Exploring Co-operative Banking Diversity – Towards a Typology at the EU Level

Literature in economics has given an extensive account of the debate regarding corporate governance (Tirole, 2006), but corporations may have various ways to act. Accordingly, it seems that « banks have unique features that... [ view full abstract ]

Literature in economics has given an extensive account of the debate regarding corporate governance (Tirole, 2006), but corporations may have various ways to act. Accordingly, it seems that « banks have unique features that influence and interact with corporate governance mechanisms » (John et al., 2016). Because these features advocate for a special treatment for banking industry, some scholars have tried to analyze how corporate governance in banks may differ from that in nonfinancial companies in order to grasp their specificities (see, inter alia, Devriese et al. (2004), OECD (2009), Mülbert (2010), Laeven (2013)). This statement is buttressed by the far-reaching changes occurred in the sector since the 1980’s. Nevertheless, banks don’t behave all the same & provide a wide diversity of models. Co-operative banks are an example of such a diversity (Groeneveld and de Vries (2009), Ferri and Kalmi (2014)). Mainstream economics usually addressed this diversity through the distinction between Shareholder Value (SHV) & Stakeholder Value (STV) companies (Coco and Ferri, 2010). But are these lenses suitable to understand co-operative banks ? Do they only belong to SHV/STV models, or could some of them be part of both/other categories ? After exploring the diversity of corporate governance theory in economics and management science, we aim at building a co-operative banks typology at the European level. Based on the idea of Berglof (2011) there is a variable degree of interdependance between ’macro’ governance system and ’micro’ governance mechanisms, the theoretical question in this paper is : In Europe, what are the country-specific (macro-level) and firm-specific (micro-level) factors influencing corporate governance of co-operative banks models ?

Theoretical methodological approach includes a threefold interrogation process to build our typology. First, we analyze to what extent economics and management science may provide sufficient theoretical background to realize co-operative banking corporate governance diversity. If the first step is not fully conclusive, we analyze to what extent economics and management science may provide theoretical background to realize co-operatives’ corporate governance diversity. Thirdly, we apply these theoretical results of the first two steps to European banking sector in order to lay the groundwork of our typology led by country-specific & firm-specific factors.

Co-operative banking is not well known in economics, which usually highlights SHV banking standards. The purpose of this paper is to undertake this perspective bearing in mind models variety may do its fair share to financial stability. Our typology suggests an updated version of the concept of hybrid governance (Makadok & Coff, 2009) applied to co-operative banks in order to enhance their comprehension. This concept goes together with the idea there is a « similarity spectrum » (going from barely to highly similar) when it comes to compare co-operative banks to other banks. As dual-bottom line institutions, it is important to recognize co-operative banks as full members of banking industry. Moreover, as pointed out by the European Association for Co-operative Banking (EACB), it is necessary to consider their features, especially in the design of banking supervision and regulation currently embodied by the Banking Union.

We expect to observe co-operative banks differentiation mainly based on country-specific factors as well as firm-specific factors. After the euro, Banking Union may be the second most important step towards European integration. In a highly competitive market such as banking industry, it is crucial to analyze co-operative banks at the European (if not international) level to report their variety and to determine strengths & weaknesses of each of their categories.

Main References

Berglof, E. (2011). A European Perspective on the Global Financial Crisis. Corporate Governance: An International Review, 19(5):497–501.

Coco, G. and Ferri, G. (2010). From Shareholders to Stakeholders Finance: A More Sustainable Lending Model. International Journal of Sustainable Economy, 2(3):352–364.

Devriese, J.; Dewatripont, M.; Heremans, D.; and Nguyen, G. (2004). Corporate Governance, Regulation and Supervision of Banks. Financial Stability Review, (2):95–120.

Ferri, G. and Kalmi, P. (2014). Co-operative Banks: Their Contribution to the Stability and Diversity of the Financial System. In Co-operative Innovations in China and the West, Palgrave Macmillan UK: 113–125.

Groeneveld, J. M. and de Vries, B. (2009). European Co-operative Banks: First Lessons of the Subprime Crisis. The International Journal of Cooperative Management, 4(2):8–21.

John, K.; De Masi, S. and Paci, A. (2016). Corporate Governance in Banks. Corporate Governance: An International Review, 24(3):303–321.

Laeven, L. (2013). Corporate Governance: What’s Special About Banks ? Annual Review of Financial Economics, (5):62–92.

Makadok, R., & Coff, R. (2009). Both Market and Hierarchy: An Incentive-System Theory of Hybrid Governance Forms. Academy of Management Review, 34(2):297-319.

Mülbert, P. O. (2010). Corporate Governance of Banks After the Financial Crises: Theory, Evidence, Reforms. Working Paper Series in Law no.51, European Commission (Brussels).

OECD (2009). Corporate Governance and the Financial Crisis: Key Findings and Main Messages.

Tirole, J. (2006). The Theory of Corporate Finance. Princeton University Press.