A triumph for cooperatives: customer-owned Swiss banks are thriving while their shareholder-owned rivals lick their wounds in disgrace

Though the Swiss seem to have a special knack for running cooperatives, there is new interest in this form of organisation in communities all over the world. Photograph by Amita Chatterjee

Everyone writing off cooperatives as impractical — or as artefacts of misguided ‘hippie’ idealism – will please read the article below, re-published with the permission of Swissinfo.ch, a section of Switzerland’s equivalent of the BBC.

The Swiss see cooperatives as building blocks of democracy. They are rightly proud of their own ‘extreme’ or ‘direct’ democracy — the subject of an earlier post here – based on the rigorous implementation of proportional representation, and are apt to shake their heads despairingly about the ‘winner-takes-all’ version of the system of government in other western democracies.

The Economist – which has a habit of sniffily referring to cooperative banks as ‘dull but safe’ – has cited two authorities confirming the wisdom of coops:

A 2009 study by the Bundesbank, Germany’s central bank, into the connection between financial stability and bank ownership also found that co-operative banks were much less likely to fail than those owned by private shareholders. That fits with earlier work done by staff at the IMF in 2007, who argued in a working paper that co-operative banks were more stable than their commercial counterparts.

23 March 2012 

Crisis gives new life to cooperative banks

 by Armando Mombelli, swissinfo.ch 

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Sometimes seen as an old-fashioned business model, cooperative banks have succeeded in strengthening their position since the crisis in the financial sector.

The three main cooperative banks in Switzerland – the Raiffeisen, Migros and Coop banks – have been enjoying strong growth in the past few years. 

“Until recent times, the banks had a stabilising effect on the economy. But in the past few years they have turned out to be a destabilising factor,” said Florian Wettstein, who teaches business ethics at St Gallen University. 

“Growing international competition and pressure from shareholders have led to a logic of short-term profit with very negative consequences,” said Wettstein. 

“We no longer talk about growth. What we want is bigger growth than last year’s or last quarter’s. At a certain point, this attempt defeats itself and we get speculative bubbles which burst sooner or later.” 

The last such speculative bubble that burst in 2008 threw the financial sector into crisis and forced many countries to exert huge efforts to save banks in difficulty. 

Even Switzerland was not spared: UBS, the number one Swiss bank, just missed going under thanks to massive intervention by the federal government and the country’s central bank. 

“It is interesting to note that Swiss banks, in particular UBS, were not just caught up in this trend. They played a very active role on the international scene, throwing their traditional culture of caution to the winds,” noted Wettstein. 

New management models 

The crisis in the financial sector spread to the “real” economy and it is still negatively impacting on growth around the world. Governments have been studying new models of management and regulation of banking to avoid another major financial crisis. 

Forbidding high-risk speculative ventures, separating investment banking from deposit management, limiting bonuses and various other measures have been examined by the Swiss government as well as others. 

Government and parliament here have approved an increase in equity capital requirements for banks, higher than those enforced by other European countries. This measure has still been regarded as insufficient by many experts. 

On the other hand, a business model that is sustainable and crisis-proof has existed for quite some time: it is the model of cooperative banks securely anchored in the local economy. 

Since 2008, Raiffeisen, Migros and Coop bank have attracted thousands of customers and billions of francs away from the “big two”, UBS and Credit Suisse, whose credibility nosedived after the losses they took on the American market. 

Last January, Raiffeisen almost completely took over Wegelin Bank, which had to shut down its activities when it found itself under investigation in the United States along with ten other Swiss banks accused of having helped thousands of American customers to evade taxes. 

In February, Raiffeisen became the first bank to guarantee transparent financing of political parties and indicate it was in favour of the introduction of automatic exchange of information on bank deposits with European countries. 

Several advantages 

In difficult times for the financial services industry, this cooperative bank is showing itself particularly dynamic and willing to break with taboos like banking secrecy which no longer seem to have much of a future. 

In the International Year of Cooperatives proclaimed by the UN, this fact may serve to renew interest in a business model often dismissed as old-fashioned – almost all the big cooperatives were founded more than half a century ago. 

“Cooperative banks actually offer several advantages,” said the economist Hans Kissling. 

 “The main one is that they are not exposed to pressure from owners or shareholders, and so they do not go for big risks and excesses. Rather they pursue a long-term strategy in the interest of their members, who are also their customers.” 

“Once shares are not involved, there is no danger of things like insider trading. Nor is there a danger of public takeover bids at their expense: attempted takeovers by other companies have to be approved by the members,” added Kissling, who is a former board member of a cooperative. 

“And last but not least, capital does not drain from the company through payments of  exorbitant dividends or salaries. It stays in the cooperative and gets used for new investments or to strengthen its equity.” 

Democracy and solidarity 

Tending as they do to democracy and solidarity, cooperatives almost always come out on top of the rankings for companies that enjoy the trust of the ordinary public. 

This has not in itself been enough to stimulate growth in the sector: every year thousands of limited companies are founded in Switzerland, but only a handful of cooperatives are set up. 

“The government should introduce tax breaks or create a special fund to promote the conversion of family businesses into cooperatives, for example on the death of the owner. Another option might be to introduce share certificates without the right to vote, which would encourage the capitalisation of cooperatives,” said Kissling. 

In the Swiss banking sector, most of the potential for this kind of development would come from the cantonal banks, which several cantons hope to privatise eventually. Conversion of these into cooperatives instead of limited companies would help safeguard their original mandate. 

In this way, almost half of the 20 principal Swiss banks could one day become cooperatives. 

“Promotion of cooperatives should above all be anchored in the constitution, as it is in Italy,” maintained Kissling. 

“This would not only serve to acknowledge the economic and social importance of cooperatives, but also to emphasise the long Swiss tradition of solidarity, which goes right back to the country’s roots.” 

He recalls that the Swiss Confederation is called in German “Eidgenossenschaft”, which literally means “a cooperative of sworn allies”. 

Armando Mombelli, swissinfo.ch

(Translated from Italian by Terence MacNamee)

[ Of course cooperatives -- being creations of imperfect human beings -- also have their flaws, and these are considered in a swissinfo.ch briefing on the topic. ]

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