PALGRAVE MACMILLAN STUDIES IN BANKING AND FINANCIAL INSTITUTIONS SERIES EDITOR: PHILIP MOLYNEUX Co-operative Banking Networks in Europe Models and Performance Federica Poli Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor Philip Molyneux University of Sharjah Sharjah, United Arab Emirates The Palgrave Macmillan Studies in Banking and Financial Institutions series is international in orientation and includes studies of banking sys- tems in particular countries or regions as well as contemporary themes such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk Management, and IT in Banking. The books focus on research and practice and include up to date and innovative studies that cover issues which impact banking systems globally. More information about this series at http://www.palgrave.com/gp/series/14678 Federica Poli Co-operative Banking Networks in Europe Models and Performance Federica Poli Università Cattolica del Sacro Cuore Milano, Italy ISSN 2523-336X ISSN 2523-3378 (electronic) Palgrave Macmillan Studies in Banking and Financial Institutions ISBN 978-3-030-21698-6 ISBN 978-3-030-21699-3 (eBook) https://doi.org/10.1007/978-3-030-21699-3 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. 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Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Alexander Spatari / Moment / Getty This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland To my beloved son P reface Over the past 20 years, the increasing dominance of the shareholder own- ership model in banking, with its main purpose of maximizing financial returns to shareholders, has proved to be a toxic combination with finan- cial deregulation, the creation of new financial instruments, and the con- comitant rising levels of bank leverage that have taken place. Despite the growing role of private joint-stock banks around the world, co-operative banking is still a credible and high-performing alternative way of doing banking. This is especially true in Europe where co-operative institutions have historical roots dating back to the nineteenth century. This book focuses on a sample of European co-operative banks (CBs), which nowadays perform universal banking activities, adopting a business model which is fundamentally based on mutuality, community develop- ment, not-for-profit, and stakeholder orientation. From a lifecycle per- spective, most European CBs have reached an advanced level of maturity. Many modern CBs have evolved into large firms which mainly transact with customers who are not co-operative members and which are run by professional managers. Many of the CB networks have turned into large, complex, financial conglomerates that have little in common with the small-scale self-help organizations from which they are descended. Forming networks allows the pursuit of economies of scale and scope while also providing a safety net or mutual support mechanism that can compensate for the risks associ- ated with being an individual co-operative whose activities are concen- trated on a homogeneous member base. The few empirical research studies, conducted prior to and after the outbreak of the global financial vii viii PREFACE crisis (GFC), into the effects on performance measures of the level of inte- gration of financial co-operatives’ systems find that integration tends to reduce the volatility of efficiency and performance measures; it appears to help control managers’ expense preferences; and notwithstanding the high costs of running hub-like organizations in highly integrated systems, these systems operate at lower costs than less integrated systems. Additionally, some authors have recently pointed out that the hybrid- ization process of CBs has exposed them to severe losses following the financial crisis, mainly due to their apex institutions and their highly diver- sified activities in financial assets which have been harshly hit by the inter- national financial turmoil. This raises the following question: are their stability and resilience to financial shocks threatened by an overexposure to risk and the introduction of the shareholder value logic into hybrid networks? Considering the situation outlined above, it seems that there is still plenty of scope to conduct further investigations into the resilience and profitability of CBs in Europe, properly taking into account the orga- nizational forms of their networks and governance. The vast majority of European CBs 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. Given the significance of co-operative banking in certain European coun- tries (e.g. France, the Netherlands, Germany, Austria, and Finland) and, by contrast, its decreasing importance in others (e.g. Italy), and also in light of the events following the outbreak of the financial crisis and the implementation of the Banking Union, it seems that further empirical consideration of the co-operative sector is warranted. With these considerations in mind, this book presents a survey of the characteristics of different forms of integration of CB networks across sev- eral European countries and provides an assessment of their impact on several performance measures for the networks and their co-operative components. With a few exceptions, the existing empirical studies neglect to examine the features of the networks to which the banks belong. Surprisingly, there is little evidence on the extent to which diverse organi- zational forms of networks determine differences in individual banks’ and networks’ performances across different countries. The principal objective of this book is to fill this gap in the literature. The European countries investigated are Austria, Finland, France, Germany, Italy, and the Netherlands. In all of these countries CBs have a significant presence, PREFACE ix while the organizational forms of their networks vary widely. Therefore, focusing on this sample of European countries may allow us to draw out some insights and policy implications about the role that network organi- zations play in determining the performance of CBs. The book is organized into nine chapters. The first chapter outlines co- operative banking’s historical roots, with its ground-breaking practices of self-help, solidarity between members and financial inclusion irrespective of social condition or wealth; its ongoing conceptualization; the principles and values associated with co-operative banking; and its role in modern economies. It offers a review of the empirical evidence on the performance of the sector relative to commercial alternatives and its contribution to financial stability in the European context. The second chapter examines the rationales for and structures of co-operative banking networks both from a theoretical perspective and as exemplified in the European coun- tries under investigation. Networks facilitate the building of relationships between CBs that have joined together for mutual benefit or to achieve a common purpose. The need to build alliances tends to increase in relation to the number of CBs existing in a territory, offering benefits in terms of supply alliances, monitoring functions, and the creation of social capital. From Chaps. 3, 4, 5, 6, 7, and 8, the banking co-operative networks that exist in each of the six European countries surveyed are examined, respec- tively: Austria, Finland, France, Germany, Italy, and the Netherlands. In relation to each country, we analyze the positioning of the co- operative system, its historical evolution, and the organizational model of its network, and, finally, present an empirical analysis which covers two research areas. The purpose of the first one is to verify empirically the effects of the ongoing hybridization in co-operative banking over the period 2005–2017, answering the following questions: have the mitiga- tion of the principles of mutuality pursued by CBs and the growing com- plementarity with markets as places of investment and funding meant that the results achieved by CBs have become more similar to those of share- holder-oriented banks? Which areas record analogies and differences in results? Can a convergence in their respective performances be observed over time? To answer these important questions, a set of commonly employed indicators in the form of ratios proxying bank performances is identified and tested. The second area of research aims to verify on a comparative basis the contributions that the central institutions of the networks and the available sample of the individual CBs were able to generate during the period 2008–2017. To deal with this empirical issue, we examine some of x PREFACE the performance indicators selected, comparing the results achieved by central institutions with those of their networks of CBs. In Chap. 9, we use the entire sample of European countries analyzed and, over different time periods between 2005 and 2017, test for the exis- tence of significant differences between the co-operative banking sector and the purely shareholder-oriented banks which have been selected. In addition to this empirical assessment, the following research question is also addressed: which of the network models seen so far enhances the per- formances of the CBs that are part of them? Or in other words, which of the types of networks analyzed has the most positive effect on the results of their owners: the local CBs? To answer this question, we return to the classification of co-operative networks introduced in Chap. 2 and exam- ine, on a comparative basis, the performances of the different networks of the individual CBs. The chapter concludes with a brief analysis of the most important challenges that, in the opinion of the author, the CBs are called to face in the coming years. Milano, Italy Federica Poli