individual can feel proximity according to the social recognition they perceive. Thus, the more the customers perceive that the brand knows them, considers them, and appreciates them personally, the more they feel a social proximity with it. Approaches to loyalty programs aimed at understanding why customers commit to a relationship over the long term have indeed shown that one of the motivations is social recognition and that this recognition can be conveyed by individualized proposals from the company, a sign of respect and appreciation, and by the way in which the staff in contact with the customer consider and treat them (Volle & Mimouni, 2010). These four facets of proximity show that the construction of proximity can be based on several levers. But what changes does digital technology bring to the notion of proximity? How does digital technology change the issue of proximity for cooperative banks?

11.3 The Challenge of Identity and Proximity of Cooperative Banks in the Digital Landscape The issue of proximity is central and seems to be even more so at a time of digitalization of ATAWAD (AnyTime, AnyWhere, AnyDevice) hyper accessibility practices and the emergence of 100% online banks. Thus, the rational difference between banks tends to fade away and we see products and services aligned with each other and probably directly linked to this profusion of information that customers, better informed, and employees, eager to show they are competitive, exploit to the best of their ability. In this context, customers and employees seem to value the emotional aspect of their communication, which thus becomes the first differentiating factor of a bank. If online banks are clearly a threat to traditional banks (hyper accessible and reactive), they also represent an opportunity for the latter to reposition themselves, integrate the digital medium in the most distinctive way possible in relation to the market, and respond as closely as possible to the unmet needs of their customers. In this relational approach, the meaning of the brand is essential. The brand, as a social object, creates the link between customers or prospects and the organization. In the banking sector, the cooperative values that customers and employees value must be conveyed and expressed through

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brands. By adopting cooperative values, and asserting its distinctiveness, a banking brand can develop a discourse of proximity and thus federate customers (Gorlier et al., 2018). In this respect, digitization is asserting itself as a tool or support for developing, affirming an identity, and generating long-term proximity with customers. How do cooperative banks manage to express their brand identity, useful and necessary to build a relationship, and suggest a type of proximity that would also allow them to assert its their difference and uniqueness therein? What are the levers used today to build proximity in the digital landscape? To answer this question, we analyzed the communications of three major banking cooperatives on social networks.

11.4 Explorative Study: Three Cooperative Banks’ Communications on Instagram Introduction to the Study In order to understand how social networks can foster perceived proximity and contribute to the implementation of a brand-customer relational dynamic, this study explores the discourses of three cooperative banks on the social network Instagram. The use of Instagram to better understand brand discourse has already been highlighted in research (Zeitoun & Veg-Sala, 2020). The objectives of the research methodology are twofold. Firstly, the aim is to study the expression plan, referring to the way banks are represented from a visual point of view: their codes. The plan of expression makes it possible to identify the status of the cooperative banks and, what they want to express about themselves by relying on the graphic design modalities used. Secondly, the content plan, referring to the meanings and senses given through the messages (posts and stories) on the cooperative banks’ Instagram accounts is analyzed. The content plan allows us to identify the type of relationship that the cooperative banks offer. These two levels of analysis (expression level and content level) are then crossed to identify three proximity types proposed by the cooperative banks (Proximity based on similarity, enrichment, or social recognition). This analysis is based on the way in which the banks transmit a discourse of proximity to their followers and not the way in which this proximity is actually perceived by the followers.

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A qualitative methodology of the structural semiotic type of three cooperative bank brands is implemented. Structural semiotics is particularly relevant when it comes to studying the meanings emitted by brands and the deep meaning of their discourse (Bertrand, 2002; Courtès, 1991; Floch, 1990; Heilbrunn & Hetzel, 2003). It is thus increasingly used in marketing and communication (Berthelot-Guiet & Boutaud, 2014). The Instagram platform was selected because since its launch in 2010 it has become a major and essential social network. In 2019, according to the HubSpot and Mention6 report, the platform reached 1 billion monthly active users, beating Twitter and LinkedIn. Instagram is also an “open-minded” network that allows different projects according to the ambitions of the user. It is, moreover, less controversial than Twitter and less directly attached to professional issues than LinkedIn plus it is a central network for brands, with a growth rate that for two years has exceeded that of its parent company, Facebook (Omnicore agency, 2019). Three French cooperative banks (Crédit Mutuel, Crédit Agricole and BRED) were chosen for their quasi-prototypical character, offering singular and contrasting models. To do so, we first carried out a review to identify, explore and classify various cooperative banks present on Instagram. After looking at numerous posts we selected the brands according to their capacity to illustrate a type of proximity. Methodology Structural semiotics wants to grasp the relations between a certain number of elements by virtue of the principle of the solidarity of the terms of a structure (Barthes, 1964; Eco, 1970; Floch, 1990; Greimas & Courtès, 1993). It is a theory of meaning and of analysis procedures that make it possible to describe systems of meanings (Floch, 1990). This methodology is based on the concept of the sign. This is formed by the relationship between a perceptible element, the “signifier”, and the meaning given to this signifier within a more or less constructed code, a meaning to which we give the name ‘signified’ (Courtès, 1991). The analysis procedure is as follows: Communication corpora were created for each cooperative bank studied. Each corpus includes Instagram posts published since the beginning of 2021, as well as front page stories recorded since the beginning of 2020. An analysis grid, synthesizing those developed in previous research (Courtès, 1991; Joly, 1994; Semprini, 1996; Tissier-Desbordes, 2004; Veg-Sala & Roux, 2014), was

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used to study each communication. It is divided into three parts: the plastic message (framing, composition, shapes, colors, lighting), the figurative message (motifs, figures, objects, characters), and the linguistic message (typography, colors, shapes, and meaning of words). In order to identify the structure of meanings for each brand, the signified of each communication was analyzed. Their overlaps and redundancies were then studied according to the two levels: the institutional status of the cooperative banks and the type of relationship proposed. Analysis Crédit Agricole @creditagricole An account that is not very active, with only 75 posts published, but a fairly large number of followers (18.7k) compared to other cooperative banks on Instagram. A self-presentation of the brand clearly aimed at people: make the world yours, with stories that cover various current topics ranging from environmental issues to employment, housing, studies, entrepreneurship, and solidarity. An eclecticism that reflects the bank’s commitment to its customers (Table 11.1). Bred—Banque Populaire @bred_bp An Instagram account with only 102 posts and 1503 followers. Stories mainly focused on financial themes (Budget, Security, Projects, Innovation). These elements immediately raise questions about the selfpresentation of the Instagram bank “A human and digital bank” and convey a very confusing first impression (Table 11.2). Crédit Mutuel @creditmutuel An Instagram account where there is not much investment/effort, with 170 posts published and 7119 followers. On its presentation, the bank only underlines the fact that it belongs to its 8 million customers. A way of justifying the choice not to invest in this digital network? 4 stories with no immediate link between them (youth offers, sailing, innovation, news) that evoke a general feeling of indeterminacy (Table 11.3).

Linguistic invariants

Figurative invariants

Artistic invariants

Not very loaded, few elements per visual Rectilinear (text highlighted) Green, blue, red Saturated Photos or videos in filter The street, buildings and pavements The interior of a flat (decor) in video selfie mode, microphone not hidden but shown Emoji and pictograms, drawings rather than photos (Sushi, smartphone, basketball, sun, gift, light bulb, question mark ….) In street interview mode Streetwear, not very sophisticated Mainly young people Sans serif font, script, usually bold and colored (red, blue, or green with white highlighting)

Composition, layout Shapes Colors, lighting

Images of the words

Models’ poses

Design

No frame Photos taken at person height

Frame and framing Viewing angle, clarity

Signifiers

Table 11.1 Analysis of Crédit Agricole—Instagram approach

Simplicity Ease of use Boldness Honesty

(continued)

Naturalness, proximity, interactivity Youth

Simplicity, truthfulness, naturalness Proximity Youthfulness, playfulness

Dynamism, proximity, accessibility

Proximity, no feeling of superiority or inferiority Simplicity

Signified

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Linguistic content

Table 11.1 (continued)

Tomorrow in hand by CA So that the world of tomorrow belongs to you Use of possessive adjectives “My”, “Ma”, “Mes” Terms and topics related to everyday life and unsupported language: “Job”, “Budget”, “a buddy”, “it’s a gift”, “telework”, “tips”, “keep it running”, “TKT”, “outright”, “it’s rolling” Vocabulary related to young people: “For your 18th birthday”, “Focus on the interview”, “to get your rental file out”, “3 reasons to fall in love with the European youth card”, “find your dream job without a diploma”, “more advice on CVs, interviews, cover letters…? Use of games, surveys and quizzes: “True or False”, “How did you find your student job? Share your tips”, “In your opinion…” Use of questions, numerous interrogative forms

Signifiers Advice, support Ownership Proximity, youth Youth, support Interactivity, exchange, help Interactivity

Signified

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Linguistic invariants

Figurative invariants

Artistic invariants Sharp pictures, use of some color filters Photo → frame → highlighted text Rectilinear (numerous frames, framing of words) Dark blue Racing yacht in full competition Kitchen, map, computer French fencers fighting Sailors in the Transat Jacques Vabre Woman pictured from the back working on a computer with accounting documents, from the side working, wearing glasses A family (with two young children) posing under a roof A woman visiting a city and looking at a map, wearing glasses; drinking coffee in the kitchen Emoji: lightning, student, sun, cloud Mix of script and handwriting

Viewing angle, clarity Composition, layout Shapes

Images of the words

Models’ poses

Colors, lighting Design

Frame like a photo holder

Frame and framing

Signifiers

Table 11.2 Analysis of Bred—Banque Populaire—Instagram approach

(continued)

Mix of control and flexibility

Can symbolize wisdom, seriousness Sport, dynamism Daily life Sport of mastery, technicality Work, seriousness The family Daily life

Supervision, mastery

Structure, leadership, professionalism, sense of control or controlled, mastered situation

Signified

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Linguistic content

Table 11.2 (continued)

“Financial service”; “The bank of tomorrow is the BRED of today”; “Life insurance vs. savings account”; “Proud to be a banker”; “At Bred, pay back your student loan only when you start working! “Budget”, “innovation”, “security”, “Think not stupid”, “Student” “Think smart”, “Students: wherever your projects take you, Bred Space follows”, “Battle: depressed team, motivated team”; “Battle: July team vs. August team”; “Digital job dating” “To all young people, discover financial aid”; “Simplify your accounting management”; “Your new real estate space is available”; “Managing your expense accounts has never been easier”; “Scams on social networks” In 3 years, Bred has reduced its energy consumption by 14%”; “Take part in the fight against climate change” “Participate in European Mobility Week”; “Managing your expenses has never been easier”; “Scams on social networks”; “In 3 years, Bred has reduced its energy consumption by 14%”

Signifiers

Seriousness Professionalism Business Support and financial security Technical and professional advice and assistance Ecology

Signified

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Linguistic invariants

Figurative invariants

Artistic invariants

Images of the words

Models’ poses

Design

Shapes Colors, lighting

Composition, layout

Viewing angle, clarity

Frame and framing

No frame Various frames At people’s height, but low angle or low angle for objects (boats and others) In the posts, for the most part only the raw photo Various Various but with a focus on blue, red, yellow Sailboat in full race, sea, sunset, the raging sea Running, Crédit Mutuel flags Concert hall, front of a supporters’ shop Racing boats seen from the sky A photo of a billboard in the street with a championship poster in partnership with CM Same for the Olympia Father and son video conference discussion Running, talking, sailing, dancing, drinking coffee, chatting, raising arms, jumping hurdles, crossing a start or finish line, receiving a medal Script writing In the stories, framed or highlighted text

Signifiers

Table 11.3 Analysis of Crédit Mutuel—Instagram approach

(continued)

Family, real Movement, action, dynamism, a life that is not static

Sport, music as a shared experience (versus technique, mastery) Anchored in life, daily life

Reliability, Dynamism, Active

Close to people But further away from objects Closeness, simplicity

Openness

Signified

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Linguistic content

Table 11.3 (continued)

“You should join a bank without shareholders”; “and my voice counts as much as anyone else’s”; “But I swear, at Crédit Mutuel, since there are no shareholders, I can participate in my bank’s decisions”; “More than 70 young talents were able to perform on stage” “A human and technological adventure “Partner of…” (several times) Some surveys and quizzes in stories

Signifiers

Closeness (One to One, without intermediaries) Anchored in real life Promise of a close relationship and banking expertise Closeness, mutual aid Interactions

Signified

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Results Emerging Status of the Three Cooperative Banks Through Their Instagram Communication Offering a specific expressive approach, each of the three cooperative banks studied is able to build a distinct expression of its status. The choice of colors, typography, and figurative elements allows the banks to first communicate around their status and/or identity. – Crédit Agricole, with its highly consistent expression, affirms a strong brand status; – Bred Banque Populaire tends to favor a more institutionalized business focused status; – Crédit Mutuel adopts a more realistic, simple expression, underlying its accessibility rather than any specific identity or status. Crédit Agricole: A Highly Powerful and Affirmative Brand Status With the choice of a harmonious and regular graphic charter on posts and stories, (along with the creation of specific content,) Crédit Agricole uses Instagram in a way that makes the brand a media brand. By playing this role, the brand strongly affirms its identity and brand status. The cooperative bank gives consistency to its communication on the social network, as it would on any other medium. The red, blue, and green colors are omnipresent and totally in line with those of the brand’s logo and its traditional communication. The Instagram account is thus linked to the Crédit Agricole brand. The dominant use of illustrations (drawings, emoticons …) contains the bank’s discourse, highlights its values, and delivers on the banking style of the brand. In this sense, Crédit Agricole expresses its brand status clearly and takes on quite an authoritative role. Bred—Banque Populaire: The Incarnation of a Major Business Institution The Instagram account of Bred—Banque Populaire uses a constant and uniform graphic charter respecting the current colors codes of the brand and its identity (blue). Thus, as for Crédit Agricole, there is a form of consistency in the use of the social network. Beyond that, using a frame for each image posted expresses control, authority, and sharpness in the visual message communicated. It shares the codes of the world

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of banking and finance: seriousness, mastery, skillfulness, expertise, reliability, professionalism. What is staged here is therefore not simply the universe of Bred—Banque Populaire but in particular that of the entire banking and finance sector. The Instagram account of the cooperative bank thus expresses an institutional status centered on the business. Crédit Mutuel: A Discourse Implicitly Referring to Real Life/Real People Versus Any Artificial, Marketed Identity or Status With a multitude of photographic styles, both in terms of what they show and how they are taken (brightness, framing, color intensity), the Crédit Mutuel Instagram account expresses a kind of realistic approach, a non-professional but more real and sincere way of talking. There is no uniformity, no visual consistency. The visual analysis rather evokes the account of people who over time would post, their desires, their activities, and their meetings. The account is not institutional and communicates neither the aesthetic codes of the brand, nor those of the business. It simply gives a quite disorganized vision of the bank with no locked identity or status, suggesting authenticity, simplicity, and naturalness. Emerging Relationship Style of the Three Cooperative Banks Through Their Instagram Communication Beyond the aesthetics of Instagram accounts, the semiotic analysis of the content of posts and stories allows us to explore the relationship they propose or which they try to stimulate among their followers. Quite consistent with their expressive approach, the content suggests three forms of relationship, each one proposed by one of the cooperative banks studied. Crédit Agricole: A Relationship Model Turned Toward Others Crédit Agricole’s approach reveals a desire to establish a bilateral contact. Whether through its posts or stories, the cooperative bank multiplies questions to its followers: “In street interview”; “How would you like to sail around the world for three years on a boat?”; “How did you find your student job? - Share your tips”. By doing so, the bank encourages its followers to share and be active, engaging in a real relationship. When the bank is not engaging its followers by questioning them, as a good friend it gives advice to its followers: “find the job of your dreams

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without a diploma”, “more advice on CVs, interviews, cover letters”, etc. This discourse is reinforced by the use of figurative elements such as light bulbs (symbols of good ideas found), question marks (symbols of questions that we can ask ourselves but that we also ask others), or by street interviews. Crédit Agricole wants to establish a dialogue and thus build a relationship turned toward others. Bred—Banque Populaire: A Professional Relationship at Stake Bred—Banque Populaire highlights its financial products and its activity. Most of the messages, in its posts or in its stories, are clearly about banking offers and services: “To all young people, discover financial aid”; “Simplify your accounting management”; “Your new real estate space is available”; “Managing your expenses has never been so easy”. When using a figurative picture, the brand chooses to show a family that wants to find the right insurance for their new house or a woman working at her computer who, thanks to Bred, finds the best way to manage her bank account. The Bred—Banque Populaire talks about its business and insists on its expertise. It offers a professional and serious relationship focusing on what it does and for whom it does it. Crédit Mutuel: A Guy Next Door with Quite a Self-Centered Relationship Mode Crédit Mutuel’s discourse is focused on the interests of the cooperative bank itself. It sponsors a sailing boat; it participates in running races; it has no shareholders… The bank’s Instagram account speaks a lot about itself. In the meantime, the brand often mentions the term “partner” to qualify the relationship proposed by the Crédit Mutuel. Despite this verbal intention, the bank keeps publishing posts informing randomly about the brand activities, the brand projects, some posts also refer to the traditional communication media. In its very genuine, sincere, unprepared, free way when addressing the social network communication challenge, Crédit Mutuel ends up mostly talking only about itself, generating a very accessible but poorly reciprocal relationship style. The Types of Proximity for Cooperative Banks Based on the frequency of interactions, none of the explored brands seems to be fully engaged in a customer-brand relationship. However, beyond

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this question of interaction, that might just be the sign of a new, as yet unmastered way of communicating by cooperative banks, the semiotic analysis (revealing each cooperative bank’s status and relational dynamic) can help understand the proximity type developed by each brand based on the proximity types defined in literature. Crossing the status of the bank and the relational dynamic highlights the three distinct types of proximity: related to similarity, related to personal enrichment, and related to social recognition (Table 11.4). Crédit Agricole: An Invitation to Self-Enrichment When a cooperative bank expresses an authoritative, trustable brand status focused on conveying its values and its identity while expressing a relationship turned toward others, like the Crédit Agricole, this can become a source of expansion. Indeed, this position can clearly allow its followers to get a general impression of self-enrichment thanks to the shared tips, the answers to generic questions and attentive listening. The cooperative bank can thus increase people’s knowledge and personal development. In this sense, the proximity developed by Crédit Agricole is clearly anchored in the proximity related to enrichment. Bred—Banque Populaire: A Promise of Social Recognition When a cooperative bank expresses an institutional status focused on its activities and business and when it promotes a relationship again focused on business issues, it offers a type of proximity related to social recognition. Conveying an image of seriousness, professionalism, expertise, and reliability the bank suggests that it shares common values with its Table 11.4 Strategic construction of three distinctive proximity types Status

Relational style

Outcomes

Cooperative banks

Strong authoritative brand status Institutionalized business focused status Real life/real people versus any artificial, marketed identity or status

Focus on others

An invitation to self-enrichment A promise of social recognition A demonstration of similarity

Crédit Agricole

Business focus Self-centered

Bred—BP Crédit Mutuel

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followers. The clients of a such bank are undoubtedly serious, professional and experts in their domain. The bank strongly occupies a business territory that echoes followers’ financial questions and ambitions. In this sense, the Bred—Banque Populaire has the capacity to provide a reassuring “in control self-image” to its clients and convinced followers who can consequently feel grateful to it. Crédit Mutuel: A Demonstration of Similarity When a cooperative bank focuses on conveying accessibility and simplicity rather than any kind of institutional status and gives access to its reality, subsequently offering a relationship centered on itself, like Crédit Mutuel, it creates a proximity based on similarity. The Crédit Mutuel incarnates the “guy next door” and uses Instagram as a regular individual would. Whether by aesthetics or content, this communication by a cooperative bank resembles that of a person’s personal Instagram account and consequently induces mimicry among followers. Lack of institutional status and a self-centered relationship do not have the ability to lead to nor to sustain a proposal of proximity based on similarity.

11.5

Conclusion

By integrating a social network system, brands are perceived as more social or human and less transactional or commercial (Marsden, 2010). Thus social networks constitute an opportunity for cooperative brands to connect with people in a more casual manner or in an alternative way (Ellison et al., 2007; Park & Kim, 2014), and the networks can be used as powerful lever to develop and sustain proximity with the banks’ customers. Based on their social network discourse (form and content) each of the cooperative bank explored creates and builds a specific proximity type. Interestingly, proximity can be built based on various self-experiences. Typically, Crédit Mutuel, inspiring similarity, refers to a self-identification process, whereas the social recognition used by the Bred—Banque Populaire bank is mostly based on an aspirational projective self-conception, and finally Crédit Agricole, which offers a sense of enrichment and customer empowerment, refers to a self-expansion individual need.

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Within the context of consumer-brand relationship researchers, and in particular Park and Kim (2014), demonstrate that brand-self connection guided by self-related affection such as self-enrichment and selfgratification are key drivers to sustaining the relationship and the sense of proximity. In this sense, the three cooperative banks have succeeded in proposing a proximity to their customers. The question that can still be raised is whether one or the other proximity type has the capacity to trigger deeper affective and/or cognitive engagement and behavioral commitment. Based on very recent research, people tend to appreciate and to feel connected with brands that have the same values as themselves but also they do feel connected with brands offering new values that they can then absorb in a self-expansion process (Michel et al., 2022). This type of connection modifies the vision of proximity. It inspires a more philosophical approach changing the proximity challenge for brands. According to the philosopher Olivier Abel, distance is supposed to enrich the proximity, a “good distance” would be the real key for a deep and long-lasting proximity “Finally, for there to be this kind of astonishing flare-up that is speech and conversation, there must be a certain distance between the bodies, like between the logs in the fire. If you put them too close together, it doesn’t burn well, but if you put them too far apart, the fire doesn’t work either. You have to find the right distance, which is evolving and is not always the same. The distance is what makes difference possible in terms of points of view, suspension of contacts, and therefore the coming together”.

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CHAPTER 12

Conclusions Eric Lamarque and Marco Migliorelli

Throughout the different chapters of this book, the contributors have analysed the behaviour of cooperative banks when facing the challenges arising from the new competitive and societal scenario. For the members of cooperative banks, fast technology changes, frequent periods of crisis (like the one following the COVID-19 pandemic), the growing importance of climate issues and new corporate social responsibility requirements have to be considered as opportunities

The contents included in this chapter do not necessarily reflect the official opinion of the European Commission. Responsibility for the information and views expressed lies entirely with the authors. E. Lamarque · M. Migliorelli (B) IAE of the University Paris 1 Panthéon-Sorbonne (Sorbonne Business School), Paris, France e-mail: [email protected] E. Lamarque e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5_12

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to further strengthen the organisations they belong to. In this respect, we believe they have a major role to play, for at least four reasons: – The COVID-19 crisis has shown that a collective action is needed to face major economic and social shocks; – The shareholder model is increasingly criticised in a context of permanent crisis or tension; – The awareness of the need to build a more sustainable economic model is expanding at an unprecedented pace, at all levels of the society; – A disruptive attitude is emerging, in particular among young generations, regarding the assessment of the values featuring the companies with which they interact. As academic researchers, but also with some practical experience of the life of cooperative banks, we developed our analysis to highlight more objectively how the members of cooperative banks can take advantage of their status. In this respect, we argue that the oserved activism for this model of governance does not have to produce an excess of confidence in the management of the banks and the feeling that members-customers will always recognise a systematic competitive advantage in the cooperative bank’s offer. We observe that traditional capitalistic financial companies, including capitalistic banks, share nowadays (or at least strongly promote) a very similar set of values with respect to cooperative banks. They assume more and more the mission of fostering banking inclusion, support social initiatives, invest in climate transition, and are increasingly engaged in delivering on the Sustainable Development Goals (SDG). We have mentioned in the book that, historically, cooperative banks were created to assume a mission and deliver an offer that were not covered by capitalistic organisations. We think that the cooperative business model is increasingly challenged by a new mainstream approach (which covers the multifaceted aspects of sustainability), so that they need today to carefully reflect about their specific positioning and value added in support of the economy and society. Companies have to continuously assess the sustainability of their competitive advantage. To this extent, cooperative banks need to consider

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how to use cooperative values to maintain their own competitive positioning. It seems clear that today cooperative banks must change some of their habits, mobilise stakeholders around their core distinguishing values and think how to reinforce the commitment of their members within the model, especially when it comes to serving young generations. We call for a fundamental discussion on what it means today to be a cooperative, and a cooperative bank. What are these banks able to develop as products, services or risk policies, which makes them really different and valuable by individuals to the point they may want to become (or remain) members? We think that this book can help the ones advocating in favour of the cooperative model by providing “food-for-thoughts ” to initiate a discussion around the modernity of the fundamental principles of solidarity, cooperation and common good.

Index

A Austria, 3, 4, 9, 59, 226, 227, 230–232

Commercial banks, 6, 15, 18, 19, 39, 62–64, 66, 69, 152, 161, 162

B Bail-outs, 10, 202 Banche di Credito Cooperativo (BCC), 9, 42, 47, 206 Banche Popolari, 11 Banking Union, 65 BPCE, 4, 9, 12, 213, 215, 218, 227, 229–231 Brand, 13, 243–250, 257–262 Building Societies, 5, 9, 59, 217, 218

Covid-19, 20, 176, 177, 189, 194, 212, 217, 219, 244, 267, 268

C Capitalisation, 208 Climate change, 20, 21, 92, 165–169, 171, 172, 175, 180, 181, 183, 193–196, 198–203, 208, 210, 211, 213, 215–220, 254

cooperative banking groups and networks, 4, 9, 12, 175

Credit, 3, 6, 7, 10, 17–19, 22, 32–34, 39–43, 46–49, 57, 58, 64, 69, 79, 80, 89, 90, 98, 99, 101–103, 105, 106, 108–114, 128–130, 143–146, 148–150, 153, 156–161, 166, 176, 180, 187, 199–202, 205–207, 209, 215, 217, 218, 232, 233, 239 Crédit Agricole, 4, 9, 12, 208, 210, 211, 213, 215, 218, 249, 251, 257–261 Crédit Mutuel, 4, 9, 12, 214, 216, 218, 249 Cross-guarantee scheme, 12, 13

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 M. Migliorelli and E. Lamarque (eds.), Contemporary Trends in European Cooperative Banking, https://doi.org/10.1007/978-3-030-98194-5

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INDEX

D Decentralization, 99–101, 103, 106, 113, 114 Democratic governance, 5, 14, 20, 22, 125, 175, 177 Denmark, 4, 9 Differentiation, 6, 17, 59, 61, 76, 78, 81, 148, 235 Digitalisation, 5, 11, 14, 16, 20, 225, 226, 235–241 Diversity, 17, 23, 34, 36, 70, 76–78, 87, 88, 145, 231, 246 Dual bottom line, 99, 100, 104 DZ Bank, 212, 214

G Germany, 2–4, 7, 9, 11, 36, 59, 144, 205, 226, 230, 232 Governance, 6, 12, 14, 15, 20, 33, 34, 37, 76, 78, 81, 82, 84–86, 88–92, 97–100, 102, 103, 106, 113, 125, 127, 138, 145–147, 151, 158, 159, 161, 167, 176–180, 188–190, 210, 211, 226, 231, 232, 235, 241, 268 Great Crisis, 11 Greece, 4, 9, 41 Green bonds, 51, 178–180, 214 Green finance, 193

E Efficiency, 3, 11, 12, 35, 36, 42, 47, 58, 61, 65, 77, 78, 83–85, 161, 169, 179, 183, 186, 200, 211, 212, 214, 215, 227, 231, 240, 241 European Central Bank (ECB), 10, 13, 64, 66, 86, 88, 187 European Union (EU), 3, 6, 8, 29–31, 50, 56, 62, 64, 69, 154, 166, 167, 169, 170, 172–174, 176, 177, 181, 182, 185, 187–190, 194, 201

H Hybridisation, 6

F Financial risks, 10, 21, 39, 92, 98, 172, 194, 199–201, 203–205, 208–210, 213, 216, 217, 219, 220 Finland, 3, 9, 11, 42, 48, 58, 59, 226, 232 Fintech, 11, 120, 121, 123–126, 133, 135–137, 226 France, 3, 4, 9, 58, 59, 76, 78–80, 82, 87, 90, 91, 98, 124, 128, 144, 208, 213, 217, 226

I Innovation, xi, xix, 2, 3, 8, 16, 21, 49, 64, 80, 120–122, 124, 128, 134, 138, 168, 170, 203, 250, 254 Institutional Protection Scheme (IPS), 12 Italy, 4, 9–11, 59, 90, 138, 188, 208, 212 J Joint stock companies, 227 L Lending, 5, 7, 8, 11, 14, 17–19, 32, 60, 100–103, 106–113, 170, 171, 175, 176, 179, 186, 204–208, 213, 214, 216–218, 239 Level playing field, 60, 65 Liquidity, 12, 13, 98, 199, 201, 206, 207, 232, 240

INDEX

Local economy, 19, 33, 46, 57, 102, 105, 107, 176, 178, 185, 189, 205, 229 Luxembourg, 4, 9, 12 M Management, 2, 8, 11–13, 15, 17, 34, 46, 51, 60, 78, 82, 83, 87, 89, 91, 92, 97–101, 103, 104, 106–108, 129, 154, 156, 161, 168, 170, 176, 180, 183, 195, 210, 211, 215–217, 219, 239, 240, 254, 259, 268 Member shares, 3, 76, 79, 85 Membership, 10, 37, 42, 43, 75–78, 80, 82, 83, 132, 145, 188, 189, 227 Mutuality, 63 N Networks with an IPS, 13 Non-performing loans, 63 O One head one vote, 37 OP-Pohjola, 12 P Portugal, 3, 4, 9, 41, 188 Profitability, 36, 40–42, 58, 77, 88, 98, 200, 226, 227, 229, 230, 232, 233, 235, 239 Proportionality, 6, 21, 56, 57, 66–69 Proximity, 1, 2, 5, 6, 15–17, 20–22, 33, 49–51, 78, 83, 104, 108, 113, 131, 137, 145, 146, 190, 206, 237, 240, 243–249, 251, 259–262 Prudent management, 1, 5, 20, 22, 37

273

R Rabobank, 3, 4, 9, 144, 208, 211–216, 226, 227, 230, 232 Raiffeisenbanken, 4, 9, 12 Raiffeisen, Friedrich Wilhelm, 2, 7, 36, 48, 59 Regulation, 6, 15, 21, 30, 31, 39, 43, 45, 46, 55–57, 59, 60, 62–70, 76, 80, 84, 88, 91, 98, 104, 106, 111, 114, 120, 122, 181, 184, 188 Relationship banking, 18, 32, 34, 37, 46, 49, 50, 57, 69, 204 Relationship lending, 3, 7, 8, 18, 19, 102 Renewable energy, 168, 169, 179, 203, 213, 214 Reporting, 21, 166, 173, 179, 184, 186, 225

S Savings banks (Sparkassen), 18, 44, 45, 144, 148, 154, 155 Schulze-Delitzsch, Franz Hermann, 2, 7, 36, 59 Shareholder value banks, 37, 39, 45, 46, 59, 66 Small and medium enterprises (SMEs), 17, 18, 20, 23, 33, 34, 38, 43, 45–49, 69, 99, 125, 128, 131, 155, 172, 176–178, 180, 182–184, 187–190, 205 Social media, 146, 161, 244 Spain, 3, 5, 9, 11, 147, 150, 151, 188 Stability, 17, 34–36, 41, 59, 60, 62, 63, 67, 68, 70, 88, 89, 112, 195, 204, 205, 207, 220 Stakeholder value banks, 19, 45, 46, 59 Sustainability, 6, 20–23, 32–34, 36, 38, 40–43, 49–51, 58, 80, 98,

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INDEX

99, 104, 134, 156, 157, 167, 170–175, 177, 179–181, 183–185, 188–190, 193, 194, 202, 203, 210, 211, 215, 268 Sustainable finance, 20, 21, 51, 170, 172, 173, 175, 178, 181–184, 190, 193

The Netherlands, 3, 11, 59, 202, 208, 214, 216, 226

U United Kingdom (UK), 5, 9, 29, 59, 209, 217, 218

T Territoriality, 7, 82, 99, 101, 102, 107, 108, 112, 132, 185, 206, 261

V Volksbanken, 4, 9, 226, 227, 229, 232