co-operative banks in the new fi nancial system
TRANSCRIPT
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Co-operative banks in
the new financial system
Rabobank Group
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Contents | 1
ContentsPreace 3
1 Executive summary 5
2 The allout rom the inancial crisis 8
. Causes and direct eects . Eects on business principles and banking models
. Impact on banking market structures
. Summary
3 History, evolution and special eatures o co-operative banks 15
. Origins o co-operative banks
. Disappearance o original ‘raisons d’être’
. Evolution o co-operative banks: local-national-international
. Six distinguishing eatures o mature co-operative banks
. Summary
4 Size and perormance o co-operative banks in Europe 22
. Size o co-operative banking sector in Europe
. Financial perormance o co-operative banks
. Impact o co-operative banks on national inancial systems
. Summary
5 Co-operative banks in the new inancial system 29
. Opportunities
. Challenges
The Rabobank Group case study 33
. History and evolution o Rabobank
. Position o Rabobank Group
. Rabobank in the new inancial system Appendix A 43
Reerences 45
Colophon 47
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2 | Co-operative banks in the new fnancial system
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Preace | 3
Last year’s inancial crisis shook the global inancial system down to its
very oundations, as the allout rom the collapse o the sub-prime
lending bubble spread across the globe. The ull extent o the integration
o the world’s inancial markets was revealed. Large-scale governmentintervention and extraordinary monetary measures were necessary to
saeguard inancial stability. Ater the shuddering blow o the immediate
eects, inancial institutions now ace the recessionary eects o the
inancial crisis.
The business principles underlying the inancial system have to change
undamentally i conidence in the inancial system and inancial stability
are to be restored. Trust, the traditional cornerstone o the inancial
sector, has been replaced by a general distrust o the banking sector.
Both inancial markets and consumers must regain conidence in banks.
And banks must likewise regain conidence in each other. Governments
and society are calling or undamental changes rom inancial institutions:
a greater ocus on integrity and ethics, a responsible risk attitude, a
longer-term perspective, improved transparency and, last but not least,
a much stronger customer ocus.
Co-operative banks were and are certainly not immune to these
developments, and made some mistakes themselves. All large
co-operative banks suered substantial losses on more risky investments.
But by comparison with private banks they appear to have been dealt
only a glancing blow by the immediate eects o the crisis. I think thatco-operative banks escaped relatively unscathed rom the crisis thanks
to their unique characteristics, not least in terms o their corporate
governance. The members, who are also customers, own the entire
organisation. And member ownership is relected in an approach that is
consensus-driven to a greater extent and avoids any strong ixation on
one stakeholder. The concomitant long-term view and risk-averse stance
translate into a more conservative banking strategy directed towards retail
banking. In addition, co-operative banks distribute little o their proit,
adding it to reserves or own unds instead. Consequently, co-operative
banks are some o the most highly capitalised institutions in Europe and
tend to contribute to the stability o national inancial systems.
The unique eatures and core competences o co-operative banks
provide a solid platorm with clear opportunities or the coming ive
years. For instance, most o the ‘new’ characteristics o the global
inancial system, and customer centricity in particular, have been part
o co-operative banks’ DNA rom the outset. But this does not mean
that these opportunities can be simply cashed in. A proactive and
innovative attitude is needed to contend with a wide range o maniest
challenges. The bottom line is that the success and lie expectancy o
mature co-operative banks depend on their competitiveness, the
quality and strategy o their management, and, last but not least,
their relationships with their members. Past experience shows that
co-operative inancial institutions are able to adapt to changing
circumstances and re-invent themselves. This is abundantly clear in
the case study o the Rabobank Group that concludes this report.
I hope that this report will contribute to a better understanding o the
strengths o the co-operative banking model. I am convinced that the
principles o this model are viable, uture-proo and oer clear added
value. This holds true as much or the developed world as it does or
emerging and developing countries, where access to inance is more
oten the exception than the rule.
Piet Moerland
Chairman o the Executive Board o Rabobank Group
Preace
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4 | Co-operative banks in the new fnancial system
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Executive summary | 5
Executive summary
Ater the house price bubble burst in , governments and monetary
authorities took a broad range o drastic measures to avoid the collapse
o the global inancial system. The restoration o public conidence in thebanking industry had top priority in the short term, while the need or
remodelling the global inancial architecture to make the inancial system
more resilient against uture shocks became apparent. In and ,
many banks were engaged in reorganisations o their businesses.
Some returned to the basics o traditional banking and others needed to
strengthen their capital position substantially. Today’s banking industry
is acing the eects o a deep economic recession and is set to suer
additional losses in credit portolios. Meanwhile, governments and
inancial authorities have announced stricter banking rules and more
stringent supervision at an international level. Capital and solvency
requirements or banks will be tightened, and improved risk management
will be required. Moreover, stringent policy measures to saeguard the
stability o the inancial system are underway.
The global turbulence shook up the banking sector and led to new
rules o the game. Banks had to rethink their strategy and adjust their
business principles and structures. The new inancial system willmaintain a tighter ocus on customer centricity, while integrity and
ethics will play a more important role in retail banking than in the past.
International controls will be improved, and the corporate governance
and compensation schemes o banks must be adjusted to provide
adequate incentives or a responsible balance between risks and their
capital position. Banks have to apply a long-term perspective instead
o a dominant ocus on short-term proit.
A distinction is drawn in this study between private and co-operative
banks. The undamental dierence between them is their corporate
governance: shareholder versus member ownership. This dierence
entails numerous consequences in terms o their business orientation
and principles. The characteristics and achievements o co-operative
Financial institutions must recognise that the uture will not be like the past.
The organisations that come out rom the inancial crisis as winners, will be those
that do what is required or survival, but also adapt to the realities o a new world.Financial institutions must resist the urge to ocus excessively on their irst-line
response to the crisis at the expense o longer-term considerations. At the same time,
inancial parties are compelled to adjust to the realities o doing business in a global
world where the interests o multiple stakeholders are becoming increasingly
important and the balance o economic power is shiting to the East.
This report ocuses on the direct and indirect eects o the crisis or European
co-operative banks. The crisis entails both clear opportunities and challenges orco-operative banks in the coming ive years. This study has been prepared or the
‘Duisenberg Lecture’ at the annual meeting o the IMF/World Bank in Istanbul,
Turkey in October .
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| Co-operative banks in the new fnancial system
competitive, operate eiciently and attract customers in the uture.
By joining orces in speciic banking areas, co-operative banks may
achieve suicient scale compared to their counterparts and diversiy
the risks o cross-border activities. To that end, ways o closer co-operationon international markets could be developed, building on the awareness
that non-committal attitudes and non-committal partnerships belong to
the past. The ultimate aim o these alliances could be to create European
co-operative institutions in certain banking areas. The easibility o this
strategic direction requires urther evaluation, but could be an enticing
prospect or co-operative-minded bankers.
Another opportunity stems rom the origins o most co-operative banks.
They were oten established more than a century ago in rural areas
where people were deprived o inancial services. The original ‘raisons
d’être’ may have disappeared or mature co-operative banks in mature
inancial markets, but this is deinitely not the case in many countries all
over the world. Co-operative banks are eminently well-equipped to help
these countries in setting up sustainable inancial inrastructures, visibly
contributing to economic and social development. With a presence in
these emerging or developing countries, co-operative banks can clearly
demonstrate their ‘presence value’, which is virtually impossible to show
in Western countries. They know very well that copying and pasting
their own co-operative template to other countries is not the right way
orward. Adjustments are necessary to allow or historical and cultural
dierences. Microinance is a natural it or co-operative banks inemerging and developing countries and they should make it their
business to claim this promising area o banking. When the inancial
sectors in these countries mature, co-operative banks will possess a
strong oothold based on a long-term commitment. The governments,
regulators and inancial sectors o developing countries should also
embrace co-operative banks, since they would provide the necessary
access to inance or enterprising poor people.
This does not mean that opportunities can simply be cashed in.
Five main challenges can be identiied.
A. Proactive and innovative attitude
Many competitors are redeining, oten with government support,
their strategy and business models and reorganising their businesses.
banks in the past ew years have remained notably underexposed in
recent publications, the press and various reports. But the success o
the co-operative business model is abundantly evident in the igures
they have posted. Average market shares o European co-operativebanks as well as member-to-population ratios have increased over
the last decade. This is one o the strongest proos o the vitality o
the co-operative business model. But one has to bear in mind that
co-operative banking is not by deinition better than other banking
models and ater all, past perormance is no guarantee o uture success.
For instance, co-operative banks were - and are - not sheltered rom
extraordinary events resulting rom the crisis. They too suered losses
and incurred write-downs directly related to the inancial crisis. But they
appear to have been hit less hard than private banks and they did not
need large-scale government support. They too eel the eects o the
general loss o conidence in the banking sector and ace competitors
on a sharply tilted playing ield. Owing to their strong position in the
retail markets, they will eel the negative impact o the deep economic
recession. To sum up, co-operative banking is not a panacea or post-
crisis banking in general, but should be viewed as an interesting
alternative to the other banking models that have been in the spotlight
or most o the time in recent decades.
Looking urther ahead, the unique eatures and natural core competences
o co-operative banks provide clear-cut opportunities in this new
banking environment. The ‘new’ characteristics o the inancial systemhave been part o co-operative banks’ DNA rom the start and are
considered to be their main competitive advantage. As member-owned
institutions, co-operative banks now have the opportunity to leverage
the new banking rules and ethics to their advantage in a well-designed
public relations campaign. In addition, their strong capital base,
balanced corporate governance structure and large yet inely-meshed
branch networks enable them to maintain a more pronounced external
ocus than many o their competitors, which may translate into market
share gains.
Building on the work by Unico and the European Association o
Co-operative Banks, closer international co-operation between European
co-operative banks likewise oers promising advantages. The reason is
that operational scale will become increasingly important to remain
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Executive summary | 7
The winners emerging rom the inancial crisis will be those banks that
are able to oer good products and services at air prices with highly
eicient operations in the long run, that put the customer irst, and that
are well-capitalised with moderate risk proiles. Strategic choices orserving customers eiciently and a strict ocus on core activities and
competences are indispensable. Modern co-operative banks must be
entrepreneurial, cost-eective, eicient and businesslike organisations.
The long history o co-operative banks shows that they can live up to
these expectations.
Within about two years, competitors will be leaner and meaner and some
o them will re-enter the market aggressively to regain market share.
B. Improving eiciency levels The pressure or oering competitive and innovative products/services
in the market is rising, while margins tend to shrink. This requires a critical
evaluation o the costs and beneits o the extensive distribution network.
Integrating physical and virtual distribution channels and pursuing ways
o personalising contacts with customers via virtual channels is necessary.
In addition, continuous training and education are required to ensure
employees’ knowledge is state-o-the-art. The attitude, knowledge and
competences o sta are the main dierentiators in banking competition.
C. Strategic choices: dierences compared to other inancial
services providers
Competitors tend to copy business models and products/services
quickly. Co-operative banks have to communicate clearly the unique
eatures they oer. Products and prices do not dier much between
players. Strategic choices or servicing customers eiciently and
maintaining a strict ocus on core activities are necessary.
D. To balance beneits and risks o international versus national
(home market) activities.
It will be a balancing act to reconcile the interests o domestic
members, i.e. the co-operative part o the organisation, with the sizeand risks o international activities. Operations abroad that become
substantially larger than the co-operative part might threaten to dilute
the co-operative nature o the bank concerned. Also, doing more
international business may increase the overall risk o the organisation
and destabilise the co-operative banking business.
E. To balance local delivery and central management
It has become more diicult or members to monitor the organisation
due to the increased organisational complexity o mature co-operative
banks, where management is carried out by dedicated proessionals.
A transparent and durable balance between local delivery and central
management is needed to saeguard engagement and involvement o
- members o - local banks.
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8 | Co-operative banks in the new fnancial system
Numerous studies and reports have already been devoted to the causes and direct and
indirect eects o the recent inancial crisis.1 This chapter will ocus primarily on the
aspects that are relevant or answering the ollowing two questions: (i) How has theinancial crisis aected the customs and business models in the inancial system;
and (ii) How will the inancial crisis impact national banking structures in the longer
term? In this report, the initial lessons learned rom the irst global inancial crisis o
the twenty-irst century are summarised in order to address these questions. The short
and longer term eects o the crisis on the inancial services industry are then outlined.
The subsequent chapters examine how the eects o the inancial crisis will speciically
aect co-operative banks in the short and long term.
2.1 Causes and direct eects
The roots o the most recent credit crisis lie in the United States. Five key
actors initially activated reinorcing dynamics within the system as a
whole (diagram .). Not only banks, but also rating agencies, banking
regulators, supervisors and private households played a part in the
creation o the bubble in house prices in the United States. It is
consequently impossible to point out a single culprit. In essence, the
incentives within the inancial system and private households were notright and led to greedy and reckless behaviour. Generally speaking,
too many inancial institutions aimed to make more and more proits
or their shareholders, investors and managers in a low interest rate
environment. This was caused in part by perverse compensation
schemes, an overriding short-term orientation and little attention to
stakeholders other than shareholders. Households also speculated on
continuing rising house prices and incurred more and more debts,
initially at low interest rates. In the run-up to the inancial crisis, the risks
associated with inancial transactions were collectively underpriced
worldwide. The end result was a tremendous growth in credit,
exceptional increases in house prices and a global spread o assets,
particularly through securitisation o US mortgages o increasingly
poorer quality.
The allout rom theinancial crisis
Detailed inormation on this topic can be ound in, or example CEPR/VoxEU.org
publications edited by Felton and Reinhart () and reports rom the industry
(Financial Stability Forum, ).
Diagram 2.1 Causes o the credit crisis
Causes Results
Loose monetary policy, particularly in US- Cheap money: low interest rates
Favourable economic conditions
- Income growth
- Wealth growth
- Low unemployment
Easing o lending terms
- New products, particularly
non-standard mortgages
Financial innovations
- Special purpose vehicles
- Credit deault swaps
Inadequate supervision
- Questionable role o rating agencies- Supervisory ramework provides incentive
or lending and securitisations
Loose monetary policy, particularly in US- Cheap money: low interest rates
Favourable economic conditions
- Income growth
- Wealth growth
- Low unemployment
Easing o lending terms
- New products, particularly
non-standard mortgages
Financial innovations
- Special purpose vehicles
- Credit deault swaps
Inadequate supervision
- Questionable role o rating agencies- Supervisory ramework provides incentive
or lending and securitisations
Source: Rabobank
▶
Enormous rise in
house prices
Enormous lending
growth
Enormous
underestimation
o risk
Enormous collective
over-optimism
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The allout rom the fnancial crisis | 9
The inancial crisis has also revealed the necessity or consumers and
irms to clean up their balance sheets (deleveraging) and to adjust their
consumption and investment patterns. These adjustments have severe
repercussions or the real economy. Consumption and investment haveallen worldwide, causing an unprecedented recession. In an attempt
to mitigate the negative eects o the inancial crisis on their real
economies, many governments have taken measures to support certain
industries, e.g. the automobile sector, to boost consumption and to
maintain purchasing power. These budgetary and iscal measures lead
to sharply rising government deicits on top o the capital injections in
inancial institutions. Many countries have been conronted with rapidly
rising unemployment rates and increasing bankruptcies in .
Following the initial blow o the direct eects, inancial institutions are
now conronted with the recessionary eects o the inancial crisis.
They have hopeully now recovered suiciently rom the initial shock to
ace these economic challenges and to bear the associated losses. It is
evident that strong capital buers and prudent risk management are
needed. The truth is that painul worldwide economic and inancial
adjustment processes are taking place in order to correct previous
bubbles in not only some housing markets, but also in commodity,
raw material and energy markets.
Co-operative banks are certainly not immune to these worldwide
developments and have also made mistakes themselves. While allthe large co-operative banks have suered substantial losses on risky
investments, they do seem to have been hit relatively less hard by
the direct eects o the crisis than private and investment banks.
Their losses and write-downs appear to be relatively moderate and mainly
concentrated in their international activities. As will be discussed later in
this report, co-operative banks are predominantly domestically orientated
and operate primarily in less risky retail banking markets. Co-operative
banks are, however, nonetheless clearly eeling the impact o the
economic downturn because many o their retail and wholesale clients
are being aected by the economic recession.
This process o continually rising house prices was brought to an end by
the Federal Reserve Bank’s monetary tightening that resulted in the now
well-known chain reactions within the inancial and economic systems
mid . It started with increasing payment diiculties or householdsthat led to oreclosure sales, which in turn placed pressure on house
prices. A negative spiral o alling house prices, oreclosures, declining
consumer and producer conidence, increasing deaults on credits,
write-downs o credit portolios in the US, worldwide losses and capital
shortages at (investment) banks, a stagnating interbank money market
and a complete loss o conidence in the inancial system ensued.
Despite major liquidity support operations and signiicant interest rate
cuts by central banks and capital injections by governments around and
ater mid-, several banks around the world either ailed or had to
be bailed out by take-overs or nationalisations.
The allout rom the collapse o the sub-prime lending bubble has spread
across the globe. This has revealed the ull extent o the integration o
the world’s inancial markets. Banks incurred huge losses and had to
write-down substantial amounts worldwide. Many banks have thereore
become appreciably more reticent in providing credits and loans to the
private sector due to weakened capitalisations. Chart . illustrates that
the credit criteria or businesses and households have been tightened
worldwide in . This exerts a downward pressure on investment and
economic activity.
Europe USA
120
90
60
30
0
-30
-60
-90
2004 2005 2006 2007 2008 2009
Chart 2.1 Global tightening o lending criteria
in %
Source: Bloomberg
Note: Net percentage o lenders that have tightened credit terms or companies.
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10 | Co-operative banks in the new fnancial system
maximisation and consequently acted as a catalyst or the emergence
o the crisis. A relatively large number o banks have already expressed
their intention to give the interest o customers again a more prominent
place in their daily business.
Ater the massive bailouts, society understandably expects inancial
institutions to adjust their behaviour to relect the wider public interest
and not, necessarily, shareholder interests. More emphasis will be placed
on people and their motives in taking inancial decisions, as well as on
the social role o banks. Integrity and ethics are once again central and
the short-term perspective with an exclusive ocus on material gains
and shareholder value will be much less accepted. The attention paid
to inancial institutions’ external eects will become more pronounced.
Priority will be given to collective and sustainable interests.
Regulation and supervisionBoth in the US and in Europe, the inancial crisis has given rise to intense
discussions about reorming the regulatory and supervisory regimes2
The Financial Stability Forum (FSF) recommendations, or example,
ocus on valuation and disclosure as means o rebuilding conidence in
the creditworthiness and robustness o inancial institutions. They also
address issues pertaining to reinorcing banks’ capital and liquidity
buers and enhancing risk management practices. The basic principles
as ormulated by the G- it in with those o the FSF: strengthening
transparency and accountability, enhancing sound regulation, promotingintegrity in inancial markets and reinorcing international co-operation
among regulators and supervisors (G-, a/b).
Based on current international policy discussions, a two-tier inancial
services system is likely to develop (PWC, ). On the one hand, retail
and investment banks will be operating under a tighter regulatory
regime. The general consensus is that banks should hold more capital.
How much and in what orm are less straightorward questions.
More capital will make the industry saer, but will also lower returns and,
as a result, most likely raise prices or customers. On the other hand, the
2.2 Eects on business principles andbanking models
New business principles The business principles o the inancial system must change drastically
in order to restore conidence and inancial stability. While the inancial
sector has traditionally thrived on trust, a general distrust o the banking
sector has now emerged. Financial markets and consumers must regain
conidence in banks. And banks must win back conidence in each other.
There have been accusations o corporate greed due to the sustained
and oten record proits that bank shareholders and management earned
until the inancial crisis broke out. This led to a public condemnation o
the ocus on short-term gains and materialism by banks. In this light,
governments and society are demanding the ollowing undamental
changes rom inancial institutions: A greater ocus on integrity and ethics,
a healthy risk attitude, a longer-term perspective, improved (product)
transparency and, last but not least, a much stronger customer ocus.
The inancial sector is also perorming critical sel-assessments and is
taking initiatives to improve its ethics, risk perception and risk attitudes.
Proposals have accordingly been put orward or healthier and more
modest executive and employee compensation structures in the inancial
services industry (Institute o International Finance, ). These schemes
induced risky behaviour and led to a ixation on short-term proit
For example, Financial Stability Forum (), G- (a/b), The de Larosière Group ().
Diagram 2.2 Stakeholders o fnancial institutions
Source: Rabobank
TaxpayerTaxpayer
EmployeeEmployee GovernmentGovernment
FirmFirm CitizenCitizen
ConsumerConsumer ShareholderShareholder
StakeholdersStakeholders
Society andenvironmentSociety andenvironment
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The allout rom the fnancial crisis | 11
concentrate more on providing services to retail customers and SMEs
rather than on wholesale banking and to ocus more clearly on their
core activities and traditional home markets.
2.3 Impact on banking market structures
The inancial crisis has both short-term and longer-term eects on
banking market structures. These structures are generally deined in
terms o inancial stability, competition, concentration, capacity, eiciency
and proitability (diagram .). While these conceptual notions are
interconnected, the signs o the correlations between these aspects
are diicult to establish and may also vary over time.
Financial stability and competition The current relationship between inancial stability and competition is
obviously inluenced by the abnormal market conditions (‘new rules’)
prevailing in the inancial services industry. The recapitalisations and
government aid programmes are contributing to the restoration o
inancial stability and are helping to restore the conidence needed to
bring about a recovery o inter-bank lending. These moves may also
support the objective o ensuring lending to the real economy. In the
longer term, recapitalisation could support eorts to prepare a troubled
bank to either return to long-term viability or to wind up its operations
in an orderly ashion. In this current recessionary period, additional
capital also provides a cushion to absorb losses and limit the risk o banks becoming insolvent.
‘shadow banking system’ comprising hedge unds, private equity, o-
balance-sheet vehicles and rating agencies will be subject to less heavy
regulation, even though it will still ace greater scrutiny than in the past.
The renaissance o classic bankingDue to the envisaged new business principles and tighter regulation
and supervision, certain national and international banking models have
become less viable or unattractive. With respect to products, a number
o dubious complex and non-transparent inancial products that have
been developed in the past ew years, partly due to demand rom the
non-inancial sector, will be eliminated. While this does not include
derivatives, their volumes may shrink and become more aligned to the
size o real economies. In addition, some activities will change, diminish
or disappear (see ECB, a). The number and size o special purpose
vehicles will certainly diminish in line with the related decrease in
securitisation activities. Investment banking will continue to be an
important activity, even though it will be carried out on a reduced scale.
A decline in cross-border banking is expected as banks reocus their
activities on their original home markets. As a result o both massive
write-downs and losses and government interventions, banks have less
scope or international aspirations. In this respect, the ECB sees signs
that the inancial turmoil has led to a retrenchment o inancial markets
within national borders and consequently to a reversal o the European
inancial integration process in banking (ECB, ).
Due to the narrowing range o products and activities, ee and
commission revenues will decrease and the dependency on interest
income will increase. Large parts o the shadow banking system and
some large international inancial conglomerates will be dismantled
and there will be a move back towards retail banking.3 It appears that
the public and politicians have developed an aversion to inancial
institutions that are considered ‘too big to ail’, ‘too big to manage’ or
‘too big to save’. In many countries, the crisis has prompted banks to
reconsider the nature, size, geographical distribution and goals o their
activities. A number o banks have already stated that they intend to
Retail business is deined as inancial products and services distributed through physical
and non-physical networks to retail customers and SMEs.
Diagram 2.3 Elements defning banking market structures
Source: Rabobank
Financial stabilityFinancial stability
ProftabilityProftability
EciencyEciency CompetitionCompetition
CapacityCapacity ConcentrationConcentration
DelicatebalanceDelicatebalance
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12 | Co-operative banks in the new fnancial system
retail banking market and their original home markets as stated earlier
(diagram .). In addition, government-supported or nationalised banks
will sooner or later re-enter the market as trimmed-down inancial
institutions that are expected to ocus predominantly on retail banking.
Concentration issuesIn combination with the espected increase in competition, government
interventions, bailouts and/or orced or emergency mergers and
acquisitions will undoubtedly lead to urther consolidation in banking.
A trend towards higher market concentration ratios has already been
discernible in the iteen original countries o the European Union4 over
the past ten years, or instance as measured by the Herindahl Index and
CR ratio (chart .).5 This relects the decrease in the number o credit
institutions and the dynamic growth o certain banking groups, due in
part to their M&A activity. The concentration ratios vary considerably rom
country to country. Smaller countries tend to have more concentrated
banking sectors. Banking sectors in larger countries, such as Germany,
Spain, Italy and the United Kingdom are more ragmented.
Be that as it may, the assessment o any government intervention
must take into account possible distortions o competition (European
Commission, b). Recapitalisation schemes may, or example, give
an undue advantage to distressed or less-perorming banks compared
to banks that are undamentally sound and better-perorming. This willdistort competition in the market, distort incentives, increase moral
hazard and weaken the overall competitiveness o banking systems.
A public scheme that crowds out market-based operations will rustrate
the return to normal market operation. It is obvious that a balance must
be struck between these competition concerns and the objectives o
restoring inancial stability, ensuring lending to the real economy and
addressing the risk o insolvency. A situation in which the various orms
o government aid exert a long-lasting inluence on uture competition
in the banking industry must be avoided.
Competition could endanger inancial stability in the longer term
i banks were to begin imitating each other ’s strategic approach.
Competition may become extremely ierce as a result o the overriding
strategic reorientation o many banks towards - the top end o - the
The data comprises countries that originally ormed the
European Union prior to the expansion on May .
A country’s Herindahl index is calculated as the sum o
the squares o all the credit institutions’ market shares in termso total assets. The CR is the percentage share o the ive
largest credit institutions, ranked according to assets, in the
sum o the assets o all the credit institutions in the EU.
Diagram 2.4 Competition risk: ocus on and imitation o retail strategies
Bank ormulate identical
strategies/priorities regarding Consequences
‘Mass market’
- Standardisation o products and processes
- Cost control and eciency emprovements
- Fierce price competition (transparency)
- Dismantling o fxed client-advisor relationship
Top o market
- Focus o large banks on top o retail market
- Pro-active service (at ‘live events’)
- Tailor made solutions
Integration o physical and virtual channels
- Tougher fght or market share
- Operational excellence is key
- Tight segmentation based
on gross contribution
- Distinctive eatures are more
dicult to demonstrate
Source: Rabobank analysis
▶
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The allout rom the fnancial crisis | 13
Based on the ratio o assets per employee, eiciency in the EU
banking sector has already improved continuously over the past ten
years. As a corollary, capacity in banking is expected to decrease;
there will be ewer branches per inhabitant.
Proitability The outbreak o the inancial crisis in June caused a plunge in
banking proitability in and . The ensuing economic recession
will place pressure on banking proits in and . However, the
impact o the inancial crisis extends urther than these remarkable
short-term consequences. The new rules, principles and business models
will be visible in all the other determinants o the banking structure in
the years ahead and will eventually result in structurally lower proitability
or the entire sector. For example, the return to retail banking, higher
capital requirements and unding costs and the elimination or reduction
o some products and activities will all exert downward pressure on the
longer-term margins and proitability or the rest o the banking industry
as a whole. Apart rom these ‘new’ trends, there are also other important
trends that will have similar consequences or proits. Diagram . shows
the major ‘new’ and existing trends and their overall implications.
Cross-border consolidation is a dierent story. From a inancial integration
perspective, both the retail banking segment and the underlying market
inrastructure (ECB, ) remain quite ragmented. Retail banking is
characterised by a higher degree o inertia and is inluenced more by
structural elements such as the regulatory ramework. This is clearlyvisible in the evolution o cross-border assets and liabilities in the euro
area. The share o cross-border non-bank loans and deposits in the euro
area has remained stable over the past decade at around to percent.
Eiciency and capacityBy creating ‘new’ rules and a dierent business environment, the
inancial crisis has boosted the importance o eiciency improvements
and cost reductions. The economic recession, increasing competition,
elimination or decreased scale o certain activities and products and
the reorientation towards retail banking all clearly necessitate eicient
operations in order to oset the all in revenues. Suicient scale,
particularly in back-oice operations, is a key precondition or realising
low unit cost prices. Banks are currently cutting jobs, closing branches
and divesting activities and business lines. They are also promoting
virtual service and distribution concepts. These actors will be relected
in the eiciency and capacity indicators o EU banking systems.
1,400
1,200
1,000
800
600
400
200
0
58
56
54
52
50
48
46
44
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Chart 2.2 Herfndahl Index and CR5 ratio in 15 EU countries
in points in %
Herfndahl index (let hand scale) CR5 ratio (right hand scale)
Source: ECB
2,500
2,000
1,500
1,000
500
0
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Chart 2.3 Eciency and capacity in EU15 banking sectors
in numbers in euros
Source: ECB
Population per branch (let hand scale) Total assets per employee (right hand scale)
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14 | Co-operative banks in the new fnancial system
2.4 Summary
The inancial crisis will lead to new rules, new business principles and new
business models in banking. The resulting banking model will eventually
be simpler, more risk averse and more transparent. Given the dramatic
experience o the crisis, special attention should be paid to the impact o investment banking activities on the stability o the new global inancial
system. Another salient eature is the expected ‘return to retail banking’
o many players. These new elements, whether enorced or not, will
undoubtedly contribute to the restoration o inancial stability, which
is an important actor o the banking structure. All the other structural
characteristics o banking will, however, undergo undamental changes
as a result o the inancial crisis. The inancial crisis will consequently haveeects on banking structures both in short and long term.
Diagram 2.5 Implications o ‘new’ and existing trends in the fnancial sector
Increasing
legislation,
regulation and
supervision
- Compliance, higher solvency requirements
- SEPA, European Payments Directive
- Adjustment o compensation schemes
- Consumer protection and transparency
- Disappearence o certain products and activities
Source: Rabobank analysis
▶
Turbulences in
competitive
environment
- Government intervention and support
- Return to retail banking o many banks
- Emergence o niche players and non-banks
(insurers, warehouses, consumer frms)
- Reorientation towards traditional home markets- Breaking up o some fnancial conglomerates
▶
Further
consolidation
and increasing
scale
- Consolidation (partly ‘orced’)
- Automation, standardisation, simplifcation
- Outsourcing/oshoring (‘process utilities’)▶
Changing
distribution
channels
- Intermediairies
- Direct banks
- Internet/online▶
▼ Margins
▲ Costs
▲ Competition
▲ Burden o administrative
expenses
Alternativeproviders
- Financing: PP fnancing, capital markets, private equity- Payments: internet frms, mobile phones ▶
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History, evolution and special eatures o co-operative banks | 15
As discussed in chapter , practices and business models in banking will change
undamentally. Beore exploring how the newly emerging banking environment
aects co-operative banks, this chapter will irst provide a brie overview o the historyand evolution o the co-operative banking sector. Subsequently, the comparative
advantages o mature co-operative banks will be discussed.
Despite the act that they addressed similar issues, dierent co-operative
banking models emerged in Europe. These variations resulted rom
country-speciic historical and cultural actors, which shaped national
market structures and market environments. In some countries, the
development o co-operative banking was initiated, nurtured and
supported by outside orces, e.g. governments. Consequently, the orm,
appearance, organisation and operation o co-operative banking groups
dier across countries and over time. They vary in terms o their attitudes
to membership and their interpretation o co-operative values (Oliver
Wyman, ). Hence, the co-operative banking model does not exist
(Van Diepenbeek, ).
3.2 Disappearance o original ‘raisons d’être’
The original ‘raisons d’être’ o co-operative banks have largely
disappeared in most European countries in the last years. Unlike or
developing countries, access to banking services and products is no
longer a major issue in the developed world. Dependence on members
or unding has eroded, since most co-operative banks now access debt
capital markets and thereore must satisy rating agency requirements
to secure unding on avourable terms. At the same time, members’
potential losses are now limited due to deposit insurance schemes, thus
weakening their incentives to monitor the organisation. Furthermore,
autonomy and discretion o local member banks in managing their
aairs have diminished due to the increased requirement or centralised
business unctions to deliver eiciency gains through economies o
scale and scope. This has created a distance between the centralised
management o co-operative banks and their members. The increasing
3.1 Origins o co-operative banks
The history o many co-operative banks can be traced back to the
inancial exclusion aced by many communities in nineteenth-century
Europe. With the industrial revolution in ull swing, the emerging inancial
services sector was primarily ocused on wealthy individuals and large
enterprises in urban areas. The rural population, in particular armers,
small businesses and the communities they supported, were eectively
excluded rom inancial services (Oliver Wyman, ). Most co-operative
banks were established ollowing the ideas o Hermann Schulze (-)
and Wilhelm Raieisen (-). Independently rom each other, they
started to promote the idea o credit co-operatives, with Schulze ocusing
on helping small business owners and artisans in urban areas and
Raieisen seeking to assist the rural poor.
Thus, co-operative banks were originally set up to correct this market
ailure and to overcome the associated problems o asymmetric
inormation in avour o borrowers. They could do so because member/
consumers inanced the institutions and were involved in the decision-
making process. Within small communities, relatively intimate knowledge
o each other’s credit and trustworthiness guaranteed that loans were
only provided to borrowers who could be expected to repay them.
Financial incentives or members to monitor each other and the social
relationships among members hence contributed signiicantly to the
lourishing o co-operative banks. Beginning in Germany, the co-operative
banking concept gradually spread to the rest o the continent and to
the Nordic countries.
History, evolution and specialeatures o co-operative banks
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1 | Co-operative banks in the new fnancial system
the desire to reach economies o scale and higher eiciency levels.
However, the extent o decentralisation and integration within the
networks varies (Desrochers and Fischer, ). Co-operative banks
were also engaged in consolidation, diversiication, domestic acquisitionso publicly quoted banks, and launching new distribution concepts.
In short, mature co-operative banks re-invented themselves in the course
o time to counter actors constituting a threat to their existence.
National-international evolutionIn line with internationalisation and globalisation trends, co-operative
banks have embarked upon international strategies. Some years
ago, European co-operative banks established platorms or mutual
international co-operation: the European Association o Co-operative
Banks (EACB) and the Unico Banking Group. The EACB constitutes a
valuable partnership in the current dynamic environment. It ocuses
on promoting the interest o co-operative banks in Europe, but also
stimulates discussions about the social role o co-operatives and lags
important changes in the regulatory environment and level playing
ield on EU level. The original aim o Unico was to support the
expansion o its partners’ international operations. The most important
components o the Unico alliance these days are the sharing o know-
how and expertise on a wide range o banking subjects and commercial
initiatives, and the joint training o sta. A notable product that has
been developed in the Unico context is UniCash - an international cash
management acility.
Co-operative banks also took individual international steps. The reasons
and strategies o cross-border expansion dier a great deal across
co-operative banks and over time, but are generally in line with those
o their private competitors (ECB, a). Regarding their motives, some
co-operative banks state that the main driver o international expansion
was the limited (organic) growth potential in their domestic markets and
the higher growth potential in their host countries. Other co-operative
inancial organisations have argued that the internationalisation
complexity o inancial services provision and the establishment o
subsidiaries or international activities corporate and investment
banking required proessionalisation o management and the associated
establishment o central institutions where decisions are increasinglytaken. Finally, the comparative disadvantages that non-co-operative
banks aced in the past or servicing small armers and small businesses
have also largely disappeared. Legal and juristic rameworks now oer
much stronger contract enorceability and veriiable inormation about
potential borrowers is generally available.
3.3 Evolution o co-operative banks:local-national-international
Local-national evolution The market environment has altered dramatically or co-operative
banks over the years. Quite a ew co-operatively organised banks did
not or could not succeed, or now just live a marginal existence. Many
countries never had a co-operative sector o any signiicance, because
the co-operative ideas did not ind very ertile soil. In other countries,
co-operative banks chose to be acquired by other banks or to transorm
themselves into private banks. This was the case in Denmark, Sweden,
the U.K. and Belgium. In Sweden, the Föreningsbank network was taken
over by the savings bank network, while in Belgium the legal structure
o co-operative banks CERA (now part o the KBC group) and BACOB
(now part o the Dexia group) was changed in such a way that theyare no longer classiied as co-operative banks. In the UK, a number o
building societies have converted into public, quoted companies in
order to expand their activities.
The currently existing co-operative banks have succeeded in ollowing up
and adjusting to changes in the market environment, but have chosen
dierent directions and strategies. The bottom line is that they are
convinced that they can still provide added value to their customers
and members resulting rom their speciic governance structure and
their disapproval o maximising proits. Although it is impossible to put
co-operative banks in one box, some general patterns in their domestic
evolutions can be observed (box .). While they began as local banks,
most o the present co-operative banks have evolved into national
(network) organisations, partly as a result o regulatory requirements or
French Crédit Agricole has a three-tier network, comprising local, regional and central
organisations. The Dutch Rabobank has a two-tier network, consisting o local member
banks and the central organisation. The Italian Banchi Populari has no national structure
at all, with all member banks acting completely independently o each other.
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History, evolution and special eatures o co-operative banks | 17
A. Organisational structures
Important changes took place in the organisational structures o
co-operative banks (Di Salvo, 2003). Nowadays, the vast majority o European co-operative banks are organised in networks. Industrial
reorganisation, governance reorm and pressures o competition
have in general led to more and more tightly integrated networks
o individual co-operative banks and have ostered an accentuated
centralisation o strategic and operating unctions and processes.
Achieving economies o scale or scope and generating synergies
were the primary motives to set up so-called higher-tier levels.
However, the evolution towards a more centralised structure is more
pronounced in some countries than in others. The networks still vary
rom loose associations to cohesive groups (Fitch, 2001). The Dutch
co-operative group is one o the most centralised systems, whereas
the Italian co-operative system remains the most decentralised o
the major European co-operative movements. The Austrian and
German co-operative sector take up a middle position.
Most co-operative groups have created second- or third-tier structures6
in order to obviate the limits intrinsic to their small scale and speciic
purposes. In many cases, legislation has endowed the central bodies
with guidance and supervisory powers over local co-operative banks.
The irst-tier bank is unequivocally assigned the primary task o
managing contacts with its members and local community and doing
business with members and customers. The higher-tier organisationshave governance models that tend to conorm to co-operative
principles, since they intrinsically perorm a service unction or their
co-operative members (EACB, 200).
B. Consolidation
In response to the increase in competition and institutional
developments within domestic retail banking markets, co-operative
banks have pursued consolidation in various ways. At the local level,
branches have been closed or merged with others in order to
achieve eiciency gains. Where third-tier structures exist, consolidation
at the regional level can be observed. Co-operative banks also played
a role in the domestic consolidation process. In particular French
co-operative banks have acquired a number o private banks.
C. Domestic diversiication
Co-operative banks have diversiied away rom purely retail and small
business banking and have also become active in corporate banking.They have set up businesses in the ields o leasing, actoring,
insurance and investment unds. Some co-operative banks ormed or
acquired specialised subsidiaries, whereas others oered non-banking
products to customers/members rom third parties. This way, the
product range oered by local member banks has been expanded.
In some co-operative systems, the subsidiaries are owned and
governed by a well-capitalised central institution. In co-operative
systems where the central organisation is insuiciently capitalised or
these acquisitions, local member banks or their regional organisations
are also shareholders o the subsidiaries, which complicates their
governance to some extent.
D. Funding
Funding sources have been extended beyond traditional
membership capital to various orms o capital market unding.
To increase capital lexibility, most co-operative banks have created
various options to strengthen their capital base. Some co-operative
banks have chosen partial demutualisation to access the equity
markets. This has happened in Finland, France and Italy. A signiicant
development in co-operative banking has been the partial lotation
o the central institution o the French Crédit Agricole group and itssubsequent acquisition o Crédit Lyonnais in 2003. Rabobank and
DZ Bank, the central institution o the German co-operative banks,
have issued hybrid debt (e.g. trust preerred securities or
proessional investors).
E. Distribution and service concepts
Traditionally, co-operative banks service customers/members via
branches. In recent times, co-operative banks have been increasingly
distributing their products and services via virtual channels, like the
internet, ATMs or call centres. Since the diversity o customers has
increased considerably, co-operative banks also dierentiate more
and more in the way they serve particular customer groups or
economic sectors.
Box 3.1 Main domestic evolutions o co-operative banks
Source: Rabobank analysis
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18 | Co-operative banks in the new fnancial system
Finally, the motive to ‘export’ the domestic co-operative model to other
countries has until recently only played a minor role in the international
strategies o co-operative banks. This changed, however, with the
growing attention or microinance in emerging markets and developingcountries. Nowadays, some co-operative banks are seeding new banking
business in new territories under the co-operative model. The French
Crédit Agricole ounded the Grameen Crédit Agricole Foundation to
develop partnerships with microinance institutions to operate in
developing and emerging economies. For instance, Rabobank assist
governments and communities in setting up agricultural co-operatives
and/or supporting co-operatively organised banks. This way, they
contribute to the creation o the required inrastructure to grant small
loans (microinance) to people in rural areas. In this respect, some
co-operative banks returned to their original roots. The rationale o the
oundation o co-operative banks in the nineteenth century was similar
to the one behind current microinance initiatives in developing
countries, namely to provide people with the tools and means to
collectively and individually help themselves. These initiatives are oten
perormed under the lag o ‘corporate social responsibility’.
3.4 Six distinguishing eatures o matureco-operative banks
At this point, two undamental questions arise, which cannot be
answered easily and unambiguously: (i) What is the ‘presence’ valueo co-operative banks in mature domestic markets; and (ii) How do
co-operatives dierentiate themselves rom their current competitors?
Regarding the irst question the European Association o Co-operative
Banks has ormulated the ollowing answer (EACB, ):
“The primary mission o co-operative banks is to promote the
economic interest o their members, who are their customers.
Co-operative banks strive to do so by oering quality products
and services at attractive prices rom the perspective o what is
good or the customer. They have an impact presence on the
conditions o products in the whole banking market and support
the economic and social integration o individuals”
strategies o their customers prompted their cross-border expansion.
The diversiication o risks and business lines as well as the somewhat
circular argument that their private peers ollow international expansion
are less requently put orward as (explicit) motives. Economies o scaleand scope are rarely mentioned as important drivers or cross-border
expansion. Rabobank estimates that European co-operative banks
currently generate on average around percent o their total net
revenues outside their home country.
Like their private competitors, co-operative banks have explored
dierent international strategies over the past decades with varying
success. Some steps led to disappointing experiences and necessitated
adjustments in the international strategy. However, a general pattern is
that co-operative banks mostly entered oreign retail banking markets
either via acquisitions o other banks or via strategic alliances with other
European counterparts. For instance, Raieisen International (a subsidiary
o the Raieisen central institution in Austria) set up a large network o
retail operations in Central and Eastern Europe, largely via acquisitions o
ormerly public banks. French Crédit Agricole and Crédit Mutuel recently
undertook international acquisition oensives in Italy, Greece, Poland
and Germany. Rabobank has pursued a set o strategic acquisitions and
new business start-ups, but has also concluded alliances with other
co-operative banks to be able to service domestic retail customers
abroad. In almost all instances, co-operative banks neither converted
the acquired oreign banks to a co-operative model nor applied ‘purely’co-operative principles in managing new business lines abroad.
Some co-operative banks have or had the ambition to become active
in international non-retail banking areas, like investment banking.
However, practices in this banking area dier substantially rom those in
retail banking. Investment banking has a much more transaction- and
money-orientated culture, which is more distant rom the co-operative
banks’ basic philosophy that is based on customer value (generally
accompanied by a limited risk appetite stemming rom the conservative
domestic banking model). Finally, some co-operative banks opted or
an international niche strategy. They have expanded their international
activities in certain geographical or product areas where they possess
comparative advantages. For instance, Rabobank has the ambition to
become the leading international bank or the ood and agribusiness.
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History, evolution and special eatures o co-operative banks | 19
III. High capitalisation, high rating and low unding costs
Co-operative banks barely distribute proit but add it to their reserves
or the banks’ own unds. Consequently, co-operative banks are some o
the more highly capitalised institutions in Europe as a result o theirunique model and ownership structure. Co-operative banks accumulate
capital by design, as their original purpose was to overcome a shortage
o capital or their chosen activities. Co-operatives have a lower cost o
capital, because they only need to remunerate the part o their equity
that is represented by member shares, not the oten much larger
intergenerational endowment. In addition, mutual support mechanisms
that exist in various countries contribute to high ratings. These collective
guarantee schemes reduce or even exclude the risk o individual
co-operative bank ailure. Finally, high capital reserves and high ratings
provide co-operative banks with opportunities to obtain relatively
cheap capital market unding, because this entails less risks or other
creditors and thus lower risk premiums.
IV. Proit as a necessary condition
Based on the long-term ocus on customer value and member
inluence, co-operative banks claim that they do not aim to maximise
short-term proit7 while healthy proitability is an important necessary
condition or co-operative banks to saeguard their continuity, to
inance growth and credit, and to provide a buer or inclement times,
proit is not a goal in itsel.
V. Conservative business model: ocus on retail banking
Member ownership leads to a conservative business model, ocused
on sustainable retail banking. This leads to good liquidity and sound
asset quality. The structure, knowledge o local customers and risk
diversiication all work in avour o co-operative banks. The knowledge
that capital cannot be easily replaced by external sources ater
considerable losses stimulates co-operative bank managers to apply
a relatively low risk appetite.
This concise ormulation embodies the roots o co-operative banking.
The customer has always been at the core o their operations and, at a
local level, members have a say in the local member bank’s policy.
Thus, the ‘promised’ greater ocus on the customer by many inancialinstitutions ollowing the crisis sounds quite awkward to co-operative
banks. An interesting element in the passage above is the comment that
co-operative banks have an ‘impact presence’. To deine and quantiy this
presence value, however, is a diicult undertaking. Even more so, because
they actually hint at a noticeable causal relationship between mature
co-operative banks and society and banking markets. Such a causality is
hard to demonstrate empirically, as it really only maniests itsel on the
entry or exit o a large co-operative bank. But it also works the other way
round: society and the market environment inluence co-operative banks.
More ounded theoretical and empirical evidence is available regarding
the question o ‘the unique and deining characteristics o co-operative
banks.’ Based on the existing literature and policy reports as well as
Rabobank’s experience, the key dierentiators o co-operative banks in
their home country can be divided into six main categories:
I. Speciic corporate governance: member ownership
Members, who are also customers, own the entire organisation and are
able to inluence its decision-making. Members have a more direct say
in the local member bank’s policy, or instance on the branch location,
opening hours, services and sponsoring activities. Member ownershipentails a more consensus-driven approach and prevents a strong
ixation on just one stakeholder. This is accompanied by a longer term
and risk-averse view, which translates into a more conservative banking
approach ocused on retail banking. With their strong local ties and
large networks, co-operative banks are in theory better equipped
to assess the creditworthiness and risks o customers at a local level.
II. Customers’ interests irst
Co-operative banks have an edge in portraying trustworthiness as
they publicly state that they do not aim to maximise proits but rather
to maximise customer value. They have a competitive advantage in
establishing trust. An important actor is that co-operative banks are
literally closer to their customers; their branch network density is higher
than that o their competitors.
The line o reasoning o PA Consulting Group () that co-operative banks spoil market
conditions or proit or shareholder-orientated banks and may eventually undermine inancial
stability, is airly ar-etched and cannot be supported by data. Co-operative banks simply
have a proit target that is based on the objective to serve customers on a continuity basis.
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20 | Co-operative banks in the new fnancial system
have a reduced incentive to stimulate an optimum use o the high
capital base (or excess capital), because they do not have a direct claim
to the capital (it is ‘capital in dead hands’). This could give rise to a r isk o
opportunistic investments by bank executives. Secondly, the introductiono external shareholders into a co-operative system creates tensions
regarding control. I capital is only provided by members, the voting
power as member o a co-operative bank and the voting power as
capital provider coincide within the same group. When ownership is
shared with external capital providers, voting power will also have to be
shared. Thirdly, the evolution o the inancial sector may call or inancial
services, activities or concepts that are not necessarily needed by
current members at the local level. These adaptations may be crucial or
attracting new customers or members or co-operative banks in the
uture. In the longer-term, co-operative banks could ind themselves at
a disadvantage because they do not operate with state-o-the-art
technology or are unable to oer innovative products. Finally, physical
distribution networks imply large ixed costs and the distribution o
some inancial products has in the last decades shited rom expensive
physical channels towards virtual channels.
VI. Proximity to customers: dense branch networks
Co-operative banks have large branch networks, providing co-operatives
with an important, albeit declining, comparative advantage in retail
markets. Co-operative banks are literally and iguratively closer to theircustomers and know those customers well through participation in
numerous social networks. This is because the co-operative banking
model centres above all on ‘relationship banking’ via local presence.
Proximity to their customers is reinorced by actively supporting local
communities. Finally, large branch networks acilitate mobilising and
retaining a relatively cheap and important unding source, provided
that their deposit rates are not much lower than those oered by
competitors.
These eatures are generally considered beneits or co-operative banks,
but it is air to make some important qualiications. Firstly, it has
become more diicult or members to monitor the organisation due
to the increased organisational complexity o co-operatives in which
management is carried out by dedicated proessionals. It is also argued
that member ownership makes decision-making slower or hinders
innovation and adjustment to new developments. In addition, members
Table 3.1 Tangible and intangible advantages or members
Individual Collective
Banking Non-banking
Tangible - Membership certiicates
- Co-operative shares
- Discounts
- Incentive loans or start-ups
- Simple procedures or obtaining loans
- Discounts
- Special oers, e.g. mobile telephone,
subscriptions
- Participation in decisions
- Priority in business relations
- Financial support or local projects
or sponsoring
Intangible - Personal advice
- Extra inormation
- Seminars
- Publications
- Seminars
- Special events
- Inluence based on one man one vote
- Inluence and say
- Member councils
- Social involvement
- Determining the use o social unds
and sponsoring
Source: Rabobank analysis based on various reports o co-operative banks.
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History, evolution and special eatures o co-operative banks | 21
an additional actor. The success o current mature co-operative banks
can be explained by their evolving comparative advantages as well as
their capability to react to and/or anticipate changes in the external
environment. One o their proclaimed unique eatures is memberownership, which is assumed to translate into customer centricity, high
capital ratios, a conservative business model and dense branch networks.
However, the reduction o members’ incentives to exert eective
oversight over central management constitutes a major challenge.
Such oversight is actually needed as co-operative banks have transormed
rom small institutions operating in local communities to large and
complex inancial conglomerates with international activities.
Despite these caveats, the identiied dierentiators must be treasured.
Furthermore, it should be remembered that the quality and range o
products and services oered, their pricing and the applied distribution
concepts are o utmost importance. In addition to this, specialadvantages to members are oered (table .). In act, customers and
members have to notice the comparative advantages and dierences in
attitude or business culture in practice in line with the co-operative
objective o delivering customer value.
Apart rom extreme situations like the current crisis, the co-operative
business model demands cost and revenue levels or retail banking
activities that do not deviate substantially rom the standards o the
banking industry. However, the deviation range or price/quantity
sensitivity o customers may vary over time and across countries.
For instance, in turbulent times, co-operative banks may have a
‘co-operative or reputation premium,’ which can be related to their
perceived status as sae havens due to their conservative approach
to banking. Customers may also eel attracted to co-operative banks
on the basis o ‘sot’ or ‘emotional’ actors, like appreciated dierences
in business principles, cultures or better scores on non-inancial
perormance indicators than those o other banks. From marketing
and brand research, it is a well-known act that customers also attach
importance to immaterial aspects such as access to the bank’s
network and knowledge, the stability and duration o relationships,
sustainability characteristics, etc.
3.5 Summary
It is clear rom recent history and the discussion in this chapter that all
organisation orms have both problems and comparative advantages.
The co-operative organisational orm is just another business model
and not by deinition the key to success. Hence, the co-operative model
should not be idolised. The success o all banks, including mature
co-operative banks, is ultimately determined by the level o customer/
member satisaction, which is in turn inluenced by many variables,
including the quality and prices o products and services, innovative
capacity, the perceived corporate social responsibility and employee
attitude, knowledge and competences. For co-operative inancial
organisations, tangible and intangible advantages o membership are
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22 | Co-operative banks in the new fnancial system
As mature co-operative banks are by deinition part o national inancial systems, they
are both conronted with structural developments and responsible or shaping them.
Through their mere existence, they also play an important economic and social role insociety (EACB, ). An important question is: How has their market position and
perormance developed in recent years? The answer may provide useul indications or
their ‘presence and added value’, vibrancy and viability. Consolidated banking data or the
period - are used to examine these issues. Since the aggregated data obscure
situations that dier considerably rom country to country, two country subgroups
will be distinguished in the analysis. Data will be presented or the entire co-operative
banking sector in iteen EU countries, as well as in six EU countries where co-operativebanks enjoy very high market shares.8
4.1 Size o co-operative banking sectorin Europe
Members and customers The co-operative sector is a major player in the European banking
landscape. In , the total number o customers and membersapproached respectively and million. These numbers are
impressive, but do not mean much i they are not put into perspective.
The success and popularity o the co-operative banking model are
ultimately visible in the development o the ‘member-to-population’
ratio. Chart . displays this ratio in iteen EU countries (EU).
The same ratio is plotted or six European countries with a relatively
large co-operative banking sector: Austria, Finland, France, Germany,
Italy and the Netherlands (henceorth EU).
In both the EU and EU, an increase in the member-population
ratio is discernible. The ratio in the EU is substantially higher and has
increased by . percentage points to almost percent. This points to
Size and perormance o co-operative banks in Europe
The EU area comprises Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, Greece, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom. EU countries comprise Austria, Finland, France, Germany, Italy and the
Netherlands; these are countries where the co-operative sector is extremely important.EU EU15
20
18
16
14
12
10
8
6
4
2
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Chart 4.1 Members as percentage o total population
in %
Source: Calculations by Rabobank based on ECB and EACB fgures
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Size and perormance o co-operative banks in Europe | 23
oered at air prices, appreciated distribution concepts, and an active
and dynamic membership policy, the legitimacy o co-operative banks
will gradually erode.
Market sharesOn average, only co-operative banks in the EU were able to gradually
increase their market shares in the loan and deposit markets over the
last decade. In the EU area, the market shares o co-operative banks
remained virtually constant. The rise in market shares in the EU showed
some acceleration in due to the acquisition o inancial institutions
by the co-operative banking sector. The EU market share o domestic
deposits now amounts to almost percent, whereas the market share
o domestic loans lies at roughly percent. It may also be noted that the
igures lead us to conclude that the loan-to-deposit ratio is somewhat
higher or co-operative banks than or private banks. This partly relects
their traditional strong position to attract local deposits. The available
evidence also supports the argument that co-operative banks have
relatively easy access to a airly cheap, risk-ree and stable unding
source, i.e. a relatively large deposit base. This is likely to contribute to a
healthy balance sheet composition and high credit ratings. The market
shares o individual co-operative banking systems do not show a clear
trend; they are declining in some countries but on the rise in others.10
The market shares or deposits and loans are signiicant, but below
the market shares on other indicators such as branches (chart .).11 The market shares or branches are in both EU and EU approximately
percentage points higher than those or deposits. Over the last
decade, co-operative banks have gained branch market share or
two reasons. The irst is that co-operative banks in France, Italy and
Spain have expanded their branch networks either organically or via
acquisitions. The second explanation is that co-operative banks in eight
EU countries have slimmed down the number o branches to a lesser
an increasing popularity o the co-operative model. The underlying
reasons or this popularity are hard to isolate and are o a inancial and
immaterial nature.9 They merely indicate that co-operative banks have
succeeded in attracting new members with their products, services,co-operative business models or other distinguishing eatures.
Co-operative banks appear to have ound appropriate answers to the
many trends and competitive challenges in the ield o retail banking.
These member-population ratios dier considerably across the EU
countries. The highest ratios are ound in Austria (.), ollowed by France
(.) and Finland (). The Swedish co-operative sector has the lowest
ratio (not counting countries without a co-operative banking sector).
The membership ratio, deined as the percentage o customers that are
members, declined between and in both the EU and EU.
This decrease can be entirely attributed to the acquisition o customers
via mergers or takeovers o other inancial institutions by co-operative
banks. Chart . shows the variation in the membership ratios across
EU countries in . The dierences can be partly explained on
historical grounds, e.g. the act that obligatory membership was not
abolished in all countries at the same time. The variation also relects
the diverging numbers o customers o subsidiaries as well as dierent
attitudes towards membership across European co-operative banking
groups. Some banks strive to make every customer a member, while
others are not actively recruiting members. Whatever their position may
be, without continuing good and innovative products and services
Germany
Chart 4.2 Membership ratios across EU6 countries in 2007
in %
60
50
40
30
20
10
0
Austria Finland France Netherlands Italy
Source: Calculations by Rabobank based on EACB and ECB data
Note: The displayed countries have a relatively large cooperative banking sector.
Some o these reasons could be inancial conditions, but also the degree o customer
satisaction, the extent to which banks act in the interest o customers, access to the bank’s
networks and knowledge, the stability/duration o relationships, the way banks deal with
environmental and sustainability issues, the degree o product and price transparency, etc.
An exception is France, where co-operative banks acquired several private banks.
The same holds or market shares or sta, albeit to a lesser extent.
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24 | Co-operative banks in the new fnancial system
still operate with somewhat higher capacity levels, or which branch
market shares and ‘deposit-to-employee’ ratios act as proxies. In the next
section, we will investigate whether this results in lower returns on
capital and/or lower eiciency levels compared to private banks.
4.2 Financial perormance o co-operative banks
Four important, interdependent indicators will be reviewed:
a. Tier- ratio
b. Proitability
c. Eiciency (expenses/income ratio)
d. Rating
It must be emphasised that it is diicult to compare co-operative bank
perormance with that o other banks. As elaborated in chapter ,
co-operative banks pursue dierent objectives and employ dierent
business models.
Tier-1 ratioChart . shows the tier- ratio or several co-operative banks at year-
end , compared to the minimum capital requirement o percent
extent than their competitors in the context o cost-cutting or eiciency
programmes. As a result, co-operative banks have strengthened their
local presence. Against the background o the expected ‘return to retail
banking’ o many inancial players in the coming years, co-operativebanks could take advantage o this act. In the EU, co-operative banks
currently own over percent o all bank branches. O course, many
co-operative banks have introduced or stimulated the use o cheaper
virtual distribution channels, while remaining loyal to their brand
value ‘nearby’.
Co-operative banks spend more money on branches, sta and other
resources to manage a given level o assets or to acquire a given level o
deposits. This is mirrored in the ratio o deposits to bank branches and
sta, which is universally below the ratio or the banking system as a
whole (chart .). The amount o deposits per employee at co-operative
banks in the EU is about . million euros, compared to almost million
euro in the banking sector as a whole. This inding is consistent with the
six comparative eatures o co-operative banks. However, the line is
clearly upward sloping, implying that co-operative banks have managed
to increase the eiciency o their operations. Deposits per employee
have risen by sixty percent since . Nevertheless, co-operative banks
EU15 deposit shareEU15 loan share EU15 branch share
45
40
35
30
25
20
15
10
5
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Chart 4.3a Market shares o co-operative banks in the EU15
in %
Source: Calculations by Rabobank based on annual reports, EACB and ECB fgures
EU deposit shareEU loan share EU branch share
45
40
35
30
25
20
15
10
5
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Chart 4.3b Market shares o co-operative banks in the EU6
in %
Source: Calculations by Rabobank based on annual reports, EACB and ECB fgures
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Size and perormance o co-operative banks in Europe | 25
Proitability The qualitative insights o chapter uel the expectation that
co-operative banks have below average proitability, as they target
customer value maximisation instead o proit maximisation. Proit is anecessary condition, without which the co-operative would be unable
to grow or invest suiciently. This would cause members to cancel their
membership because its added value would be substantially reduced.
Proitability is usually assessed in terms o return on assets and return
on equity. Our calculations, based on a sample o orty-ive banks
located in Western Europe, show that the return on assets and return
on equity o co-operative banks is lower than or private banks, as
expected. The lower return on equity is caused by the lower leverage
resulting rom a higher core capital ratio or co-operative banks.
This supports the observation that co-operative banks maintain on
average larger capital buers. The indings partly relect the primary
ocus on maximisation o customer value.
set by the market.12 This ratio relects the amount o equity relative to the
risk-weighted assets o a bank. It can be concluded that co-operative
banks maintain a comparatively high level o capital. There are a number
o explanations or this (Oliver Wyman, ). Firstly, high capitalisationis connected with the strong ocus o co-operative banks on retail
operations, or which relatively high capital requirements prevail.
Secondly, co-operative banks add a major portion o their proit to the
capital reserves each year. Thirdly, solid capitalisation is simply necessary
or co-operative banks with a view to continuity. Co-operative banks have
to rely less on other options to raise capital, as most o them cannot
issue shares.13
Chart . shows that the tier- ratios o most co-operative banks in
and were comortably higher than the market’s minimum
requirement o percent. In the course o , tier- ratios o many
banks have deteriorated worldwide. Several banks needed to attract
additional capital. This chart simply illustrates the act that co-operative
banks entered the crisis with a strong capital base and subsequently
strengthened their capital position in . It should be noted that the
tier- capital ratio’s pertain to the entire co-operative groups, not just
the co-operative banking part.
All banks in EUCo-operative banks in EU
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Chart 4.4 Deposits per employee in EU6 countries
in millions o euros
Source: Calculations by Rabobank based on EACB and ECB fgures
Raifeisen (CH)
Rabobank (NL)
Pohjola Group (Fin)
Crédit Mutuel (FR)
Banques Populaires (FR)
Crédit Agricole (FR)
RZB (AT)
BVR (DE)
Minimal capital reserve
2008 2007
3 4 5 6 7 8 9 10 11 12 13 14
Chart 4.5 Tier 1 ratio
in %
Source: Annual reports
Tier- ratios under Basel II. The statutory requirement is percent but in practice
the market demands percent. This last percentage is included here.
Exceptions are Crédit Agricole and the holding company Raieisen Zentral Bank o
the Austrian Raieisenbanken.
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2 | Co-operative banks in the new fnancial system
concealed ‘excess return’, i.e. proit on top o the co-operative price.
Regarding costs, the ocus on customer value is sometimes assumed to
provide an excuse or more relaxed cost control and ineicient operations.
Benchmarking o expenses and revenues o co-operative banks against
banking sector standards is only a rough way to veriy the validity o
these hypotheses. As discussed, inancial acts cannot just be compared
with those o other banks due to dierent business models. In this respect,
it is interesting to observe that various studies rom dierent parts o
Europe conclude that there is little dierence between the eiciency o
co-operative banks and private banks in Europe (Moody’s, ; Hesse
and Čihák ; Oliver Wyman, ). In some countries, co-operative
banks in act operate more eiciently, particularly in the EU.
Our own calculations presented in table . corroborate these views.
In the period -, co-operative banks in all Western European
countries, except France, operated more eiciently than private banks
(chart .). Hence, the relatively expensive distribution concepts o
co-operative banks do not show up in lower overall eiciency levels.
Moreover, the expenses/income ratio o the co-operative banks even
improved signiicantly on average between and . The higher
costs o their disproportionate branch networks were more than oset
by higher revenues, which is quite an achievement in the current
competitive environment. For co-operative banks, it still pays to adhere
to their traditional business model. This outcome suggests that they usetheir assets and capital base in a highly eicient way.
Ratings The rating o a bank is an overall report mark or its risk proile,
capital buer, stability o income lows, market shares, strategy and
diversiication o activities. In short, all variables described in the previous
subsections are important building blocks or ratings. For co-operative
banks, the organisation and the degree o decentralisation are an
additional rating actor (Standard & Poor’s, ). In practice, it also
appears that all co-operative banks in the EU have some orm o
support mechanism in place (Fitch, ).
Table 4.1 Average inancial perormance o banks
(2002-2007)
Co-operative banks
(N=9/O=53)
Private banks
(N=3/O=159)
Percentage
(standard deviation)
Percentage
(standard deviation)
ROE . (.) . (.)
ROA . (.) . (.)
Core capital ratio . (.) . (.)
Tier ratio . (.) . (.)
Cost/income ratio (.) (.)
Source: Calculations by Rabobank based on annual reports. Figures are based on 45 large banks established in
Western Europe. N= number o banks. O = number o observations during 2002-2007.
Eiciency (cost/income ratio)Some experts claim that the absence o a proit objective, or a lower
proit requirement, deprives co-operative banks o incentives to operate
eiciently. With regards to income, this would mean that they set a
suboptimal price and that eiciently operating competitors realise a
Austria Switzerland Germany France Netherlands
Chart 4.6 Cost/income ratio by country (2002-2007)
in %
70
60
50
40
30
20
10
0
Source: ECB (2008) and calculations by Rabobank based on Bankscope
Note: The co-operative banks in these countries were compared with the total group o 45 banks.
Co-ope ra ti ve ba nks Pri va te b anks
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Size and perormance o co-operative banks in Europe | 27
4.3 Impact o co-operative banks onnational inancial systems
The notion that co-operative banks in Western Europe contribute to thestability o the banking system thanks to their strong capital reserves,
stable income, risk diversiication and ocus on retail banking is
increasingly supported by empirical studies. IMF researchers Hesse
and Čihák () conclude that the strong capitalisation and stable
income o co-operative banks more than compensate or the adverse
inluence o lower proitability on their stability. In their view, inancial
co-operatives contribute to the stability o the inancial sector.
The relatively high credit ratings o co-operative banks also point to their
beneicial impact on inancial stability. All these research results oer a
rather convincing counterbalance to the criticism voiced by some
analysts (e.g. PA Consulting Group, ) that the lower proitability
requirement o co-operative banks would distort the competitive
environment in retail banking and would ultimately lead to instability.
An elegant yet simple measure or assessing the stability o co-operative
banks and their impact on the stability o inancial systems is the so-called
Z-score. The Z-score measures bank stability and indicates the distance
to insolvency, combining accounting measures o proitability, leverage
and volatility. It can be used to compare the inancial stability o a bank
with that o other banks. The higher the Z-score, the more stable the
bank. Rabobank calculations reveal that European co-operative bankshad substantially higher Z-scores than private banks in the period
- (Groeneveld and De Vries, ).14 In addition, private bank
Z-scores seem to have declined since , while those o co-operative
banks have remained relatively stable. Consequently, co-operative banks
lit the average Z-score in individual countries, and thus contribute to
national inancial stability.
All things considered, major rating agencies award co-operative banks
with high credit ratings and consider them to be stable, inancially healthy
and solid. At the end o , rating agencies expected operating results
and balance sheet structures o the co-operative banks to remain at asatisactory level. Apart rom a higher degree o capitalisation and a lower
risk proile, this is also caused by the existence o collective guarantee
schemes in co-operative banking systems to prevent the ailure o
individual co-operative banks.
Table 4.2 Credit ratings o a number o co-operative and
private banks
Bank Type
Standard
& Poor’s Moody’s Fitch
France
Banques Populaires Co-operative A+ Aa A+
BNP Paribas Private AA Aa AA
Crédit Agricole Co-operative AA- Aa AA-
Crédit Mutuel Co-operative A+ Aa AA-
Société Générale Private AA- Aa AA-
Germany
DZ Bank Co-operative A+ Aa A+
Commerzbank Private A Aa A
Deutsche Bank Private A+ Aa AA-Finland
Pohjola Group Co-operative AA- Aa AA-
Nordea Bank Finland Private AA- Aa AA-
Netherlands
Rabobank Co-operative AAA Aaa AA+
Fortis Bank SA/NV Private A A A+
ING Groep Private A+ A A+
SNS REAAL Private A- Baa BBB+
Austria
RZB Co-operative A Aa n.b.
Erste Group Bank Private A Aa A
Source: Rating agencies Fitch, Moody’s and Standard & Poor’s
Note: Ratings pertain to April 2009. The rating shown or Crédit Agricole, Crédit Mutuel, DZ BANK and RZB is that o the
central organisation. Consolidated rating or all individual local member banks do not exist.
Beck et al. () ind similar results or Germany.
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28 | Co-operative banks in the new fnancial system
4.4 Summary
Over the last decade, European co-operative banks have convinced an
increasing share o the population in their home countries to becomemembers. This is strong evidence or the high level o customer
satisaction with co-operative banks. Co-operative banks have
strengthened their domestic retail market position between and
. Their inancial perormance is also satisactory. They enjoy a strong
capital base, stable proit growth, satisactory eiciency levels and
relatively high ratings. Consequently, they exert a positive impact on the
stability o national inancial systems. These are great and promising
achievements, which create conidence or the uture and lead to the
conclusion that the overall business proposition o mature co-operatives15
and the immaterial membership advantages have maintained their
appeal. Hence, co-operative banks ind themselves under a lucky star
and have a good starting position or the upcoming years. There is,
however, no room or complacency. Co-operative banks must ind
adequate and timely answers to existing and emerging challenges in
banking, which is the topic o chapter .
The overall business proposition encompasses a wide range o aspects, including prices,
products, services, distribution concepts and business philosophy.
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Co-operative banks in the new fnancial system | 29
Ater the house price bubble burst in , governments and monetary authorities took
a broad range o drastic measures to avoid the collapse o the global inancial system.
The need to remodel the global inancial architecture became apparent. In and, many banks were engaged in a proound reorganisation o their businesses.
Some returned to the basics o traditional banking and others needed to strengthen
their capital position. Banks also took steps to restore conidence among the public.
To date, the banking industry inds itsel conronted with a deep economic recession
and will suer additional loses in their credit portolios. Meanwhile, government and
inancial authorities have announced more stringent banking rules and supervision.
It cannot be excluded that governments will have to interere once again in thebanking sector to saeguard inancial stability. It goes without saying that the eatures o
the inancial system will have to change (chapter ). This means that banks will be
required to adjust their business principles, strategies and structures to meet a set o
new banking conditions in the near uture.
a wide range o challenges which require a proactive and innovative
attitude. The long history o co-operative banks shows, however, thatthey are able to adapt to changing circumstances and re-invent
themselves. Key opportunities and challenges o co-operative banks
or the next ive years have been outlined below.
5.1 Opportunities
A. Customer centricity
Customer centricity, integrity and ethics will play a more important role
in retail banking than in the past. These ‘new’ characteristics o the global
inancial system have been part o the co-operative banks’ DNA rom
the start and are considered to be their main comparative advantages
to date. As consumer-owned institutions, co-operative banks now have
the opportunity to turn the new rules and ethics in banking to their
advantage through well-designed public relations campaign. I they
Co-operative banks were and are not sheltered rom these extraordinary
events. They have also suered losses and incurred write downs whichare directly related to the inancial crisis. They appear, however, to be less
impacted than private banks and did not need large scale government
support. They have also been hurt by the general loss o conidence in
the banking sector and are aced with large distortions in the competitive
environment. With their strong position in the retail markets, they will
now eel the negative impact o the deep economic recession. Rising
unemployment and increasing ailures o SME’s will exert a negative
pressure on co-operative banks.
I we consider the characteristics o the new inancial system, we can
conclude that the unique eatures and natural core competences o
co-operative banks (section .) provide good starting points and
opportunities in this turbulent banking environment. This does not mean
that these opportunities can just be cashed in. Co-operative banks ace
Co-operative banks in thenew inancial system
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30 | Co-operative banks in the new fnancial system
times where the inancial markets and authorities are urging banks to
hold more capital. How much and in what orm are less straightorward
questions. More capital will make the industry saer, but will also lower
returns and, as a result, most likely raise prices or customers. Their startingposition oers good growth opportunities. The need to attract extra
capital is less pronounced, giving co-operatives a comparative advantage
over many other banks which have to obtain resh and more expensive
unding on the capital markets.
C. Corporate governance structure
The inancial crisis has demonstrated the necessity o improving banks’
internal control mechanisms, corporate governance and compensation
schemes. However, the required changes apply to a lesser extent to
co-operative banks, because they have always had a solid and balanced
corporate governance structure, due to member ownership.
Member ownership entails a more consensus-driven approach which is
accompanied by a longer term, risk-averse view and, last but not least,
the absence o option packages intended excessively award managers.
Many private banks are currently adjusting their corporate governance,
internal (risk) organisation or business model, providing co-operative
banks a good opportunity to be more externally ocused: they do not
have to adjust their business model and culture that extensively.
D. Gaining market shares
The ‘trust or reputation premium’ over shareholder-owned banks dueto their proclaimed conservative approach to banking and high
capitalisation could be very useul in the ace o the expected surge in
retail banking competition. Indeed, co-operative banks are likely to be
‘attacked’ in the higher segments o the retail markets and their business
model will be - partly - copied by private banks. Co-operative banks may
try to turn their disproportionate branch networks into an important
comparative advantage, which would provide access to a huge deposit
base, at least in the short to medium term.
E. Closer international co-operation
Co-operative banks are still primarily national based inancial institutions.
In the past decades, mature co-operative banks have gradually expanded
their business abroad. But in the uture, the scale o operations will
are able to successully demonstrate these issues, rising numbers o
members and increasing market shares can be expected. In addition,
their customer-centred business model may discipline the inancial
sector as a whole.
B. Strong capital base and high ratings
High capitalisation and relatively high credit ratings are powerul assets
o co-operative banks. This is especially true in these current turbulent
Table 5.1 Main eects o the inancial crisis or the entire
banking industry
Main eects Characteristics o the new inancial system
New rules o
the game
- Corporate governance, clear attention to risk management
- Compensation schemes to introduce the right incentives
- Tighter supervision and regulation or banks and other
inancial institutions on an international level
- Higher capital and solvency requirements or banks
- Policy measures: government intervention, exit strategies,
extraordinary monetary actions, early warning systems or
risk events
New business
principles
- Customer centricity
- Morality and integrity
- Healthy risk attitude
- Long-term perspectives instead o short-term proits
- Attention to all stakeholders, not just shareholders
- Attention to externalities o behaviour
- Transparency in products and organisation
New business
models
- Less, but simpler and transparent products and activities
- Focus on retail banking
- Reorientation towards home markets due to national sup-
port
- Less scope or large-scale international aspirations, partlydue to support rom national governments
- Dismantling o some large inancial conglomerates
Source: Rabobank analysis
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Co-operative banks in the new fnancial system | 31
5.2 Challenges
In the upcoming years, the entire banking industry will have to adjust its
strategy and organisation undamentally to meet the requirements o the new inancial system and restore public conidence in the integrity
o banks. Co-operative banks will also be aced with great challenges
to meet new banking conditions ater the crisis. Given the current
perspectives on the market and society as a whole, the most important
challenges in the years to come are:
A. Proactive and innovative attitude
Many competitors are redeining (with government support) their
strategy and business models, reorganising their businesses and ocusing
on the retail market. Within approximately two years, competitors will be
leaner and meaner and some o them will want to re-enter the market
aggressively to (re)gain market share.
B. Improving eiciency levels
Pressure to oer competitive and innovative products/services in the
market is surging, while margins tend to shrink. This requires a critical
evaluation o the costs and beneits o the extensive distribution
network. Integrating physical and virtual distribution channels and
inding ways to personalise customers contact via virtual channels is a
key component o this process. In addition, continuous training and
education are necessary to provide employees with state o the artknowledge. In act, the attitude, knowledge and competences o sta
are the main distinguishing actors in banking competition.
C. Strategic choices: dierences compare to other inancial
services providers
Competitors tend to copy business models and products/services quickly.
Co-operative banks have to communicate their unique eatures clearly.
Products and prices are no longer discriminating actors, but other
elements that come into considerations. It is necessary to make
strategic choices or servicing customers eiciently and maintaining a
strict ocus on core activities and businesses. Modern co-operative banks
have to be entrepreneurial, cost-eicient and businesslike organisations.
become increasingly important to remain competitive, operate eiciently
and attract customers. When joining orces in certain banking areas,
co-operative banks may realise suicient scale among their counterparts
to diversiy the risks o cross border activities. To this end, ways o closerco-operation must be developed. This demands acceptance o the act
that noncommittal attitudes and partnerships belong to the past. These
collaborations could in certain banking areas lead to the creation o
European co-operative institutions. The easibility o this road should
be investigated urther, but should be an attractive prospect or
co-operative-minded bankers. The existing platorms or mutual
international co-operation, the European Association o Co-operative
Banks and Unico Banking Group could play an initiating role in the
creation o such institution.
F. Introducing the co-operative model abroad
Many co-operative banks were established over a century ago in rural
areas where people were deprived o inancial services. Although the
original ‘raisons d’être’ o mature co-operative banks have disappeared,
this is deinitely not the case in many other countries throughout the
world. Here lies a noble task or co-operative banks. They are well
positioned to help these countries in setting up inancial inrastructures.
This is one ield where they can visibly contribute to economic and
social development. By being present in these emerging or developing
countries, co-operative banks can clearly demonstrate the ‘presence
value’ o co-operative principles, which is vir tually impossible to show inWestern countries. O course, the co-operative model cannot just be
copied and pasted to other countries. Adjustments are necessary to
account or historical and cultural dierences. Microinance is the place
to be or co-operative banks in emerging and developing countries
and they should take a claim on this promising banking area. When the
inancial sectors in these countries mature, co-operative banks will
possess a strong oothold based on a long-term commitment. Given the
viability, solidity and added value o co-operative banks, the governments,
regulators and inancial sectors o developing countries should also
embrace co-operative principles, since they would contribute to the
necessary access to inance or enterprising poor people.
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32 | Co-operative banks in the new fnancial system
D. To balance beneits and risks o international versus national
(home market) activities.
It will be a balancing act to reconcile the interests o domestic
members, i.e. the co-operative part o the organisation, with the sizeand risks o international activities. I the operations abroad become
substantially larger than the co-operative part, the dilution o the
co-operative nature will be looming. Furthermore, adding international
businesses may increase the overall risk o the organisation and
destabilise the co-operative banking business.
E. To balance local delivery and central management
It has become more diicult or members to monitor the organisation
due to the increased organisational complexity o mature co-operative
banks, where management is carried out by dedicated proessionals.
A transparent and an endurable balance between local delivery and
central management is needed to saeguard engagement and
involvement o local banks members.
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The Rabobank Group case study | 33
This case study deals with the history and evolution o the largest retail bank in the
Netherlands, the co-operative Rabobank.16 Like all other banks, Rabobank has aced
social, economic, technological and regulatory challenges throughout its existence. These include, or example, the Great Depression o the s, the World Wars, the
reconstruction o the Dutch economy, the IT revolution and the liberalisation and
globalisation o the economy. Despite the act that Rabobank has not always made the
optimal decisions, it has mostly chosen the right answers to changing circumstances,
thereby preserving its co-operative identity. This is clearly relected in a large Dutch
customer base (. million), comprised o . million members, and a Triple-A rating.
This chapter will irst discuss the history and strategic positioning o Rabobank. It willconclude with an overview o the opportunities and challenges or Rabobank or the
upcoming ive years as a result o the recent inancial crisis.
.1 History and evolution o Rabobank
Origin o co-operative banks in the NetherlandsAs in many other Western European countries, the irst co-operative
banks in the Netherlands had their roots in the local agricultural sector.
Situated in the Rhine delta, a geographically strategic position as the
gateway to Western Europe, agriculture and international trade have
historically played a major role in the Dutch economy. The rapid
improvement in transportation possibilities by sea and over land in
the second hal o the nineteenth century made Europe accessible to
commodities, especially massive cheap grain imports rom the United
States. Farming prices in Western Europe dropped by more than
percent in the s, leading to an agricultural depression. This caused
great scarcity o capital among armers, which led to social abuse such
as buying by instalments and the provision o loans at exorbitant rates.
In , an advice committee appointed by the Dutch government
emphasised the need or an agricultural credit system based on sound
and air principles. Moreover, this was to be set up by the concernedarmers themselves. The committee recommended the establishment
o credit co-operatives based on the principles o the German
Raieisenbanks. Around , the irst co-operative agricultural credit
banks were set up in the Netherlands. Soon ater, many other banks were
launched throughout the country. Although every local co-operative
bank had its own unique historical background, there were also large
similarities. For instance, armers and dignities o the local community
were oten the bank’s ounding athers. As early as , the local
co-operative banks started to work together by setting up two central
The Rabobank Groupcase study
See Rabobank () or an extensive exposition o the development o Rabobank Group.
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34 | Co-operative banks in the new fnancial system
and a centralised approach. To reach economies o scale and to avoid
ineiciencies rom growing competition between the local member
banks o the two organisations, the two central organisations decided to
merge in to orm Coöperatieve Centrale Raieissen-Boerenleenbank,
known as Rabobank. In this way, the co-operative banking group was also
able to improve its competitive position in a urther consolidating Dutch
banking landscape. This led to a solid national network organisation.
The merger eventually resulted in substantial cost reductions and a
avourable scale or large investments to acquire market share and to
serve the emerging mass markets and new economic sectors eiciently.
organisations, one in the northern and the other in the southern part
o the country. These central banks were necessary to overcome the
disadvantages o the local banks’ limited scale and to oster their
development by perorming the co-ordinating role o a ‘banker’s bank’.
In the ollowing years, local co-operative banks lourished due to their
strong roots in local communities, their appealing democratic structure
and their attractive loans and savings rates as compared to private banks.
Since the irst credit co-operative in the Netherlands was ounded, the
number o local co-operative banks and members increased sharply to
more than , local member banks and , members around .
Evolution o Rabobank: local-national The inancial services industry has changed undamentally over the
years. As in other Western countries, the original ‘raisons d’être’ o the
co-operative banking model largely disappeared ater World War II.
The Dutch co-operative banking group developed rom a local
agricultural credit co-operative to a retail bank with nationwide coverage.
All these developments led to adjustments in organisational structures,
consolidation, domestic diversiication, other sources o unding and
new business models.
Especially ater World War II, the central organisations became more
and more important or the urther development o the local member
banks. The increasing complexity o inancial products as well as the
establishment o subsidiaries or international activities, corporate
banking, insurance and investment banking called or proessionalisation
Box .1 Governance and comparative advantageo local co-operative banks
Historically, local banks in the Netherlands were autonomous
agricultural credit co-operatives, each with its own Board and
responsible or its own balance sheet and administration. The Board
o Directors and the Supervisory Board received no remuneration
(only the cashier received a small salary) and were elected at the
annual general meeting. The banks were deeply embedded in the
local community and were thereore able to gather relevant
inormation and knowledge about the development o businesses
and members/customers. This gave agricultural credit banks a strong
competitive advantage in the credit and savings market.
Scheme .1 Governance structure o Rabobank
Regional Delegates Assembly Regional Delegates Assembly
Central Delegates Assembly
General Assembly
Regional Delegates Assembly
Local Member Bank Local Member Bank Local Member Bank Local Member Bank Local Member Bank Local Member Bank
Source: Rabobank
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The Rabobank Group case study | 35
Facilitated by regulatory changes, this centralisation o activities and the
creation o scale advantages made it possible to diversiy and expand
inancial activities as well as to launch virtual distribution concepts like
internet banking. Like its main competitors, the Rabobank Group
entered into the ields o private banking, asset management, and lie
insurance via organic growth, joint ventures or acquisitions (scheme .).
The total volume o inancial services developed prosperously and
inancial perormance indicators such as solvency, eiciency and proit
improved constantly. This resulted in the highest possible credit rating:
Triple-A status.
The national and international expansion o the Rabobank Group, the
disappearance o the original motives or the establishment o the
co-operative banking group and the emergence o large domestic
competitors via consolidation17 provoked a undamental sel-assessment,
culminating in the Great Co-operative Debate in the years through
. Since the merger o the two central organisation, the perception
In , ABN merged with AMRO to orm ABN AMRO. In , the ormer
‘Nederlandse Middenstandsbank’ and ‘Postbank’ merged with the insurer ‘National
Nederlanden’ to become ING.
Scheme .2 Organisation o the Rabobank Group Situation at 1 July 2009
1.7 million members
152 local Rabobanks with 1,01 branches
Rabobank Nederland
Labels
Support o local Rabobanks
Corporate clients
Private individuals
Private Banking
Other support units
Asset management
Orbay
RobecoSarasin (9%)
Schretlen & Co
Leasing
De Lage Landen
- Athlon- Crediam
- Freo
Real estate
Rabo Real Estate Group
- Bouwonds PropertyDevelopment
- Bouwonds REIM
- FGH Bank
- Fondsenbeheer
Nederland
- MAB Development
Insurance
Eureko (39%)
- Interpolis
Housing
Obvion
Business
Rembrandt
Mergers & Acquisition
Rabobank International
Food & agri business
International retail banking
Wholesale banking
Rabobank Group sta unctions
CSR
Investor Relations
Long-Term Funding
Other sta units
The local Rabobanks and their members make up the core o the banking business. They are Rabobank’s key stakeholders. Being the central (legal) entity,
Rabobank Nederland acilitates the local Rabobanks, or instance by providing marketing and product development support, but also by oering competence
centres in the areas o operations management, ICT and governance. Rabobank International applies its knowledge and experience o the ood & agri business
towards serving corporate and retail customers globally.
Rabobank Nederland carries out several sta unctions or Rabobank Group as a whole, including Corporate Social Responsibility, Investor Relations, Long-Term
Funding, Human Resources, Legal and Tax Aairs, Knowledge and Economic Research and Communications. The bottom part o the diagram shows R abobank
Group’s chie labels that operate in the dierent markets under their own brands and together comprise the bank ’s all-fnance services.
9.5 million customers
Source: Rabobank
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3 | Co-operative banks in the new fnancial system
was that the co-operative philosophy18 had been subject to considerable
erosion. Local member banks were no longer active in engaging or
attracting members. A local member bank acted and operated more
and more like a ‘private bank’. In this context, some elt that Rabobank could equally well become a listed bank. This would oer Rabobank
better development prospects and access to more unding sources
to resist the increasing competition. Additional arguments were the
rapidly growing costs and the required large investments in new
banking technologies.
Though internal sceptics o the continuation o the co-operative
banking model remained a minority, they actually pointed out highly
relevant questions about the meaning o membership in the context o
globalisation o the economy and the added value o the co-operative
model in mature inancial systems. Ater intense discussions, it was
decided to retain the co-operative identity. This decision was mainly
based on the act that Rabobank was and remains to date an organisation
o, and or, enterprising people. A dierent legal ormat with airly
uncertain eects would diminish the countervailing power o members’
inluence on the day-to-day business decisions o proessionals managing
the co-operative group. The conviction was that there were great
opportunities or a viable and strong co-operative bank amidst private
banks. It was deemed highly desirable to obtain more and engaged
members19 and to extend the autonomy o the local member banks.
The new governance model reconirmed the core principles o deliveringcustomer value, contributing to social commitment, realising employee
value and revitalising the membership policy. It was acknowledged that
only a inancially sound organisation could meet these ambitions.
In , Rabobank ormalised its strategic ambition to be an Allinanz
services provider in the Netherlands. Since then, new challenges have
arisen. In order to maintain its position as Allinanz market leader, strategic
adjustments were necessary (box .). To this end, the Rabobank Groupormulated so-called Strategic Frameworks that outlined the uture
course o action or the upcoming three to ive years. The most recent
Strategic Framework covers the period - and gives directions
or Rabobank’s course in light o the eects o the current inancial crisis.
Evolution o Rabobank: national-internationalInitially, the leading motive or starting cross-border activities was the
need to serve customers with international activities and aspirations,
especially rom the Dutch F&A sector. In the ’s, this was done
through collaboration agreements with banks in the UK (Continental
Bankers) and the USA (Bank o America). In order to improve the level
o co-operation between European sister organisations, the Unico
Banking Group () was established by Rabobank and ive other
banks. The aim was to support the expansion o the partners’
international operations.
Thereater, Rabobank pursued dierent international strategies, with
varying degrees o success: takeovers, co-operation agreements and
alliances with other partners, as well as setting up its own representative
oices across the world. The most salient steps and evolutions are
presented in box .. Evidently, Rabobank has gone through aninteresting, but sometimes diicult learning process, just like other
co-operative banks and private banks. Step by step, Rabobank has
discovered the international strategy that suits it best. To date, ollowing
local customers, taking small, well-considered steps and linking up with
existing activities and core competences are the basic principles driving
international businesses. A relatively new shoot concerns the activities
o the Rabobank Development Program. Under this programme,
Rabobank tries to introduce and acilitate agricultural co-operatives
in emerging or developing countries. The Rabobank’s Dutch model
cannot simply be ‘exported’ to other countries that have dierent
historical backgrounds and legal structures. Today, the Rabobank Group
is active in roughly locations spread over oreign countries.
The deinition o a co-operative remains the same as in the nineteenth century:
A strategic alliance o people who are willing to promote each others’ material interest
and to help each other realise their ambitions. They do this by running a business
- the co-operative - jointly and or their collective beneit.
Every customer o a local member bank is ree to become a member, but the Board
o the bank decides whether or not a customer becomes a member o the bank.
Members are engaged in the policy o the bank regarding activities and sponsoring o
the local community. A Members Council connects the Board with members. With respect
to inancial services, members have no substantially privileged position compared to
non-members. An exclusive product that only members can acquire is a Member Certiicate,
which is issued by Rabobank Nederland.
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The Rabobank Group case study | 37
.2 Position o Rabobank Group
Financial and economic turbulence The inancial crisis has had a huge direct impact on the Dutch banking
sector. The Dutch government and Dutch Central Bank had to take
extraordinary measures to saeguard inancial stability. For instance, the
Dutch part o both ABN AMRO and Fortis was nationalised and many
other inancial players needed government support in the orm o
capital injections or state-guaranteed inancing programmes. Rabobank
ully supports these measures, because inancial stability is o utmost
importance or every bank. All in all, ity percent o the Dutch banking
sector received government support. Since the beginning o the
inancial crisis, Rabobank incurred losses and write-downs o around six
percent o its total equity, but did not need any orm o aid due to its
strong capitalisation.
This massive government intervention has o course had major
consequences or the competitive environment and uture trends in
the Dutch banking sector (Dutch Central Bank, ). Partly orced by
this government aid, banks are reconsidering their business strategies
Box .2 Strategic Framework
At the turn o the century, a new course was needed as undingbecame more and more expensive and downward pressure on credit
and lending margins led to a structural reduction in the interest
revenues. Rabobank tried to compensate or the lower interest
revenues by generating commissions rom new activities, but this
shit was insuicient to ully compensate or the loss o interest
income. In close co-operation with Rabobank Nederland, local
member banks developed a strategic vision to counter this trend,
which can also be attributed to increasingly competitive market
conditions and changing customer needs. The 2005-2010 Strategic
Framework mentioned three ambitions:
1. Retaining Allinanz market leadership in the Netherlands.
2. Achieving urther growth o and strengthening synergies with
subsidiaries and partners.
3. Strengthening the bank’s position as a leading international
Food & Agri bank.
The underlying business principles o this ramework are:
1. Maintaining the co-operative identity (long-term relationships
with customers and keeping the member base active by investing
in young people).
2. Working towards Allinanz market leadership in the Netherlands.3. Working towards a global F&A bank as a natural ocus.
4. Maintaining Triple-A status (requires a strong balance sheet,stable proit growth and a tier-1 ratio o at least 10%).
5. High CSR policy standards (maintaining a position as one o the
most sustainable banks).
Upscaling and reorganising the operational management and
customer service o local Rabobanks were important measures
to achieve the goals.
The inancial crisis called or a review o the 2005-2010 Strategic
Framework, but the business principles remained the same. The crisis
led to proit declines or Rabobank International (RI), higher capital
requirements and higher costs o attracting external unding, which
in turn resulted in the introduction o liquidity mark-ups on transer
prices and strong reduced opportunities or attracting longer-maturity
unding. The crisis also gave rise to opportunities in the deposit
market, the corporate market, mainly as a result o Rabobank’s solid
image (Triple-A rating). The strategic review resulted in a ew
accentuations. The acknowledgement that capital and unding
will be scarce in the upcoming years requires a sharper ocus on the
international ood & agribusiness as RI’s core business, the integration
o physical and virtual channels and the streamlining o processesbased on validated best practices.
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38 | Co-operative banks in the new fnancial system
Co-operative Debate, it was decided that RI would need to cut back
its investment banking activities.
2. Another noteworthy episode was the attempt to orm a strategicalliance with the German DG Bank, a co-member o Unico, in 1999.
The alliance would be in line with the ‘multi-domestic concept’ that
had recently been ormulated within Rabobank. This concept meant
that the European partner banks - preerably co-operatives - would
continue to serve their customers in the domestic market, but at the
same time they would work together in a number o product areas
where a pan-European scale was deemed necessary. The irst step
in the alliance with DG Bank would have been to amalgamate all
activities in the area o corporate and investment banking.
The ultimate aim o this collaboration was to create a single European
co-operative inancial group. In practice, the venture proved to be
too complex, too time-consuming and was beset by too many
uncertainties. This project was consequently abandoned in 2000.
3. Just ater the beginning o the twenty-irst century, RI positioned
itsel more and more as the world’s leading Food & Agri bank.
Alongside traditional inancing packages, it started to oer highly
proessional products and advice including inancial market
derivates, structured inance solutions, commodity trade inance
and investment banking services such as advice on M&A. RI also
played an innovative role by stimulating, marketing and trading inagricultural product derivates such as weather derivates. In this period,
the international ambition was to have at least one oice in all
important F&A countries and regions o the world and also to achieve
a prominent market position among the larger, well-run primary
agricultural companies in key agricultural production countries.
4. The most recent strategic reorientation o RI can be attributed to
the general eects o the inancial crisis on the Rabobank Group.
In the 2009-2012 Strategic Framework, a radical ocus restriction is
proposed or RI, both abroad and in the proessional markets.
This shit implies a strong curtailment o activities with an elevated
operational, reputational or credit risk and the phasing out o
lending to non-core customers outside the Netherlands.
Box .3 International steps
International retail banking
In the past decades, the retail customers o local Rabobanks have
been mainly serviced by so-called international Rabodesks abroad.
These desks, with Dutch-speaking sta, help and advise theircustomers on a wide range o international banking issues in dierent
countries. They typically work closely together with partner banks
since it is rather diicult and expensive to build a sel-owned retail
network in other countries. To date, there are still many dierences
between European countries regarding the modalities o retail
products. From 2002 onwards, there has been an acceleration o
out-o-country activities in the ield o international retail banking,
aimed at securing a solid retail base in a number o strategically
important countries and supporting its international direct banking
activities. Rabobank has acquired stakes in several retail banks and
initiated internet banking activities in a number o countries.
International wholesale banking
In 199, most o the international wholesale activities were brought
together in a new group entity: Rabobank International (RI). This entity
has adjusted its main ocus and strategy several times, mirroring
changes in international trends in banking and the search or the
optimal international group strategy.
1. Initially, RI pursued a ‘customer ocus strategy’ based on our
geographical areas, three main activities and three sectors.The geographical areas were Europe, North and South America,
Asia and Australia and New Zealand. The activities concerned were
corporate banking, international private banking and investment
banking. The three ocus sectors were agribusiness, the ood sector
and healthcare. It became apparent during the irst years o RI that
the perormance o international activities was much more volatile
than that o the domestic retail business. This was clearly and painully
illustrated by the overly ambitious strategy to expand and intensiy
investment banking activities. It soon turned out that investment
banking did not match the co-operative principles and customs o the
domestic retail business. Building a signiicant position in investment
banking appeared to be very costly and the required competences
were absent. In September 1999, in line with the results o the Great
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The Rabobank Group case study | 39
Regarding domestic market shares, Rabobank has succeeded in keeping
its originally strong position as market leader in the Food and Agri sector
(%). However, the size o this sector in the Dutch economy has shrunk
over time and currently accounts or roughly percent o Rabobank’stotal loan portolio. Competitors have tried hard to acquire substantial
market shares in these sectors over the years. One o the reasons is that
these sectors tend to be relatively stable and less risky than many other
economic sectors. In almost all other areas o retail banking, Rabobank
has managed to strengthen its position over the last decade (appendix
A). The market share or branches exceeds the one or deposits; this
conirms the divergent business model o Rabobank, where being
‘nearby’ customers is an important element. Rabobank has nonetheless
cut back on the number o branches as a result o changing customer
preerences or virtual distribution channels.
Another strategic goal o Rabobank is to be among the top three o
best perorming banks in the area o corporate social responsibility.
Rabobank was recently ranked as one o the top Corporate Social
and it seems that they are primarily reocusing on retail markets, which
is a European-wide phenomenon. Rabobank oresees an increase in
competition and hopes that government aid will be terminated as
soon as possible.
As has happened in other countries, the reputation o all Dutch banks
has been damaged. Public and political discussions about the social role
o banks and reorms o the compensation schemes have blazed up.
To restore conidence, the sector itsel installed an advisory commission
(Commission Maas, ). This commission has ormulated
recommendations about governance and risk management, the public
role o banks, supervision and regulation, and the uture o the banking
industry in the Netherlands. In July , the Dutch government
published its vision on the uture o the Dutch inancial sector (Ministry
o Finance, ). Improvements in banking supervision, higher capital
requirements, and acceptable compensation schemes are important
elements.
Following the direct eects o the inancial crisis, the banking sector is
now conronted with an economic recession. Credit losses and write-
downs will be unavoidable. Banks are reocusing their activities, improving
their risk proile, cutting costs and tightening their credit criteria.
The sector will consequently ace many challenges in the near uture.
Size and position o Rabobank O course, Rabobank cannot hide rom these diicult inancial and
economic times and intense debates. Rabobank too is conronted with
negative sentiments towards banks. Rabobank is, however, able to explain
that it has always steered a prudent course and is notably dierent rom
private banks due to its conservative banking model and speciic
corporate governance based on member ownership. Viewed over a
longer period o time, the vitality o the co-operative banking model
clearly stands out when looking at the development o members and
customers. Over the past ten years, the total number o members grew
rom , in to more than . million to date. Rabobank currently
has . million customers o whom . million are located in the
Netherlands. Local member banks are owned by . million members,
which equals more than percent o the Dutch population. Worldwide,
Rabobank employs around , employees.
Revenues generated outside the Netherlands as a percentage o total revenues
o the Rabobank Group (end o year)
Balance sheet total o Rabobank Group
45
40
35
30
25
20
15
10
5
0
1980 1985 1990 1995 2000 2005 2010
Chart 6.1 Contribution o perormance abroad versus domestic
in %
Source: Rabobank
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40 | Co-operative banks in the new fnancial system
Box .4 Rabo Development and Rabobank Foundation: a co-operative mission abroad
To co-ordinate and manage the increasing activities in this ield, a
new subsidiary was established in 200: Rabo Financial Institution
Development B.V. (Rabo Development). To date, Rabo Development
holds stakes in partner banks in Arica (Tanzania, Zambia, Rwandaand Mozambique), South America (Paraguay) and China. Technical
assistance to these banks is provided by consultants o Rabo
International Advisory Service B.V. (RIAS) which was set up in 1989
and has been active in more than 50 countries. Rabobank executed
the co-operative mission through Rabobank Foundation which this
year celebrated its 35 years o enhancing rural welare, empowerment
and income by assisting recipient organisations to develop into
sound institutions. The Foundation is currently active in about 25
developing countries and works in co-operation with microinance
institutions, co-operatives and NGOs.
In line with its co-operative roots and aspirations, Rabobank took the
initiative to help partner banks in a number o developing countries
on a long-term basis. In most cases, Rabobank takes a stake in these
banks in exchange or a seat on the board, in order to be able toinluence the partner bank’s strategy. Rabobank’s contribution is not,
nor has it ever been, solely inancial. Rabobank also provides input
in the orm o experience, know-how and expertise. Rabobank is
committed to assisting the partner bank in giving small agricultural
and commercial companies and private individuals access to
aordable credit acilities and other banking services. The partners
do not necessarily have a co-operative structure. A number o these
banks, however, ocus speciically on rural areas and aspire to serve
everyone, not just the ‘better’ market segment. The underlying idea
is that partner banks will eventually develop into ully ledged and
strong institutions, which in the long term will give Rabobank a
presence in countries that are gaining in importance in the world
economy, especially in the ield o agribusiness.
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The Rabobank Group case study | 41
Responsibility (CSR) banks o the world. The Group has identiied our
goals or its CSR policy: introducing sustainability in F&A, encouraging
new production methods and renewable energy sources, promoting
economic participation and diversity and ostering social cohesionand solidarity.
Lastly, the importance o Rabobank’s international activities has grown
over the last three decades. The uneven expansion and strategic moves
abroad are visible in the international assets and oreign revenues as a
percentage o total assets and revenues respectively. This shows the
diversiication o activities. It appears that international activities have a
higher risk proile than the activities o local Rabobanks in the Netherlands,
with the latter ocusing primarily on retail banking. The higher revenues
that can be expected are sometimes counterbalanced by a greater
volatility in returns caused by the deterioration o particular international
markets or a rise in the level o credit or country risks. This is also the
case in the current crisis. Most o the losses and write-downs were
concentrated in the international activities.
Financial perormance o the Rabobank GroupOverall, the inancial perormance o Rabobank Group is strong.
With solid capital buers Rabobank has recorded stable proit growth
and improved eiciency over the last ew years. Appendix A shows the
key igures o the Rabobank Group. Chart . shows the tier- ratio
(minimum requirement o %), whereas chart . displays the avourable
development o net proit in de past decades.
Rabobank has been awarded the highest rating - Triple-A status - romrating agencies Standard & Poor’s and Moody’s or many years.
Determinants o the rating are the risk proile, capital buer, stability o
income lows, market shares, strategy and diversiication o the activities.
The existence o the internal cross-guarantee scheme is also an
important actor. It can be said that this rating has proven extremely
important in the current turbulent times. Due to this status, Rabobank
has been able to weather the storm very well to date. Rabobank has kept
access to the capital markets and is able to preserve its independent
position. Customers urthermore consider Rabobank as a sae haven.
.3 Rabobank in the new inancial system
As or all co-operative banks, the external environment has altered
dramatically or Rabobank. Competitors o Rabobank in its home market
received government support in order to guarantee inancial stability.
At the same time, initiatives were taken to repair the damaged reputation
o banks. New ethics and business models were proposed by the sector,
policy makers and regulatory authorities. Due to its speciic structure
and eatures, Rabobank already complies with most o the suggestions
and recommendations. This opens up new opportunities.
12
10
8
6
4
2
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Chart 6.2 Tier 1 ratio
in %
Source: Rabobank
3,000
2,500
2,000
1,500
1,000
500
0
Chart 6.3 Net profts
in millions o euros
Source: Rabobank
’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
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42 | Co-operative banks in the new fnancial system
Last but not least, the need or highly educated and qualiied sta
constitutes a critical success actor. The attitude, competences and
knowledge o employees are known to constitute the main
distinguishing actors in tomorrow’s competition. This point is clearly
stressed in the Strategic Framework. Thereore, Rabobank will have to
strongly ocus on management and employee development.
At an early stage, Rabobank recognised the severity o the inancial
crisis and its implications. In the irst hal o , Rabobank started a
large-scale assessment o the situation which eventually culminated in
a revision o its strategic course. This was laid down in the -
Strategic Framework. Rabobank has taken into consideration the
extraordinary competitive environment and is anticipating remarkable
shits in its competitor’s business models and strategic ocus. It is
expected that they will concentrate more strongly on their domestic
retail markets, which have traditionally been the domain o Rabobank.
An increase in competition and a greater urge or cost-cutting andeiciency are oreseen. It will no longer be suicient to employ general
cost reduction targets. This time, undamental choices will have to be
made regarding targeted product-market combinations.
The Strategic Framework provides guidelines or the assessment o the
possible choices. For the upcoming years, the availability o capital has
been identiied as the bottleneck or national and international growth.
This implies that or operations that are urther removed rom the
Group’s core business - co-operative banking - other criteria apply.
These activities must meet higher proit targets and must have lower
capital requirements. The scarce capital will be primarily used or the
member banks (scheme .).
Scheme 6.3 Capital allocation policy o scarce resources
Source: Rabobank
Leveraging specialisations and benefts o scaleLeveraging specialisations and benefts o scale D e c l i n i n g a v a i l a b i l i t y o f f u n d i n g a n d e q u i t y
D e c l i n i n g a v a i l a b i l i t y o f f u n d i n g a n d e q u i t y
M o un t i n gr e t ur nr e q ui r em en t
M o un t i n gr e t ur nr e q ui r em en t
Food & agri outside NLFood & agri outside NL
All-fnance market
leader in NL
All-fnance market
leader in NL
Member
banks
Member
banks
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Appendix A | 43
Key igures Rabobank Group (consolidated, group level)
IFRS DUTCH GAAP
2008 2007 200 2005 2004 2004 2003 2002 2001 2000 1999
Volume o services
(in millions o euros)
Total assets , , , , , , , , , , ,
Private sector lending , , , , , , , , , , ,
Due to customers , , , , , , , , , , ,Assets managed and held
in custody , , , , , , , , , , ,
Financial position and solvency
(in millions o euros)
Equity , , , , , , , , , , ,
Tier I capital , , , , , , , , , , ,
Qualiying capital , , , , , , , , , , ,
Risk-weighted assets , , , , , , , , , , ,
Tier I ratio . . . . . . . . . .
BIS ratio . . . . . . . . . .
Eiciency ratio . . . . . . . . . . .
Proit and loss account
(in millions o euros)
Total income , , , , , , , , , , ,
Operating expenses , , , , , , , , , , ,
Value adjustments ,
Taxation
Net proit , , , , , , , , , , ,
Nearby
Member banks
Branches , , , , , , , , , , ,Cash dispensing machines , , , , , , , , , , ,
Foreign oices
Employees
Number o employees (in te) , , , , , , , , , , ,
Client data
Members (x ,) , , , , , , , ,
Market shares
(in the Netherlands)
Mortgages % % % % % % % % % % %
Savings % % % % % % % % % % %
Small and medium-sized
enterprises % % % % % % % % % % %
Food & agri % % % % % % % % % % %
Source: Rabobank
Appendix A
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44 | Co-operative banks in the new fnancial system
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Reerences | 45
European Central Bank (a), ‘EU Banking Structures’,
Frankurt am Main, October .
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European Central Bank (), ‘Financial Integration in Europe’,
Frankurt am Main, April .
Felton, A., and C.M. Reinhart (Eds., ), ‘The First Global Financial
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Research, VoxEU.org Publications, London.
Financial Stability Forum (), ‘Report o the Financial Stability
Forum on Enhancing Market and Institutional Resilience’, Basel.
Fitch (), ‘The European Co-operative Banking Sector’, Financial
institutions Special Report, by analyst A. Le Bras, November .
Fitch (), ‘Update on European Co-operative Banking’,
Special Report, by analyst A. Le Bras et al., October .
Fonteyne, W. (), ‘Co-operative Banks in Europe - Policy issues’,
IMF Working Paper.
Groeneveld, J.M. and B. De Vries (), ‘European co-operative banks:
First lessons rom the subprime crisis’, Working Paper Economic
Research Department, Rabobank Nederland.
G (a), ‘Global Plan or Recovery and Reorm’,
Communiqué, London, April .
G (b), ‘Declaration on Strengthening the Financial System’,
Communiqué, London, April .
Beck, T., H. Hesse, T. Kick and N. von Westernhagen (),
‘Bank Ownership and Stability: Evidence rom Germany’,
Working Paper, drat February .
Commission Maas (), Towards restoration o conidence’,
Advisory Committee Future o Banks, Den Haag (in Dutch)
Desrochers, M., and K.P. Fischer (), ‘The Power o Networks:
Integration and Financial Co-operative Perormance’, CIRPÉE,
Working Paper -, Quebec, Canada, May .
Diepenbeek, W.J.J. van (), Co-operatives as a business organization,
lessons rom co-operative organization history, University o Maastricht.
Dutch Central Bank (), ‘The Dutch Financial System - an
investigation o Current and Future Trends’, Amsterdam .
EACB (), ‘Co-operative banks in Europe: values and practices
to promote development’, Brussels.
EACB (), ‘Corporate Governance Principles in Co-operative Banks’,
Brussels.
EACB (), ‘Co-operative banks: Catalysts or economic and social
cohesion in Europe’, Brussels, March .
European Commission (a), ‘Quarterly report on the euro area’,
Vol. , No. , pp. -.
European Commission (b), ‘The recapitalisation o inancial
institutions in the current inancial crisis: limitation o aid to the
minimum necessary and saeguards against undue distortions o
competition’, communication rom the commission, Brussels,
.., C() .
Reerences
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4 | Co-operative banks in the new fnancial system
Hesse, H. and Čihák, M. (), ‘Co-operative Banks and Financial
Stability’, IMF Working Paper.
Institute o International Finance (), ‘Final Report o the IIFCommittee on Market Best Practices: Principles o Conduct and
Best Practice Recommendations’, July .
Ministry o Finance (), ‘Government view on uture o inancial
sector’, Den Haag (in Dutch).
Moody’s (), ‘European Co-operative Banks: Moving Beyond Issues
o Costs and Eiciency’, Moody’s Investors service, Special Comment by
A. Cunningham, London.
Oliver Wyman (), ‘Co-operative Bank: Customer Champion’,
Financial Services.
PA Consulting Group (), ‘Mutually assured destruction?’,
PA Consulting, London.
PricewaterhouseCoopers (), ‘The day ater tomorrow’,
report o the Financial Services Division.
The de Larosière Group (), Report o the High Level Group on
Financial Supervision in Europe, Brussels, February .
Rabobank (), ‘Rabobank Matters’, Utrecht, .
Salvo, R. Di (), The Governance o Mutual and Co-operative Bank
Systems in Europe, Co-operative Studies, Edizioni del Credito Cooperativo.
Standard & Poor’s (), ‘European Co-operative Banks Continue
to Restructure’, by credit analysts S. Dalmaz and A. De Toytot, Paris,
April .
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Colophon | 47
ColophonArt Direction and DesignBorghouts Design, Haarlem
CopyrightNo part o this publication may be reproduced in any orm by print,
photo print, microilm or any other means without written permission
o Rabobank.
DisclaimerNeither Rabobank nor other legal entities in the group to which it
belongs, accept any liability whatsoever or any direct or consequential
loss arising rom any use o this document or its content or otherwise
arising in connection herewith.
DateOctober
The report ‘Co-operative banks in the new inancial system’ is a product
o the Economic Research Department o the Rabobank Group in
co-operation with the internal departments ‘Group Finance’ and
‘Multilateral Development Banks’. It is part o a comprehensive studyabout co-operative banks and the impact o the inancial and economic
crisis on the banking industry. The report is prepared or the ‘Duisenberg
Lecture’ at the annual meeting o the IMF and World Bank in Istanbul,
Turkey in October .
AuthorsHans Groeneveld ( [email protected])
August Sjauw-Koen-Fa ([email protected])
Contact addressRabobank Nederland
Economic Research Department
Postbox
HG Utrecht
The Netherlands
Telephone +
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48 | Co-operative banks in the new fnancial system
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