Co-operative banks, building societies and virtual banks

In this context, it is worth mentioning the role of mutual banks or co-operative banks. In the UK, the Co-operative Bank founded in 1872 (called “Loan and Deposit Department of the Cooperative Wholesale Society”) was a company controlled by the Co-operative Banking Group (known as “Co-operative Financial Services”) part of a financial conglomerate which provided insurance services and pension funds.[1] The Co-operative Bank experienced a turmoil after the merger with Britannia Building Society in 2009, a transaction that caused huge losses and led to the recapitalisation of the institution.40 Co-operative banks include credit unions and building societies. Credit unions are regulated by the Credit Unions Act 1979 Chapter 34, as amended by the Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011 (UK), SI 2011/2687, which define the main aim of these banks in ‘the promotion of thrift among the members of the society by the accumulation of their savings’. Building societies are regulated by the Building Societies Act 1986 Chapter 53 (BSA), as amended by the Financial Services Act 2012 (Mutual Societies) Order 2013 (SI 2013/496). Article 5, paragraph 1 of the BSA 1986 provides that main objective of the building societies ‘is that of raising, primarily by the subscriptions of the members, a stock or fund for making to them advances secured on land for their residential use’. Specifically, the building societies are mutual financial institution and take part of the Building Societies Commission. The Co-operative and Community Benefit Societies Act 2014 regulates the whole sector: this statute has reordered the co-operative banks as a type of banks.

Among credit institutions particular attention is dedicated to central banks which are primarily concerned with three main and interconnected aspects of stability: (1) domestic

price stability; (2) external stability of the value of the currency; and (3) overall systemic stability in the financial system.[2] Central banks are typically established by law or statute, but beyond this initial act which gives them legitimacy and generally sets out the goals, functions and governance in generic terms, there is little detailed law governing their operational aspects. The provision of lending facilities to the government has been a traditional rationale for the establishment of central banks. The main rationale for central banking is the twin mandate of monetary stability and financial stability. The privilege of issuing money is considered the first rationale of a central bank, a task generally associated with financing the government, particularly in war times. It is also this privilege that lets it act as ‘lender of last resort’: this is an instrument of banking supervision in a ‘crisis-situation’ stage. As part of its micro-prudential functions, the central bank via the lender of last resort provides assistance to a bank suffering from a liquidity crisis.

Most recently, financial technologies have spread the use of virtual platforms to negotiate banking services: digital devices, cloud computing and automation characterise the commercial business of banks. The traditional channels of banking services have mutated into an electronic system of payments. Virtual banks represent the new frontiers of lending and money deposits: e-banking refers to any activity carried out by using electronic devices and digital services provided through pre-loaded computer programs. Internet banking refers to the provision of any banking services placed online, while e-money consists of stored value on prepaid payment devices that allow payment to be made. E-trading refers to the conduct of market making (as principal) or brokerage (as agent) dealing in securities using electronic devices. The new technologies have determined a revolution in the banking industry that makes financial services more efficient and profitable, reinforcing investment options and ensuring credit access. As Lord Hodge noted ‘banks are using Al and machine-learning to maximise profits from scarce capital, to improve their models for risk-management and stress-testing, and to carry out market impact analysis, by creating so-called “trading robots” which evaluate the impact of the business’s own trading on the market in which it operates’.

  • [1] First models of co-operative bank are Friend of Labour Loan Societies, Funding Clubs, Slate Clubs, Self-help Societies, Co-operative People’s Bank, Community Cooperatives and Cooperative Workshops. For an overview, see H.W. Wolff, Co-operative Banking. Its Principles and Practice (BiblioBazaar, LLC 2008) 8-9. 2 Sir Christopher Kelly, ‘Failings in Management and Governance. Report of the Independent Review into the Events Leading to the Co-operative Bank’s Capital Shortfall’ (30 April 2014) 2-3 (accessed 28 July 2020). 3 In doctrine, see Lorraine E. Talbot, ‘Keeping Bad Company: Building Societies—A Case Study* (2009) 60 Northern Ireland Legal Quarterly 444-445. 4 See Co-operative and Community Benefit Societies Act 2014 Chapter 14 (accessed 29 July 2020).
  • [2] Rosa M. Lastra, International Financial and Monetary Law (2nd edn, OUP 2015) 31-33. 2 Patricia S. Pollard, ‘A Look Inside Two Central Banks: The ECB and the Federal Reserve’ Federal Reserve Bank of St Louis (January-February 2003) (accessed 8 July 2020). 3 Milton Friedman, ‘The Role of Monetary Policy’ (1968) 58 American Economic Review 2-3. 4 Monetary policy refers to the actions taken by the monetary authorities to affect the supply and cost of money and credit. A legal definition is generally absent in central bank statutes. 5 Marvin Goodfriend and Robert G. King, ‘Financial Deregulation, Monetary Policy and Central Banking’ (1988) 74 Economic Review Federal Reserve Bank of Richmond 5-6. See also Charles Goodhart, The Evolution of Central Banks (MIT Press 1988). 6 Glenn Hoggard, Patricia Jackson and Erlend Neir, ‘Banking Crises and the Design of Safety Nets’ (2005) 29(1) Journal of Banking and Finance 143-144. 7 uk/docs/speech-190314.pdf> (accessed 27 July 2020). 8 Anita K. Pennathur, ‘“Clicks and Bricks”: e-Risk Management for Banks in the Age of the Internet’ (2001) 25 Journal of Banking and Finance 2013-2014. 9 Electronic money (e-money) is defined as an electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the e-money issuer. The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions. 10 Lord Hodge, ‘The Potential and Perils of Financial Technology: Can the Law Adapt to Cope?’ (The First 11 Edinburgh FinTech Law' Lecture, University of Edinburgh, 14 March 2019)
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