Review of Poli, F (2019) Co-operative Banking Networks in Europe: Models and Performance, Palgrave Macmillan
This book, written by Federica Poli, Associate Professor of Banking at the Università Cattolica del Sacro Cuore in Milan, Italy, offers an informative survey of the characteristics of different types of co-operative banks’ networks across several European countries. It also describes strategies of integration. Precisely, co-operative banking systems in the following European countries are discussed: Austria, Finland, France, Germany, Italy and the Netherlands. The book is clearly written and can be recommended not only to academic researchers but also to students on their masters’ and doctoral programmes who are focusing their research efforts on alternative models of banking.
As stated by the author in the preface, the book attempts to fill an important gap in empirical studies on co-operative banks by properly accounting for the distinctive features of the networks to which such banks belong. This is particularly important due to the fact that ‘the vast majority of European co-operative banks are organized in networks, which vary from loose associations to cohesive groups where membership may or may not be compulsory. Forms of membership vary from country to country, as do governance structures and risk management mechanisms’ (p. viii).
The book is organised into nine chapters. Chapter 1 outlines co-operative banks’ historical roots. Chapter 2 discusses the rationale for co-operative banking networks, which are considered as being particularly important in ‘generating social capital which in turn is vital in banking to minimize adverse selection and moral hazards and to impose discipline on the bank management’ (p. 68). Chapters 3 – 8 focus on banking networks in the mentioned European countries, all of which have an outstanding tradition in co-operative banking, with a significant presence of co-operative banks on their national markets. Finally, in Chapter 9 the sample of co-operative banks from the selected countries is used to test – over different time periods – the existence of significant differences between the co-operative banking sector and shareholder-oriented banks.
Poli is successful in shedding light on the remarkable peculiarities of co-operative banking groups and networks under investigation. For example, the organizational models adopted by Austrian co-operative banks are based on formal networks, albeit with changing degrees of integration. These networks are made up of legally autonomous local institutions at the regional and national level whose capital belongs to local banks, thus creating an inverted ownership structure. In Finland, the main co-operative banking networks are generally highly integrated (even though some individual banks are rather reluctant to be part of a formal organisational framework) whereas in France leading co-operative banking groups have adopted hybrid structures whereby networks of French credit institutions are affiliated to a central body which is currently under substantial control of the affiliated banks.
Throughout the book Poli convincingly argues that a number of differences between shareholder banks and co-operative banks indeed persist in European countries while chances for further developments in co-operative banking are largely preserved for the years to come. The author finds that only in the case of the Netherlands there is no clear difference between the co-operative banking model and the shareholder-oriented model of banking. The book both supports and upgrades the findings of other economists and scholars (organizational sociologists, experts in co-operative policies etc.) who have focused their research on co-operative banking – for instance by acknowledging the fact that the indicators of co-operative banks’ profitability and operating efficiency are generally more satisfactory in more integrated networks. Furthermore, it is noted that strategically integrated co-operative banking groups ‘are less focused on trading over time, thus demonstrating their lower propensity to short-term investment horizons and speculation’ (p. 382).
Amongst others, the following characteristics which differentiate co-operative banks from joint-stock banks are singled out in the book (p. 382 and elsewhere): the equity held as a proportion of total assets (%) by the more integrated co-operative networks is always higher than that of the corresponding joint-stock banks; stakeholder-oriented banking groups provide significant contributions to the development of local economies and have less intense links with financial markets; also, in comparison to standard commercial banks co-operative banks are on average less prone to engage in speculation and in risky financial operations.
On the other hand, according to Poli, one should not neglect the market threats and challenges for European co-operative banks (p. 389), namely: the rapid pace of digitalization of banking; the constant pressure on profitability; and restrictions imposed by the regulators (with regulations often designed with large joint-stock banks in mind). The Italian economist therefore raises awareness of the challenges ahead for co-operative banks, for instance the need to provide an adequate response to the increasing digitalization in banking and so-called ‘fintech phenomena’ as well as the need to mobilize the participation of co-operative members to a greater extent. As she suggests, ‘in today’s digital world, technology challenges the way banking relationships are managed in a banking business model, including in the co-operative sector, which places relationships and inclusion at the centre of its distinctive mission’ (p. 395).
The book could be further developed in future by accounting for the co-operative banking networks present in other important European countries such as Belgium and Spain. Ultimately, the book also manages to stimulate further debate on co-operative banking by opening up a number of potential questions. For instance, why are co-operative banks and co-operative banking networks underrepresented in some European countries and macro-regions as for example in Eastern Europe? These are some of the questions that could further improve the valuable findings in Poli’s insightful book that is recommended reading for those interested in contemporary banking and current trends in financial intermediation.
Selected quotes from the book
‘As shareholder-oriented banks, co-operatives are subject to some potential sources of conflicts of interest with regard to the relations between members and depositors or borrowers and those between members and managers’ (p. 28)
‘[For the Netherlands] the data reported show that overall co-operative and shareholder-oriented banking do show less significant differences in their outcomes than in other countries surveyed in the book. The co-operative banking group exhibits a capitalization which is statistically significantly higher than that of commercial banks. This implies that co-operative banking in the Netherlands retains a superior ability to face banking risks. However, if we compare the two business models, taking into account their asset and liability allocative choices, we find that there are strong similarities’ (p. 376)
‘The weakening of the degree of independence of local banks is the price that has generally been paid in return for ensuring the greater resilience of the entire sector and its values and principles. In parallel, the progress of network organizations, perhaps mostly externally influenced, has required the strengthening of the co-operative identity’ (p. 390)
‘Among the co-operative banking groups, those in the northern Europe seem to have entered the market for crowdfunding initiatives more decisively through forms of collaboration with existing platforms and investments in their own technological financial market places. Digitalization will increasingly cover other operational areas, from payments to consulting and financial investment, and even insurance, affecting both the design of products, and their delivery’ (p. 393)
From: pp.8-9 of WEA Commentaries 10(3), August 2020