Mutual and Cooperative Local Financial Institutions

A major form of stakeholder value institutions is mutual and cooperative banking. Groeneveld (2015) advocates such retail banking as one which “demonstrably results in a moderate risk profile and close links with the real economy and local communities” (p. 6). In a similar vein, the argument is put that “empirical evidence in this study suggests that no radical differences exist between cooperative banks and their peers in terms of performance and efficiency. More important, there are economic, systemic and welfare benefits to be derived from a successful cooperative sector in the banking systems in Europe. A financial system populated by a diversity of ownership and governance structures, and alternative business models, is likely to be more competitive, systemically less risky and conducive to more regional growth than one populated by a single model” (Ayadi et al. 2010, p. vi).

Ayadi et al. (2010) argue that there are many reasons why cooperative banks have less incentive to take excessive risks. These include that while they have to break even they do not have to strive for maximization of profits which can induce highly risky behaviour. They are able to adopt a longer-term horizon in their decision-making and lending practices and be under less short-termist pressures. These authors stress the strong local presence of cooperative banks “which allows them to have a better understanding of the needs and the risk profiles of their customers and ultimately to mitigate acute asymmetric information”. Their empirical results “highlight that despite slightly lower profitability, the cooperative bank model is not consistently different than other banks in terms of efficiency and market power. ... In addition to providing cases where cooperative banks are comparable (if not better) than their peers, our finding also highlight the role of diversity in contributing to broader financial stability” (p. 16).

 
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