Co-operative banks in the new fi nancial system

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Co-operative banks in

the new financial system

Rabobank Group



Contents | 1

ContentsPreace 3

1 Executive summary 5

2 The allout rom the inancial crisis 8

. Causes and direct eects . Eects on business principles and banking models

. Impact on banking market structures

. Summary

3 History, evolution and special eatures o co-operative banks 15

. Origins o co-operative banks

. Disappearance o original ‘raisons d’être’

. Evolution o co-operative banks: local-national-international

. Six distinguishing eatures o mature co-operative banks

. Summary

4 Size and perormance o co-operative banks in Europe 22

. Size o co-operative banking sector in Europe

. Financial perormance o co-operative banks

. Impact o co-operative banks on national inancial systems

. Summary

5 Co-operative banks in the new inancial system 29

. Opportunities

. Challenges

The Rabobank Group case study 33

. History and evolution o Rabobank

. Position o Rabobank Group

. Rabobank in the new inancial system Appendix A 43

Reerences 45

Colophon 47



2 | Co-operative banks in the new fnancial system



Preace | 3

Last year’s inancial crisis shook the global inancial system down to its

very oundations, as the allout rom the collapse o the sub-prime

lending bubble spread across the globe. The ull extent o the integration

o the world’s inancial markets was revealed. Large-scale governmentintervention and extraordinary monetary measures were necessary to

saeguard inancial stability. Ater the shuddering blow o the immediate

eects, inancial institutions now ace the recessionary eects o the

inancial crisis.

The business principles underlying the inancial system have to change

undamentally i conidence in the inancial system and inancial stability

are to be restored. Trust, the traditional cornerstone o the inancial

sector, has been replaced by a general distrust o the banking sector.

Both inancial markets and consumers must regain conidence in banks.

And banks must likewise regain conidence in each other. Governments

and society are calling or undamental changes rom inancial institutions:

a greater ocus on integrity and ethics, a responsible risk attitude, a

longer-term perspective, improved transparency and, last but not least,

a much stronger customer ocus.

Co-operative banks were and are certainly not immune to these

developments, and made some mistakes themselves. All large

co-operative banks suered substantial losses on more risky investments.

But by comparison with private banks they appear to have been dealt

only a glancing blow by the immediate eects o the crisis. I think thatco-operative banks escaped relatively unscathed rom the crisis thanks

to their unique characteristics, not least in terms o their corporate

governance. The members, who are also customers, own the entire

organisation. And member ownership is relected in an approach that is

consensus-driven to a greater extent and avoids any strong ixation on

one stakeholder. The concomitant long-term view and risk-averse stance

translate into a more conservative banking strategy directed towards retail

banking. In addition, co-operative banks distribute little o their proit,

adding it to reserves or own unds instead. Consequently, co-operative

banks are some o the most highly capitalised institutions in Europe and

tend to contribute to the stability o national inancial systems.

The unique eatures and core competences o co-operative banks

provide a solid platorm with clear opportunities or the coming ive

years. For instance, most o the ‘new’ characteristics o the global

inancial system, and customer centricity in particular, have been part

o co-operative banks’ DNA rom the outset. But this does not mean

that these opportunities can be simply cashed in. A proactive and

innovative attitude is needed to contend with a wide range o maniest

challenges. The bottom line is that the success and lie expectancy o

mature co-operative banks depend on their competitiveness, the

quality and strategy o their management, and, last but not least,

their relationships with their members. Past experience shows that

co-operative inancial institutions are able to adapt to changing

circumstances and re-invent themselves. This is abundantly clear in

the case study o the Rabobank Group that concludes this report.

I hope that this report will contribute to a better understanding o the

strengths o the co-operative banking model. I am convinced that the

principles o this model are viable, uture-proo and oer clear added

value. This holds true as much or the developed world as it does or

emerging and developing countries, where access to inance is more

oten the exception than the rule.

Piet Moerland

Chairman o the Executive Board o Rabobank Group

Preace



Executive summary | 5

Executive summary

Ater the house price bubble burst in , governments and monetary

authorities took a broad range o drastic measures to avoid the collapse

o the global inancial system. The restoration o public conidence in thebanking industry had top priority in the short term, while the need or

remodelling the global inancial architecture to make the inancial system

more resilient against uture shocks became apparent. In and ,

many banks were engaged in reorganisations o their businesses.

Some returned to the basics o traditional banking and others needed to

strengthen their capital position substantially. Today’s banking industry

is acing the eects o a deep economic recession and is set to suer

additional losses in credit portolios. Meanwhile, governments and

inancial authorities have announced stricter banking rules and more

stringent supervision at an international level. Capital and solvency

requirements or banks will be tightened, and improved risk management

will be required. Moreover, stringent policy measures to saeguard the

stability o the inancial system are underway.

The global turbulence shook up the banking sector and led to new

rules o the game. Banks had to rethink their strategy and adjust their

business principles and structures. The new inancial system willmaintain a tighter ocus on customer centricity, while integrity and

ethics will play a more important role in retail banking than in the past.

International controls will be improved, and the corporate governance

and compensation schemes o banks must be adjusted to provide

adequate incentives or a responsible balance between risks and their

capital position. Banks have to apply a long-term perspective instead

o a dominant ocus on short-term proit.

A distinction is drawn in this study between private and co-operative

banks. The undamental dierence between them is their corporate

governance: shareholder versus member ownership. This dierence

entails numerous consequences in terms o their business orientation

and principles. The characteristics and achievements o co-operative

Financial institutions must recognise that the uture will not be like the past.

The organisations that come out rom the inancial crisis as winners, will be those

that do what is required or survival, but also adapt to the realities o a new world.Financial institutions must resist the urge to ocus excessively on their irst-line

response to the crisis at the expense o longer-term considerations. At the same time,

inancial parties are compelled to adjust to the realities o doing business in a global

world where the interests o multiple stakeholders are becoming increasingly

important and the balance o economic power is shiting to the East.

This report ocuses on the direct and indirect eects o the crisis or European

co-operative banks. The crisis entails both clear opportunities and challenges orco-operative banks in the coming ive years. This study has been prepared or the

‘Duisenberg Lecture’ at the annual meeting o the IMF/World Bank in Istanbul,

Turkey in October .



| Co-operative banks in the new fnancial system

competitive, operate eiciently and attract customers in the uture.

By joining orces in speciic banking areas, co-operative banks may

achieve suicient scale compared to their counterparts and diversiy

the risks o cross-border activities. To that end, ways o closer co-operationon international markets could be developed, building on the awareness

that non-committal attitudes and non-committal partnerships belong to

the past. The ultimate aim o these alliances could be to create European

co-operative institutions in certain banking areas. The easibility o this

strategic direction requires urther evaluation, but could be an enticing

prospect or co-operative-minded bankers.

Another opportunity stems rom the origins o most co-operative banks.

They were oten established more than a century ago in rural areas

where people were deprived o inancial services. The original ‘raisons

d’être’ may have disappeared or mature co-operative banks in mature

inancial markets, but this is deinitely not the case in many countries all

over the world. Co-operative banks are eminently well-equipped to help

these countries in setting up sustainable inancial inrastructures, visibly

contributing to economic and social development. With a presence in

these emerging or developing countries, co-operative banks can clearly

demonstrate their ‘presence value’, which is virtually impossible to show

in Western countries. They know very well that copying and pasting

their own co-operative template to other countries is not the right way

orward. Adjustments are necessary to allow or historical and cultural

dierences. Microinance is a natural it or co-operative banks inemerging and developing countries and they should make it their

business to claim this promising area o banking. When the inancial

sectors in these countries mature, co-operative banks will possess a

strong oothold based on a long-term commitment. The governments,

regulators and inancial sectors o developing countries should also

embrace co-operative banks, since they would provide the necessary

access to inance or enterprising poor people.

This does not mean that opportunities can simply be cashed in.

Five main challenges can be identiied.

A. Proactive and innovative attitude

Many competitors are redeining, oten with government support,

their strategy and business models and reorganising their businesses.

banks in the past ew years have remained notably underexposed in

recent publications, the press and various reports. But the success o

the co-operative business model is abundantly evident in the igures

they have posted. Average market shares o European co-operativebanks as well as member-to-population ratios have increased over

the last decade. This is one o the strongest proos o the vitality o

the co-operative business model. But one has to bear in mind that

co-operative banking is not by deinition better than other banking

models and ater all, past perormance is no guarantee o uture success.

For instance, co-operative banks were - and are - not sheltered rom

extraordinary events resulting rom the crisis. They too suered losses

and incurred write-downs directly related to the inancial crisis. But they

appear to have been hit less hard than private banks and they did not

need large-scale government support. They too eel the eects o the

general loss o conidence in the banking sector and ace competitors

on a sharply tilted playing ield. Owing to their strong position in the

retail markets, they will eel the negative impact o the deep economic

recession. To sum up, co-operative banking is not a panacea or post-

crisis banking in general, but should be viewed as an interesting

alternative to the other banking models that have been in the spotlight

or most o the time in recent decades.

Looking urther ahead, the unique eatures and natural core competences

o co-operative banks provide clear-cut opportunities in this new

banking environment. The ‘new’ characteristics o the inancial systemhave been part o co-operative banks’ DNA rom the start and are

considered to be their main competitive advantage. As member-owned

institutions, co-operative banks now have the opportunity to leverage

the new banking rules and ethics to their advantage in a well-designed

public relations campaign. In addition, their strong capital base,

balanced corporate governance structure and large yet inely-meshed

branch networks enable them to maintain a more pronounced external

ocus than many o their competitors, which may translate into market

share gains.

Building on the work by Unico and the European Association o

Co-operative Banks, closer international co-operation between European

co-operative banks likewise oers promising advantages. The reason is

that operational scale will become increasingly important to remain



Executive summary | 7

The winners emerging rom the inancial crisis will be those banks that

are able to oer good products and services at air prices with highly

eicient operations in the long run, that put the customer irst, and that

are well-capitalised with moderate risk proiles. Strategic choices orserving customers eiciently and a strict ocus on core activities and

competences are indispensable. Modern co-operative banks must be

entrepreneurial, cost-eective, eicient and businesslike organisations.

The long history o co-operative banks shows that they can live up to

these expectations.

Within about two years, competitors will be leaner and meaner and some

o them will re-enter the market aggressively to regain market share.

B. Improving eiciency levels The pressure or oering competitive and innovative products/services

in the market is rising, while margins tend to shrink. This requires a critical

evaluation o the costs and beneits o the extensive distribution network.

Integrating physical and virtual distribution channels and pursuing ways

o personalising contacts with customers via virtual channels is necessary.

In addition, continuous training and education are required to ensure

employees’ knowledge is state-o-the-art. The attitude, knowledge and

competences o sta are the main dierentiators in banking competition.

C. Strategic choices: dierences compared to other inancial

services providers

Competitors tend to copy business models and products/services

quickly. Co-operative banks have to communicate clearly the unique

eatures they oer. Products and prices do not dier much between

players. Strategic choices or servicing customers eiciently and

maintaining a strict ocus on core activities are necessary.

D. To balance beneits and risks o international versus national

(home market) activities.

It will be a balancing act to reconcile the interests o domestic

members, i.e. the co-operative part o the organisation, with the sizeand risks o international activities. Operations abroad that become

substantially larger than the co-operative part might threaten to dilute

the co-operative nature o the bank concerned. Also, doing more

international business may increase the overall risk o the organisation

and destabilise the co-operative banking business.

E. To balance local delivery and central management

It has become more diicult or members to monitor the organisation

due to the increased organisational complexity o mature co-operative

banks, where management is carried out by dedicated proessionals.

A transparent and durable balance between local delivery and central

management is needed to saeguard engagement and involvement o

- members o - local banks.




Numerous studies and reports have already been devoted to the causes and direct and

indirect eects o the recent inancial crisis.1 This chapter will ocus primarily on the

aspects that are relevant or answering the ollowing two questions: (i) How has theinancial crisis aected the customs and business models in the inancial system;

and (ii) How will the inancial crisis impact national banking structures in the longer

term? In this report, the initial lessons learned rom the irst global inancial crisis o

the twenty-irst century are summarised in order to address these questions. The short

and longer term eects o the crisis on the inancial services industry are then outlined.

The subsequent chapters examine how the eects o the inancial crisis will speciically

aect co-operative banks in the short and long term.

2.1 Causes and direct eects

The roots o the most recent credit crisis lie in the United States. Five key

actors initially activated reinorcing dynamics within the system as a

whole (diagram .). Not only banks, but also rating agencies, banking

regulators, supervisors and private households played a part in the

creation o the bubble in house prices in the United States. It is

consequently impossible to point out a single culprit. In essence, the

incentives within the inancial system and private households were notright and led to greedy and reckless behaviour. Generally speaking,

too many inancial institutions aimed to make more and more proits

or their shareholders, investors and managers in a low interest rate

environment. This was caused in part by perverse compensation

schemes, an overriding short-term orientation and little attention to

stakeholders other than shareholders. Households also speculated on

continuing rising house prices and incurred more and more debts,

initially at low interest rates. In the run-up to the inancial crisis, the risks

associated with inancial transactions were collectively underpriced

worldwide. The end result was a tremendous growth in credit,

exceptional increases in house prices and a global spread o assets,

particularly through securitisation o US mortgages o increasingly

poorer quality.

The allout rom theinancial crisis

Detailed inormation on this topic can be ound in, or example CEPR/VoxEU.org

publications edited by Felton and Reinhart () and reports rom the industry

(Financial Stability Forum, ).

Diagram 2.1 Causes o the credit crisis

Causes Results

Loose monetary policy, particularly in US- Cheap money: low interest rates

Favourable economic conditions

- Income growth

- Wealth growth

- Low unemployment

Easing o lending terms

- New products, particularly

non-standard mortgages

Financial innovations

- Special purpose vehicles

- Credit deault swaps

Inadequate supervision

- Questionable role o rating agencies- Supervisory ramework provides incentive

or lending and securitisations

Loose monetary policy, particularly in US- Cheap money: low interest rates

Favourable economic conditions

- Income growth

- Wealth growth

- Low unemployment

Easing o lending terms

- New products, particularly

non-standard mortgages

Financial innovations

- Special purpose vehicles

- Credit deault swaps

Inadequate supervision

- Questionable role o rating agencies- Supervisory ramework provides incentive

or lending and securitisations

Source: Rabobank

▶

Enormous rise in

house prices

Enormous lending

growth

Enormous

underestimation

o risk

Enormous collective

over-optimism



The allout rom the fnancial crisis | 9

The inancial crisis has also revealed the necessity or consumers and

irms to clean up their balance sheets (deleveraging) and to adjust their

consumption and investment patterns. These adjustments have severe

repercussions or the real economy. Consumption and investment haveallen worldwide, causing an unprecedented recession. In an attempt

to mitigate the negative eects o the inancial crisis on their real

economies, many governments have taken measures to support certain

industries, e.g. the automobile sector, to boost consumption and to

maintain purchasing power. These budgetary and iscal measures lead

to sharply rising government deicits on top o the capital injections in

inancial institutions. Many countries have been conronted with rapidly

rising unemployment rates and increasing bankruptcies in .

Following the initial blow o the direct eects, inancial institutions are

now conronted with the recessionary eects o the inancial crisis.

They have hopeully now recovered suiciently rom the initial shock to

ace these economic challenges and to bear the associated losses. It is

evident that strong capital buers and prudent risk management are

needed. The truth is that painul worldwide economic and inancial

adjustment processes are taking place in order to correct previous

bubbles in not only some housing markets, but also in commodity,

raw material and energy markets.

Co-operative banks are certainly not immune to these worldwide

developments and have also made mistakes themselves. While allthe large co-operative banks have suered substantial losses on risky

investments, they do seem to have been hit relatively less hard by

the direct eects o the crisis than private and investment banks.

Their losses and write-downs appear to be relatively moderate and mainly

concentrated in their international activities. As will be discussed later in

this report, co-operative banks are predominantly domestically orientated

and operate primarily in less risky retail banking markets. Co-operative

banks are, however, nonetheless clearly eeling the impact o the

economic downturn because many o their retail and wholesale clients

are being aected by the economic recession.

This process o continually rising house prices was brought to an end by

the Federal Reserve Bank’s monetary tightening that resulted in the now

well-known chain reactions within the inancial and economic systems

mid . It started with increasing payment diiculties or householdsthat led to oreclosure sales, which in turn placed pressure on house

prices. A negative spiral o alling house prices, oreclosures, declining

consumer and producer conidence, increasing deaults on credits,

write-downs o credit portolios in the US, worldwide losses and capital

shortages at (investment) banks, a stagnating interbank money market

and a complete loss o conidence in the inancial system ensued.

Despite major liquidity support operations and signiicant interest rate

cuts by central banks and capital injections by governments around and

ater mid-, several banks around the world either ailed or had to

be bailed out by take-overs or nationalisations.

The allout rom the collapse o the sub-prime lending bubble has spread

across the globe. This has revealed the ull extent o the integration o

the world’s inancial markets. Banks incurred huge losses and had to

write-down substantial amounts worldwide. Many banks have thereore

become appreciably more reticent in providing credits and loans to the

private sector due to weakened capitalisations. Chart . illustrates that

the credit criteria or businesses and households have been tightened

worldwide in . This exerts a downward pressure on investment and

economic activity.

Europe USA

120

90

60

30

0

-30

-60

-90

2004 2005 2006 2007 2008 2009

Chart 2.1 Global tightening o lending criteria

in %

Source: Bloomberg

Note: Net percentage o lenders that have tightened credit terms or companies.




maximisation and consequently acted as a catalyst or the emergence

o the crisis. A relatively large number o banks have already expressed

their intention to give the interest o customers again a more prominent

place in their daily business.

Ater the massive bailouts, society understandably expects inancial

institutions to adjust their behaviour to relect the wider public interest

and not, necessarily, shareholder interests. More emphasis will be placed

on people and their motives in taking inancial decisions, as well as on

the social role o banks. Integrity and ethics are once again central and

the short-term perspective with an exclusive ocus on material gains

and shareholder value will be much less accepted. The attention paid

to inancial institutions’ external eects will become more pronounced.

Priority will be given to collective and sustainable interests.

Regulation and supervisionBoth in the US and in Europe, the inancial crisis has given rise to intense

discussions about reorming the regulatory and supervisory regimes2

The Financial Stability Forum (FSF) recommendations, or example,

ocus on valuation and disclosure as means o rebuilding conidence in

the creditworthiness and robustness o inancial institutions. They also

address issues pertaining to reinorcing banks’ capital and liquidity

buers and enhancing risk management practices. The basic principles

as ormulated by the G- it in with those o the FSF: strengthening

transparency and accountability, enhancing sound regulation, promotingintegrity in inancial markets and reinorcing international co-operation

among regulators and supervisors (G-, a/b).

Based on current international policy discussions, a two-tier inancial

services system is likely to develop (PWC, ). On the one hand, retail

and investment banks will be operating under a tighter regulatory

regime. The general consensus is that banks should hold more capital.

How much and in what orm are less straightorward questions.

More capital will make the industry saer, but will also lower returns and,

as a result, most likely raise prices or customers. On the other hand, the

2.2 Eects on business principles andbanking models

New business principles The business principles o the inancial system must change drastically

in order to restore conidence and inancial stability. While the inancial

sector has traditionally thrived on trust, a general distrust o the banking

sector has now emerged. Financial markets and consumers must regain

conidence in banks. And banks must win back conidence in each other.

There have been accusations o corporate greed due to the sustained

and oten record proits that bank shareholders and management earned

until the inancial crisis broke out. This led to a public condemnation o

the ocus on short-term gains and materialism by banks. In this light,

governments and society are demanding the ollowing undamental

changes rom inancial institutions: A greater ocus on integrity and ethics,

a healthy risk attitude, a longer-term perspective, improved (product)

transparency and, last but not least, a much stronger customer ocus.

The inancial sector is also perorming critical sel-assessments and is

taking initiatives to improve its ethics, risk perception and risk attitudes.

Proposals have accordingly been put orward or healthier and more

modest executive and employee compensation structures in the inancial

services industry (Institute o International Finance, ). These schemes

induced risky behaviour and led to a ixation on short-term proit

For example, Financial Stability Forum (), G- (a/b), The de Larosière Group ().

Diagram 2.2 Stakeholders o fnancial institutions

Source: Rabobank

TaxpayerTaxpayer

EmployeeEmployee GovernmentGovernment

FirmFirm CitizenCitizen

ConsumerConsumer ShareholderShareholder

StakeholdersStakeholders

Society andenvironmentSociety andenvironment




concentrate more on providing services to retail customers and SMEs

rather than on wholesale banking and to ocus more clearly on their

core activities and traditional home markets.

2.3 Impact on banking market structures

The inancial crisis has both short-term and longer-term eects on

banking market structures. These structures are generally deined in

terms o inancial stability, competition, concentration, capacity, eiciency

and proitability (diagram .). While these conceptual notions are

interconnected, the signs o the correlations between these aspects

are diicult to establish and may also vary over time.

Financial stability and competition The current relationship between inancial stability and competition is

obviously inluenced by the abnormal market conditions (‘new rules’)

prevailing in the inancial services industry. The recapitalisations and

government aid programmes are contributing to the restoration o

inancial stability and are helping to restore the conidence needed to

bring about a recovery o inter-bank lending. These moves may also

support the objective o ensuring lending to the real economy. In the

longer term, recapitalisation could support eorts to prepare a troubled

bank to either return to long-term viability or to wind up its operations

in an orderly ashion. In this current recessionary period, additional

capital also provides a cushion to absorb losses and limit the risk o banks becoming insolvent.

‘shadow banking system’ comprising hedge unds, private equity, o-

balance-sheet vehicles and rating agencies will be subject to less heavy

regulation, even though it will still ace greater scrutiny than in the past.

The renaissance o classic bankingDue to the envisaged new business principles and tighter regulation

and supervision, certain national and international banking models have

become less viable or unattractive. With respect to products, a number

o dubious complex and non-transparent inancial products that have

been developed in the past ew years, partly due to demand rom the

non-inancial sector, will be eliminated. While this does not include

derivatives, their volumes may shrink and become more aligned to the

size o real economies. In addition, some activities will change, diminish

or disappear (see ECB, a). The number and size o special purpose

vehicles will certainly diminish in line with the related decrease in

securitisation activities. Investment banking will continue to be an

important activity, even though it will be carried out on a reduced scale.

A decline in cross-border banking is expected as banks reocus their

activities on their original home markets. As a result o both massive

write-downs and losses and government interventions, banks have less

scope or international aspirations. In this respect, the ECB sees signs

that the inancial turmoil has led to a retrenchment o inancial markets

within national borders and consequently to a reversal o the European

inancial integration process in banking (ECB, ).

Due to the narrowing range o products and activities, ee and

commission revenues will decrease and the dependency on interest

income will increase. Large parts o the shadow banking system and

some large international inancial conglomerates will be dismantled

and there will be a move back towards retail banking.3 It appears that

the public and politicians have developed an aversion to inancial

institutions that are considered ‘too big to ail’, ‘too big to manage’ or

‘too big to save’. In many countries, the crisis has prompted banks to

reconsider the nature, size, geographical distribution and goals o their

activities. A number o banks have already stated that they intend to

Retail business is deined as inancial products and services distributed through physical

and non-physical networks to retail customers and SMEs.

Diagram 2.3 Elements defning banking market structures

Source: Rabobank

Financial stabilityFinancial stability

ProftabilityProftability

EciencyEciency CompetitionCompetition

CapacityCapacity ConcentrationConcentration

DelicatebalanceDelicatebalance




retail banking market and their original home markets as stated earlier

(diagram .). In addition, government-supported or nationalised banks

will sooner or later re-enter the market as trimmed-down inancial

institutions that are expected to ocus predominantly on retail banking.

Concentration issuesIn combination with the espected increase in competition, government

interventions, bailouts and/or orced or emergency mergers and

acquisitions will undoubtedly lead to urther consolidation in banking.

A trend towards higher market concentration ratios has already been

discernible in the iteen original countries o the European Union4 over

the past ten years, or instance as measured by the Herindahl Index and

CR ratio (chart .).5 This relects the decrease in the number o credit

institutions and the dynamic growth o certain banking groups, due in

part to their M&A activity. The concentration ratios vary considerably rom

country to country. Smaller countries tend to have more concentrated

banking sectors. Banking sectors in larger countries, such as Germany,

Spain, Italy and the United Kingdom are more ragmented.

Be that as it may, the assessment o any government intervention

must take into account possible distortions o competition (European

Commission, b). Recapitalisation schemes may, or example, give

an undue advantage to distressed or less-perorming banks compared

to banks that are undamentally sound and better-perorming. This willdistort competition in the market, distort incentives, increase moral

hazard and weaken the overall competitiveness o banking systems.

A public scheme that crowds out market-based operations will rustrate

the return to normal market operation. It is obvious that a balance must

be struck between these competition concerns and the objectives o

restoring inancial stability, ensuring lending to the real economy and

addressing the risk o insolvency. A situation in which the various orms

o government aid exert a long-lasting inluence on uture competition

in the banking industry must be avoided.

Competition could endanger inancial stability in the longer term

i banks were to begin imitating each other ’s strategic approach.

Competition may become extremely ierce as a result o the overriding

strategic reorientation o many banks towards - the top end o - the

The data comprises countries that originally ormed the

European Union prior to the expansion on May .

A country’s Herindahl index is calculated as the sum o

the squares o all the credit institutions’ market shares in termso total assets. The CR is the percentage share o the ive

largest credit institutions, ranked according to assets, in the

sum o the assets o all the credit institutions in the EU.

Diagram 2.4 Competition risk: ocus on and imitation o retail strategies

Bank ormulate identical

strategies/priorities regarding Consequences

‘Mass market’

- Standardisation o products and processes

- Cost control and eciency emprovements

- Fierce price competition (transparency)

- Dismantling o fxed client-advisor relationship

Top o market

- Focus o large banks on top o retail market

- Pro-active service (at ‘live events’)

- Tailor made solutions

Integration o physical and virtual channels

- Tougher fght or market share

- Operational excellence is key

- Tight segmentation based

on gross contribution

- Distinctive eatures are more

dicult to demonstrate

Source: Rabobank analysis

▶




Based on the ratio o assets per employee, eiciency in the EU

banking sector has already improved continuously over the past ten

years. As a corollary, capacity in banking is expected to decrease;

there will be ewer branches per inhabitant.

Proitability The outbreak o the inancial crisis in June caused a plunge in

banking proitability in and . The ensuing economic recession

will place pressure on banking proits in and . However, the

impact o the inancial crisis extends urther than these remarkable

short-term consequences. The new rules, principles and business models

will be visible in all the other determinants o the banking structure in

the years ahead and will eventually result in structurally lower proitability

or the entire sector. For example, the return to retail banking, higher

capital requirements and unding costs and the elimination or reduction

o some products and activities will all exert downward pressure on the

longer-term margins and proitability or the rest o the banking industry

as a whole. Apart rom these ‘new’ trends, there are also other important

trends that will have similar consequences or proits. Diagram . shows

the major ‘new’ and existing trends and their overall implications.

Cross-border consolidation is a dierent story. From a inancial integration

perspective, both the retail banking segment and the underlying market

inrastructure (ECB, ) remain quite ragmented. Retail banking is

characterised by a higher degree o inertia and is inluenced more by

structural elements such as the regulatory ramework. This is clearlyvisible in the evolution o cross-border assets and liabilities in the euro

area. The share o cross-border non-bank loans and deposits in the euro

area has remained stable over the past decade at around to percent.

Eiciency and capacityBy creating ‘new’ rules and a dierent business environment, the

inancial crisis has boosted the importance o eiciency improvements

and cost reductions. The economic recession, increasing competition,

elimination or decreased scale o certain activities and products and

the reorientation towards retail banking all clearly necessitate eicient

operations in order to oset the all in revenues. Suicient scale,

particularly in back-oice operations, is a key precondition or realising

low unit cost prices. Banks are currently cutting jobs, closing branches

and divesting activities and business lines. They are also promoting

virtual service and distribution concepts. These actors will be relected

in the eiciency and capacity indicators o EU banking systems.

1,400

1,200

1,000

800

600

400

200

0

58

56

54

52

50

48

46

44

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Chart 2.2 Herfndahl Index and CR5 ratio in 15 EU countries

in points in %

Herfndahl index (let hand scale) CR5 ratio (right hand scale)

Source: ECB

2,500

2,000

1,500

1,000

500

0

16,000,000

14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Chart 2.3 Eciency and capacity in EU15 banking sectors

in numbers in euros

Source: ECB

Population per branch (let hand scale) Total assets per employee (right hand scale)




2.4 Summary

The inancial crisis will lead to new rules, new business principles and new

business models in banking. The resulting banking model will eventually

be simpler, more risk averse and more transparent. Given the dramatic

experience o the crisis, special attention should be paid to the impact o investment banking activities on the stability o the new global inancial

system. Another salient eature is the expected ‘return to retail banking’

o many players. These new elements, whether enorced or not, will

undoubtedly contribute to the restoration o inancial stability, which

is an important actor o the banking structure. All the other structural

characteristics o banking will, however, undergo undamental changes

as a result o the inancial crisis. The inancial crisis will consequently haveeects on banking structures both in short and long term.

Diagram 2.5 Implications o ‘new’ and existing trends in the fnancial sector

Increasing

legislation,

regulation and

supervision

- Compliance, higher solvency requirements

- SEPA, European Payments Directive

- Adjustment o compensation schemes

- Consumer protection and transparency

- Disappearence o certain products and activities


▶

Turbulences in

competitive

environment

- Government intervention and support

- Return to retail banking o many banks

- Emergence o niche players and non-banks

(insurers, warehouses, consumer frms)

- Reorientation towards traditional home markets- Breaking up o some fnancial conglomerates

▶

Further

consolidation

and increasing

scale

- Consolidation (partly ‘orced’)

- Automation, standardisation, simplifcation

- Outsourcing/oshoring (‘process utilities’)▶

Changing

distribution

channels

- Intermediairies

- Direct banks

- Internet/online▶

▼ Margins

▲ Costs

▲ Competition

▲ Burden o administrative

expenses

Alternativeproviders

- Financing: PP fnancing, capital markets, private equity- Payments: internet frms, mobile phones ▶



History, evolution and special eatures o co-operative banks | 15

As discussed in chapter , practices and business models in banking will change

undamentally. Beore exploring how the newly emerging banking environment

aects co-operative banks, this chapter will irst provide a brie overview o the historyand evolution o the co-operative banking sector. Subsequently, the comparative

advantages o mature co-operative banks will be discussed.

Despite the act that they addressed similar issues, dierent co-operative

banking models emerged in Europe. These variations resulted rom

country-speciic historical and cultural actors, which shaped national

market structures and market environments. In some countries, the

development o co-operative banking was initiated, nurtured and

supported by outside orces, e.g. governments. Consequently, the orm,

appearance, organisation and operation o co-operative banking groups

dier across countries and over time. They vary in terms o their attitudes

to membership and their interpretation o co-operative values (Oliver

Wyman, ). Hence, the co-operative banking model does not exist

(Van Diepenbeek, ).

3.2 Disappearance o original ‘raisons d’être’

The original ‘raisons d’être’ o co-operative banks have largely

disappeared in most European countries in the last years. Unlike or

developing countries, access to banking services and products is no

longer a major issue in the developed world. Dependence on members

or unding has eroded, since most co-operative banks now access debt

capital markets and thereore must satisy rating agency requirements

to secure unding on avourable terms. At the same time, members’

potential losses are now limited due to deposit insurance schemes, thus

weakening their incentives to monitor the organisation. Furthermore,

autonomy and discretion o local member banks in managing their

aairs have diminished due to the increased requirement or centralised

business unctions to deliver eiciency gains through economies o

scale and scope. This has created a distance between the centralised

management o co-operative banks and their members. The increasing

3.1 Origins o co-operative banks

The history o many co-operative banks can be traced back to the

inancial exclusion aced by many communities in nineteenth-century

Europe. With the industrial revolution in ull swing, the emerging inancial

services sector was primarily ocused on wealthy individuals and large

enterprises in urban areas. The rural population, in particular armers,

small businesses and the communities they supported, were eectively

excluded rom inancial services (Oliver Wyman, ). Most co-operative

banks were established ollowing the ideas o Hermann Schulze (-)

and Wilhelm Raieisen (-). Independently rom each other, they

started to promote the idea o credit co-operatives, with Schulze ocusing

on helping small business owners and artisans in urban areas and

Raieisen seeking to assist the rural poor.

Thus, co-operative banks were originally set up to correct this market

ailure and to overcome the associated problems o asymmetric

inormation in avour o borrowers. They could do so because member/

consumers inanced the institutions and were involved in the decision-

making process. Within small communities, relatively intimate knowledge

o each other’s credit and trustworthiness guaranteed that loans were

only provided to borrowers who could be expected to repay them.

Financial incentives or members to monitor each other and the social

relationships among members hence contributed signiicantly to the

lourishing o co-operative banks. Beginning in Germany, the co-operative

banking concept gradually spread to the rest o the continent and to

the Nordic countries.

History, evolution and specialeatures o co-operative banks




the desire to reach economies o scale and higher eiciency levels.

However, the extent o decentralisation and integration within the

networks varies (Desrochers and Fischer, ). Co-operative banks

were also engaged in consolidation, diversiication, domestic acquisitionso publicly quoted banks, and launching new distribution concepts.

In short, mature co-operative banks re-invented themselves in the course

o time to counter actors constituting a threat to their existence.

National-international evolutionIn line with internationalisation and globalisation trends, co-operative

banks have embarked upon international strategies. Some years

ago, European co-operative banks established platorms or mutual

international co-operation: the European Association o Co-operative

Banks (EACB) and the Unico Banking Group. The EACB constitutes a

valuable partnership in the current dynamic environment. It ocuses

on promoting the interest o co-operative banks in Europe, but also

stimulates discussions about the social role o co-operatives and lags

important changes in the regulatory environment and level playing

ield on EU level. The original aim o Unico was to support the

expansion o its partners’ international operations. The most important

components o the Unico alliance these days are the sharing o know-

how and expertise on a wide range o banking subjects and commercial

initiatives, and the joint training o sta. A notable product that has

been developed in the Unico context is UniCash - an international cash

management acility.

Co-operative banks also took individual international steps. The reasons

and strategies o cross-border expansion dier a great deal across

co-operative banks and over time, but are generally in line with those

o their private competitors (ECB, a). Regarding their motives, some

co-operative banks state that the main driver o international expansion

was the limited (organic) growth potential in their domestic markets and

the higher growth potential in their host countries. Other co-operative

inancial organisations have argued that the internationalisation

complexity o inancial services provision and the establishment o

subsidiaries or international activities corporate and investment

banking required proessionalisation o management and the associated

establishment o central institutions where decisions are increasinglytaken. Finally, the comparative disadvantages that non-co-operative

banks aced in the past or servicing small armers and small businesses

have also largely disappeared. Legal and juristic rameworks now oer

much stronger contract enorceability and veriiable inormation about

potential borrowers is generally available.

3.3 Evolution o co-operative banks:local-national-international

Local-national evolution The market environment has altered dramatically or co-operative

banks over the years. Quite a ew co-operatively organised banks did

not or could not succeed, or now just live a marginal existence. Many

countries never had a co-operative sector o any signiicance, because

the co-operative ideas did not ind very ertile soil. In other countries,

co-operative banks chose to be acquired by other banks or to transorm

themselves into private banks. This was the case in Denmark, Sweden,

the U.K. and Belgium. In Sweden, the Föreningsbank network was taken

over by the savings bank network, while in Belgium the legal structure

o co-operative banks CERA (now part o the KBC group) and BACOB

(now part o the Dexia group) was changed in such a way that theyare no longer classiied as co-operative banks. In the UK, a number o

building societies have converted into public, quoted companies in

order to expand their activities.

The currently existing co-operative banks have succeeded in ollowing up

and adjusting to changes in the market environment, but have chosen

dierent directions and strategies. The bottom line is that they are

convinced that they can still provide added value to their customers

and members resulting rom their speciic governance structure and

their disapproval o maximising proits. Although it is impossible to put

co-operative banks in one box, some general patterns in their domestic

evolutions can be observed (box .). While they began as local banks,

most o the present co-operative banks have evolved into national

(network) organisations, partly as a result o regulatory requirements or

French Crédit Agricole has a three-tier network, comprising local, regional and central

organisations. The Dutch Rabobank has a two-tier network, consisting o local member

banks and the central organisation. The Italian Banchi Populari has no national structure

at all, with all member banks acting completely independently o each other.




A. Organisational structures

Important changes took place in the organisational structures o

co-operative banks (Di Salvo, 2003). Nowadays, the vast majority o European co-operative banks are organised in networks. Industrial

reorganisation, governance reorm and pressures o competition

have in general led to more and more tightly integrated networks

o individual co-operative banks and have ostered an accentuated

centralisation o strategic and operating unctions and processes.

Achieving economies o scale or scope and generating synergies

were the primary motives to set up so-called higher-tier levels.

However, the evolution towards a more centralised structure is more

pronounced in some countries than in others. The networks still vary

rom loose associations to cohesive groups (Fitch, 2001). The Dutch

co-operative group is one o the most centralised systems, whereas

the Italian co-operative system remains the most decentralised o

the major European co-operative movements. The Austrian and

German co-operative sector take up a middle position.

Most co-operative groups have created second- or third-tier structures6

in order to obviate the limits intrinsic to their small scale and speciic

purposes. In many cases, legislation has endowed the central bodies

with guidance and supervisory powers over local co-operative banks.

The irst-tier bank is unequivocally assigned the primary task o

managing contacts with its members and local community and doing

business with members and customers. The higher-tier organisationshave governance models that tend to conorm to co-operative

principles, since they intrinsically perorm a service unction or their

co-operative members (EACB, 200).

B. Consolidation

In response to the increase in competition and institutional

developments within domestic retail banking markets, co-operative

banks have pursued consolidation in various ways. At the local level,

branches have been closed or merged with others in order to

achieve eiciency gains. Where third-tier structures exist, consolidation

at the regional level can be observed. Co-operative banks also played

a role in the domestic consolidation process. In particular French

co-operative banks have acquired a number o private banks.

C. Domestic diversiication

Co-operative banks have diversiied away rom purely retail and small

business banking and have also become active in corporate banking.They have set up businesses in the ields o leasing, actoring,

insurance and investment unds. Some co-operative banks ormed or

acquired specialised subsidiaries, whereas others oered non-banking

products to customers/members rom third parties. This way, the

product range oered by local member banks has been expanded.

In some co-operative systems, the subsidiaries are owned and

governed by a well-capitalised central institution. In co-operative

systems where the central organisation is insuiciently capitalised or

these acquisitions, local member banks or their regional organisations

are also shareholders o the subsidiaries, which complicates their

governance to some extent.

D. Funding

Funding sources have been extended beyond traditional

membership capital to various orms o capital market unding.

To increase capital lexibility, most co-operative banks have created

various options to strengthen their capital base. Some co-operative

banks have chosen partial demutualisation to access the equity

markets. This has happened in Finland, France and Italy. A signiicant

development in co-operative banking has been the partial lotation

o the central institution o the French Crédit Agricole group and itssubsequent acquisition o Crédit Lyonnais in 2003. Rabobank and

DZ Bank, the central institution o the German co-operative banks,

have issued hybrid debt (e.g. trust preerred securities or

proessional investors).

E. Distribution and service concepts

Traditionally, co-operative banks service customers/members via

branches. In recent times, co-operative banks have been increasingly

distributing their products and services via virtual channels, like the

internet, ATMs or call centres. Since the diversity o customers has

increased considerably, co-operative banks also dierentiate more

and more in the way they serve particular customer groups or

economic sectors.

Box 3.1 Main domestic evolutions o co-operative banks





Finally, the motive to ‘export’ the domestic co-operative model to other

countries has until recently only played a minor role in the international

strategies o co-operative banks. This changed, however, with the

growing attention or microinance in emerging markets and developingcountries. Nowadays, some co-operative banks are seeding new banking

business in new territories under the co-operative model. The French

Crédit Agricole ounded the Grameen Crédit Agricole Foundation to

develop partnerships with microinance institutions to operate in

developing and emerging economies. For instance, Rabobank assist

governments and communities in setting up agricultural co-operatives

and/or supporting co-operatively organised banks. This way, they

contribute to the creation o the required inrastructure to grant small

loans (microinance) to people in rural areas. In this respect, some

co-operative banks returned to their original roots. The rationale o the

oundation o co-operative banks in the nineteenth century was similar

to the one behind current microinance initiatives in developing

countries, namely to provide people with the tools and means to

collectively and individually help themselves. These initiatives are oten

perormed under the lag o ‘corporate social responsibility’.

3.4 Six distinguishing eatures o matureco-operative banks

At this point, two undamental questions arise, which cannot be

answered easily and unambiguously: (i) What is the ‘presence’ valueo co-operative banks in mature domestic markets; and (ii) How do

co-operatives dierentiate themselves rom their current competitors?

Regarding the irst question the European Association o Co-operative

Banks has ormulated the ollowing answer (EACB, ):

“The primary mission o co-operative banks is to promote the

economic interest o their members, who are their customers.

Co-operative banks strive to do so by oering quality products

and services at attractive prices rom the perspective o what is

good or the customer. They have an impact presence on the

conditions o products in the whole banking market and support

the economic and social integration o individuals”

strategies o their customers prompted their cross-border expansion.

The diversiication o risks and business lines as well as the somewhat

circular argument that their private peers ollow international expansion

are less requently put orward as (explicit) motives. Economies o scaleand scope are rarely mentioned as important drivers or cross-border

expansion. Rabobank estimates that European co-operative banks

currently generate on average around percent o their total net

revenues outside their home country.

Like their private competitors, co-operative banks have explored

dierent international strategies over the past decades with varying

success. Some steps led to disappointing experiences and necessitated

adjustments in the international strategy. However, a general pattern is

that co-operative banks mostly entered oreign retail banking markets

either via acquisitions o other banks or via strategic alliances with other

European counterparts. For instance, Raieisen International (a subsidiary

o the Raieisen central institution in Austria) set up a large network o

retail operations in Central and Eastern Europe, largely via acquisitions o

ormerly public banks. French Crédit Agricole and Crédit Mutuel recently

undertook international acquisition oensives in Italy, Greece, Poland

and Germany. Rabobank has pursued a set o strategic acquisitions and

new business start-ups, but has also concluded alliances with other

co-operative banks to be able to service domestic retail customers

abroad. In almost all instances, co-operative banks neither converted

the acquired oreign banks to a co-operative model nor applied ‘purely’co-operative principles in managing new business lines abroad.

Some co-operative banks have or had the ambition to become active

in international non-retail banking areas, like investment banking.

However, practices in this banking area dier substantially rom those in

retail banking. Investment banking has a much more transaction- and

money-orientated culture, which is more distant rom the co-operative

banks’ basic philosophy that is based on customer value (generally

accompanied by a limited risk appetite stemming rom the conservative

domestic banking model). Finally, some co-operative banks opted or

an international niche strategy. They have expanded their international

activities in certain geographical or product areas where they possess

comparative advantages. For instance, Rabobank has the ambition to

become the leading international bank or the ood and agribusiness.




III. High capitalisation, high rating and low unding costs

Co-operative banks barely distribute proit but add it to their reserves

or the banks’ own unds. Consequently, co-operative banks are some o

the more highly capitalised institutions in Europe as a result o theirunique model and ownership structure. Co-operative banks accumulate

capital by design, as their original purpose was to overcome a shortage

o capital or their chosen activities. Co-operatives have a lower cost o

capital, because they only need to remunerate the part o their equity

that is represented by member shares, not the oten much larger

intergenerational endowment. In addition, mutual support mechanisms

that exist in various countries contribute to high ratings. These collective

guarantee schemes reduce or even exclude the risk o individual

co-operative bank ailure. Finally, high capital reserves and high ratings

provide co-operative banks with opportunities to obtain relatively

cheap capital market unding, because this entails less risks or other

creditors and thus lower risk premiums.

IV. Proit as a necessary condition

Based on the long-term ocus on customer value and member

inluence, co-operative banks claim that they do not aim to maximise

short-term proit7 while healthy proitability is an important necessary

condition or co-operative banks to saeguard their continuity, to

inance growth and credit, and to provide a buer or inclement times,

proit is not a goal in itsel.

V. Conservative business model: ocus on retail banking

Member ownership leads to a conservative business model, ocused

on sustainable retail banking. This leads to good liquidity and sound

asset quality. The structure, knowledge o local customers and risk

diversiication all work in avour o co-operative banks. The knowledge

that capital cannot be easily replaced by external sources ater

considerable losses stimulates co-operative bank managers to apply

a relatively low risk appetite.

This concise ormulation embodies the roots o co-operative banking.

The customer has always been at the core o their operations and, at a

local level, members have a say in the local member bank’s policy.

Thus, the ‘promised’ greater ocus on the customer by many inancialinstitutions ollowing the crisis sounds quite awkward to co-operative

banks. An interesting element in the passage above is the comment that

co-operative banks have an ‘impact presence’. To deine and quantiy this

presence value, however, is a diicult undertaking. Even more so, because

they actually hint at a noticeable causal relationship between mature

co-operative banks and society and banking markets. Such a causality is

hard to demonstrate empirically, as it really only maniests itsel on the

entry or exit o a large co-operative bank. But it also works the other way

round: society and the market environment inluence co-operative banks.

More ounded theoretical and empirical evidence is available regarding

the question o ‘the unique and deining characteristics o co-operative

banks.’ Based on the existing literature and policy reports as well as

Rabobank’s experience, the key dierentiators o co-operative banks in

their home country can be divided into six main categories:

I. Speciic corporate governance: member ownership

Members, who are also customers, own the entire organisation and are

able to inluence its decision-making. Members have a more direct say

in the local member bank’s policy, or instance on the branch location,

opening hours, services and sponsoring activities. Member ownershipentails a more consensus-driven approach and prevents a strong

ixation on just one stakeholder. This is accompanied by a longer term

and risk-averse view, which translates into a more conservative banking

approach ocused on retail banking. With their strong local ties and

large networks, co-operative banks are in theory better equipped

to assess the creditworthiness and risks o customers at a local level.

II. Customers’ interests irst

Co-operative banks have an edge in portraying trustworthiness as

they publicly state that they do not aim to maximise proits but rather

to maximise customer value. They have a competitive advantage in

establishing trust. An important actor is that co-operative banks are

literally closer to their customers; their branch network density is higher

than that o their competitors.

The line o reasoning o PA Consulting Group () that co-operative banks spoil market

conditions or proit or shareholder-orientated banks and may eventually undermine inancial

stability, is airly ar-etched and cannot be supported by data. Co-operative banks simply

have a proit target that is based on the objective to serve customers on a continuity basis.




have a reduced incentive to stimulate an optimum use o the high

capital base (or excess capital), because they do not have a direct claim

to the capital (it is ‘capital in dead hands’). This could give rise to a r isk o

opportunistic investments by bank executives. Secondly, the introductiono external shareholders into a co-operative system creates tensions

regarding control. I capital is only provided by members, the voting

power as member o a co-operative bank and the voting power as

capital provider coincide within the same group. When ownership is

shared with external capital providers, voting power will also have to be

shared. Thirdly, the evolution o the inancial sector may call or inancial

services, activities or concepts that are not necessarily needed by

current members at the local level. These adaptations may be crucial or

attracting new customers or members or co-operative banks in the

uture. In the longer-term, co-operative banks could ind themselves at

a disadvantage because they do not operate with state-o-the-art

technology or are unable to oer innovative products. Finally, physical

distribution networks imply large ixed costs and the distribution o

some inancial products has in the last decades shited rom expensive

physical channels towards virtual channels.

VI. Proximity to customers: dense branch networks

Co-operative banks have large branch networks, providing co-operatives

with an important, albeit declining, comparative advantage in retail

markets. Co-operative banks are literally and iguratively closer to theircustomers and know those customers well through participation in

numerous social networks. This is because the co-operative banking

model centres above all on ‘relationship banking’ via local presence.

Proximity to their customers is reinorced by actively supporting local

communities. Finally, large branch networks acilitate mobilising and

retaining a relatively cheap and important unding source, provided

that their deposit rates are not much lower than those oered by

competitors.

These eatures are generally considered beneits or co-operative banks,

but it is air to make some important qualiications. Firstly, it has

become more diicult or members to monitor the organisation due

to the increased organisational complexity o co-operatives in which

management is carried out by dedicated proessionals. It is also argued

that member ownership makes decision-making slower or hinders

innovation and adjustment to new developments. In addition, members

Table 3.1 Tangible and intangible advantages or members

Individual Collective

Banking Non-banking

Tangible - Membership certiicates

- Co-operative shares

- Discounts

- Incentive loans or start-ups

- Simple procedures or obtaining loans

- Discounts

- Special oers, e.g. mobile telephone,

subscriptions

- Participation in decisions

- Priority in business relations

- Financial support or local projects

or sponsoring

Intangible - Personal advice

- Extra inormation

- Seminars

- Publications

- Seminars

- Special events

- Inluence based on one man one vote

- Inluence and say

- Member councils

- Social involvement

- Determining the use o social unds

and sponsoring

Source: Rabobank analysis based on various reports o co-operative banks.




an additional actor. The success o current mature co-operative banks

can be explained by their evolving comparative advantages as well as

their capability to react to and/or anticipate changes in the external

environment. One o their proclaimed unique eatures is memberownership, which is assumed to translate into customer centricity, high

capital ratios, a conservative business model and dense branch networks.

However, the reduction o members’ incentives to exert eective

oversight over central management constitutes a major challenge.

Such oversight is actually needed as co-operative banks have transormed

rom small institutions operating in local communities to large and

complex inancial conglomerates with international activities.

Despite these caveats, the identiied dierentiators must be treasured.

Furthermore, it should be remembered that the quality and range o

products and services oered, their pricing and the applied distribution

concepts are o utmost importance. In addition to this, specialadvantages to members are oered (table .). In act, customers and

members have to notice the comparative advantages and dierences in

attitude or business culture in practice in line with the co-operative

objective o delivering customer value.

Apart rom extreme situations like the current crisis, the co-operative

business model demands cost and revenue levels or retail banking

activities that do not deviate substantially rom the standards o the

banking industry. However, the deviation range or price/quantity

sensitivity o customers may vary over time and across countries.

For instance, in turbulent times, co-operative banks may have a

‘co-operative or reputation premium,’ which can be related to their

perceived status as sae havens due to their conservative approach

to banking. Customers may also eel attracted to co-operative banks

on the basis o ‘sot’ or ‘emotional’ actors, like appreciated dierences

in business principles, cultures or better scores on non-inancial

perormance indicators than those o other banks. From marketing

and brand research, it is a well-known act that customers also attach

importance to immaterial aspects such as access to the bank’s

network and knowledge, the stability and duration o relationships,

sustainability characteristics, etc.

3.5 Summary

It is clear rom recent history and the discussion in this chapter that all

organisation orms have both problems and comparative advantages.

The co-operative organisational orm is just another business model

and not by deinition the key to success. Hence, the co-operative model

should not be idolised. The success o all banks, including mature

co-operative banks, is ultimately determined by the level o customer/

member satisaction, which is in turn inluenced by many variables,

including the quality and prices o products and services, innovative

capacity, the perceived corporate social responsibility and employee

attitude, knowledge and competences. For co-operative inancial

organisations, tangible and intangible advantages o membership are




As mature co-operative banks are by deinition part o national inancial systems, they

are both conronted with structural developments and responsible or shaping them.

Through their mere existence, they also play an important economic and social role insociety (EACB, ). An important question is: How has their market position and

perormance developed in recent years? The answer may provide useul indications or

their ‘presence and added value’, vibrancy and viability. Consolidated banking data or the

period - are used to examine these issues. Since the aggregated data obscure

situations that dier considerably rom country to country, two country subgroups

will be distinguished in the analysis. Data will be presented or the entire co-operative

banking sector in iteen EU countries, as well as in six EU countries where co-operativebanks enjoy very high market shares.8

4.1 Size o co-operative banking sectorin Europe

Members and customers The co-operative sector is a major player in the European banking

landscape. In , the total number o customers and membersapproached respectively and million. These numbers are

impressive, but do not mean much i they are not put into perspective.

The success and popularity o the co-operative banking model are

ultimately visible in the development o the ‘member-to-population’

ratio. Chart . displays this ratio in iteen EU countries (EU).

The same ratio is plotted or six European countries with a relatively

large co-operative banking sector: Austria, Finland, France, Germany,

Italy and the Netherlands (henceorth EU).

In both the EU and EU, an increase in the member-population

ratio is discernible. The ratio in the EU is substantially higher and has

increased by . percentage points to almost percent. This points to

Size and perormance o co-operative banks in Europe

The EU area comprises Austria, Belgium, Denmark, Finland, France, Germany, Ireland,

Italy, Greece, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United

Kingdom. EU countries comprise Austria, Finland, France, Germany, Italy and the

Netherlands; these are countries where the co-operative sector is extremely important.EU EU15

20

18

16

14

12

10

8

6

4

2

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Chart 4.1 Members as percentage o total population

in %

Source: Calculations by Rabobank based on ECB and EACB fgures



Size and perormance o co-operative banks in Europe | 23

oered at air prices, appreciated distribution concepts, and an active

and dynamic membership policy, the legitimacy o co-operative banks

will gradually erode.

Market sharesOn average, only co-operative banks in the EU were able to gradually

increase their market shares in the loan and deposit markets over the

last decade. In the EU area, the market shares o co-operative banks

remained virtually constant. The rise in market shares in the EU showed

some acceleration in due to the acquisition o inancial institutions

by the co-operative banking sector. The EU market share o domestic

deposits now amounts to almost percent, whereas the market share

o domestic loans lies at roughly percent. It may also be noted that the

igures lead us to conclude that the loan-to-deposit ratio is somewhat

higher or co-operative banks than or private banks. This partly relects

their traditional strong position to attract local deposits. The available

evidence also supports the argument that co-operative banks have

relatively easy access to a airly cheap, risk-ree and stable unding

source, i.e. a relatively large deposit base. This is likely to contribute to a

healthy balance sheet composition and high credit ratings. The market

shares o individual co-operative banking systems do not show a clear

trend; they are declining in some countries but on the rise in others.10

The market shares or deposits and loans are signiicant, but below

the market shares on other indicators such as branches (chart .).11 The market shares or branches are in both EU and EU approximately

percentage points higher than those or deposits. Over the last

decade, co-operative banks have gained branch market share or

two reasons. The irst is that co-operative banks in France, Italy and

Spain have expanded their branch networks either organically or via

acquisitions. The second explanation is that co-operative banks in eight

EU countries have slimmed down the number o branches to a lesser

an increasing popularity o the co-operative model. The underlying

reasons or this popularity are hard to isolate and are o a inancial and

immaterial nature.9 They merely indicate that co-operative banks have

succeeded in attracting new members with their products, services,co-operative business models or other distinguishing eatures.

Co-operative banks appear to have ound appropriate answers to the

many trends and competitive challenges in the ield o retail banking.

These member-population ratios dier considerably across the EU

countries. The highest ratios are ound in Austria (.), ollowed by France

(.) and Finland (). The Swedish co-operative sector has the lowest

ratio (not counting countries without a co-operative banking sector).

The membership ratio, deined as the percentage o customers that are

members, declined between and in both the EU and EU.

This decrease can be entirely attributed to the acquisition o customers

via mergers or takeovers o other inancial institutions by co-operative

banks. Chart . shows the variation in the membership ratios across

EU countries in . The dierences can be partly explained on

historical grounds, e.g. the act that obligatory membership was not

abolished in all countries at the same time. The variation also relects

the diverging numbers o customers o subsidiaries as well as dierent

attitudes towards membership across European co-operative banking

groups. Some banks strive to make every customer a member, while

others are not actively recruiting members. Whatever their position may

be, without continuing good and innovative products and services

Germany

Chart 4.2 Membership ratios across EU6 countries in 2007

in %

60

50

40

30

20

10

0

Austria Finland France Netherlands Italy

Source: Calculations by Rabobank based on EACB and ECB data

Note: The displayed countries have a relatively large cooperative banking sector.

Some o these reasons could be inancial conditions, but also the degree o customer

satisaction, the extent to which banks act in the interest o customers, access to the bank’s

networks and knowledge, the stability/duration o relationships, the way banks deal with

environmental and sustainability issues, the degree o product and price transparency, etc.

An exception is France, where co-operative banks acquired several private banks.

The same holds or market shares or sta, albeit to a lesser extent.




still operate with somewhat higher capacity levels, or which branch

market shares and ‘deposit-to-employee’ ratios act as proxies. In the next

section, we will investigate whether this results in lower returns on

capital and/or lower eiciency levels compared to private banks.

4.2 Financial perormance o co-operative banks

Four important, interdependent indicators will be reviewed:

a. Tier- ratio

b. Proitability

c. Eiciency (expenses/income ratio)

d. Rating

It must be emphasised that it is diicult to compare co-operative bank

perormance with that o other banks. As elaborated in chapter ,

co-operative banks pursue dierent objectives and employ dierent

business models.

Tier-1 ratioChart . shows the tier- ratio or several co-operative banks at year-

end , compared to the minimum capital requirement o percent

extent than their competitors in the context o cost-cutting or eiciency

programmes. As a result, co-operative banks have strengthened their

local presence. Against the background o the expected ‘return to retail

banking’ o many inancial players in the coming years, co-operativebanks could take advantage o this act. In the EU, co-operative banks

currently own over percent o all bank branches. O course, many

co-operative banks have introduced or stimulated the use o cheaper

virtual distribution channels, while remaining loyal to their brand

value ‘nearby’.

Co-operative banks spend more money on branches, sta and other

resources to manage a given level o assets or to acquire a given level o

deposits. This is mirrored in the ratio o deposits to bank branches and

sta, which is universally below the ratio or the banking system as a

whole (chart .). The amount o deposits per employee at co-operative

banks in the EU is about . million euros, compared to almost million

euro in the banking sector as a whole. This inding is consistent with the

six comparative eatures o co-operative banks. However, the line is

clearly upward sloping, implying that co-operative banks have managed

to increase the eiciency o their operations. Deposits per employee

have risen by sixty percent since . Nevertheless, co-operative banks

EU15 deposit shareEU15 loan share EU15 branch share

45

40

35

30

25

20

15

10

5

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Chart 4.3a Market shares o co-operative banks in the EU15

in %

Source: Calculations by Rabobank based on annual reports, EACB and ECB fgures

EU deposit shareEU loan share EU branch share

45

40

35

30

25

20

15

10

5

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Chart 4.3b Market shares o co-operative banks in the EU6

in %

Source: Calculations by Rabobank based on annual reports, EACB and ECB fgures




Proitability The qualitative insights o chapter uel the expectation that

co-operative banks have below average proitability, as they target

customer value maximisation instead o proit maximisation. Proit is anecessary condition, without which the co-operative would be unable

to grow or invest suiciently. This would cause members to cancel their

membership because its added value would be substantially reduced.

Proitability is usually assessed in terms o return on assets and return

on equity. Our calculations, based on a sample o orty-ive banks

located in Western Europe, show that the return on assets and return

on equity o co-operative banks is lower than or private banks, as

expected. The lower return on equity is caused by the lower leverage

resulting rom a higher core capital ratio or co-operative banks.

This supports the observation that co-operative banks maintain on

average larger capital buers. The indings partly relect the primary

ocus on maximisation o customer value.

set by the market.12 This ratio relects the amount o equity relative to the

risk-weighted assets o a bank. It can be concluded that co-operative

banks maintain a comparatively high level o capital. There are a number

o explanations or this (Oliver Wyman, ). Firstly, high capitalisationis connected with the strong ocus o co-operative banks on retail

operations, or which relatively high capital requirements prevail.

Secondly, co-operative banks add a major portion o their proit to the

capital reserves each year. Thirdly, solid capitalisation is simply necessary

or co-operative banks with a view to continuity. Co-operative banks have

to rely less on other options to raise capital, as most o them cannot

issue shares.13

Chart . shows that the tier- ratios o most co-operative banks in

and were comortably higher than the market’s minimum

requirement o percent. In the course o , tier- ratios o many

banks have deteriorated worldwide. Several banks needed to attract

additional capital. This chart simply illustrates the act that co-operative

banks entered the crisis with a strong capital base and subsequently

strengthened their capital position in . It should be noted that the

tier- capital ratio’s pertain to the entire co-operative groups, not just

the co-operative banking part.

All banks in EUCo-operative banks in EU

5

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Chart 4.4 Deposits per employee in EU6 countries

in millions o euros

Source: Calculations by Rabobank based on EACB and ECB fgures

Raifeisen (CH)

Rabobank (NL)

Pohjola Group (Fin)

Crédit Mutuel (FR)

Banques Populaires (FR)

Crédit Agricole (FR)

RZB (AT)

BVR (DE)

Minimal capital reserve

2008 2007

3 4 5 6 7 8 9 10 11 12 13 14

Chart 4.5 Tier 1 ratio

in %

Source: Annual reports

Tier- ratios under Basel II. The statutory requirement is percent but in practice

the market demands percent. This last percentage is included here.

Exceptions are Crédit Agricole and the holding company Raieisen Zentral Bank o

the Austrian Raieisenbanken.




concealed ‘excess return’, i.e. proit on top o the co-operative price.

Regarding costs, the ocus on customer value is sometimes assumed to

provide an excuse or more relaxed cost control and ineicient operations.

Benchmarking o expenses and revenues o co-operative banks against

banking sector standards is only a rough way to veriy the validity o

these hypotheses. As discussed, inancial acts cannot just be compared

with those o other banks due to dierent business models. In this respect,

it is interesting to observe that various studies rom dierent parts o

Europe conclude that there is little dierence between the eiciency o

co-operative banks and private banks in Europe (Moody’s, ; Hesse

and Čihák ; Oliver Wyman, ). In some countries, co-operative

banks in act operate more eiciently, particularly in the EU.

Our own calculations presented in table . corroborate these views.

In the period -, co-operative banks in all Western European

countries, except France, operated more eiciently than private banks

(chart .). Hence, the relatively expensive distribution concepts o

co-operative banks do not show up in lower overall eiciency levels.

Moreover, the expenses/income ratio o the co-operative banks even

improved signiicantly on average between and . The higher

costs o their disproportionate branch networks were more than oset

by higher revenues, which is quite an achievement in the current

competitive environment. For co-operative banks, it still pays to adhere

to their traditional business model. This outcome suggests that they usetheir assets and capital base in a highly eicient way.

Ratings The rating o a bank is an overall report mark or its risk proile,

capital buer, stability o income lows, market shares, strategy and

diversiication o activities. In short, all variables described in the previous

subsections are important building blocks or ratings. For co-operative

banks, the organisation and the degree o decentralisation are an

additional rating actor (Standard & Poor’s, ). In practice, it also

appears that all co-operative banks in the EU have some orm o

support mechanism in place (Fitch, ).

Table 4.1 Average inancial perormance o banks

(2002-2007)

Co-operative banks

(N=9/O=53)

Private banks

(N=3/O=159)

Percentage

(standard deviation)

Percentage

(standard deviation)

ROE . (.) . (.)

ROA . (.) . (.)

Core capital ratio . (.) . (.)

Tier ratio . (.) . (.)

Cost/income ratio (.) (.)

Source: Calculations by Rabobank based on annual reports. Figures are based on 45 large banks established in

Western Europe. N= number o banks. O = number o observations during 2002-2007.

Eiciency (cost/income ratio)Some experts claim that the absence o a proit objective, or a lower

proit requirement, deprives co-operative banks o incentives to operate

eiciently. With regards to income, this would mean that they set a

suboptimal price and that eiciently operating competitors realise a

Austria Switzerland Germany France Netherlands

Chart 4.6 Cost/income ratio by country (2002-2007)

in %

70

60

50

40

30

20

10

0

Source: ECB (2008) and calculations by Rabobank based on Bankscope

Note: The co-operative banks in these countries were compared with the total group o 45 banks.

Co-ope ra ti ve ba nks Pri va te b anks




4.3 Impact o co-operative banks onnational inancial systems

The notion that co-operative banks in Western Europe contribute to thestability o the banking system thanks to their strong capital reserves,

stable income, risk diversiication and ocus on retail banking is

increasingly supported by empirical studies. IMF researchers Hesse

and Čihák () conclude that the strong capitalisation and stable

income o co-operative banks more than compensate or the adverse

inluence o lower proitability on their stability. In their view, inancial

co-operatives contribute to the stability o the inancial sector.

The relatively high credit ratings o co-operative banks also point to their

beneicial impact on inancial stability. All these research results oer a

rather convincing counterbalance to the criticism voiced by some

analysts (e.g. PA Consulting Group, ) that the lower proitability

requirement o co-operative banks would distort the competitive

environment in retail banking and would ultimately lead to instability.

An elegant yet simple measure or assessing the stability o co-operative

banks and their impact on the stability o inancial systems is the so-called

Z-score. The Z-score measures bank stability and indicates the distance

to insolvency, combining accounting measures o proitability, leverage

and volatility. It can be used to compare the inancial stability o a bank

with that o other banks. The higher the Z-score, the more stable the

bank. Rabobank calculations reveal that European co-operative bankshad substantially higher Z-scores than private banks in the period

- (Groeneveld and De Vries, ).14 In addition, private bank

Z-scores seem to have declined since , while those o co-operative

banks have remained relatively stable. Consequently, co-operative banks

lit the average Z-score in individual countries, and thus contribute to

national inancial stability.

All things considered, major rating agencies award co-operative banks

with high credit ratings and consider them to be stable, inancially healthy

and solid. At the end o , rating agencies expected operating results

and balance sheet structures o the co-operative banks to remain at asatisactory level. Apart rom a higher degree o capitalisation and a lower

risk proile, this is also caused by the existence o collective guarantee

schemes in co-operative banking systems to prevent the ailure o

individual co-operative banks.

Table 4.2 Credit ratings o a number o co-operative and

private banks

Bank Type

Standard

& Poor’s Moody’s Fitch

France

Banques Populaires Co-operative A+ Aa A+

BNP Paribas Private AA Aa AA

Crédit Agricole Co-operative AA- Aa AA-

Crédit Mutuel Co-operative A+ Aa AA-

Société Générale Private AA- Aa AA-

Germany

DZ Bank Co-operative A+ Aa A+

Commerzbank Private A Aa A

Deutsche Bank Private A+ Aa AA-Finland

Pohjola Group Co-operative AA- Aa AA-

Nordea Bank Finland Private AA- Aa AA-

Netherlands

Rabobank Co-operative AAA Aaa AA+

Fortis Bank SA/NV Private A A A+

ING Groep Private A+ A A+

SNS REAAL Private A- Baa BBB+

Austria

RZB Co-operative A Aa n.b.

Erste Group Bank Private A Aa A

Source: Rating agencies Fitch, Moody’s and Standard & Poor’s

Note: Ratings pertain to April 2009. The rating shown or Crédit Agricole, Crédit Mutuel, DZ BANK and RZB is that o the

central organisation. Consolidated rating or all individual local member banks do not exist.

Beck et al. () ind similar results or Germany.




4.4 Summary

Over the last decade, European co-operative banks have convinced an

increasing share o the population in their home countries to becomemembers. This is strong evidence or the high level o customer

satisaction with co-operative banks. Co-operative banks have

strengthened their domestic retail market position between and

. Their inancial perormance is also satisactory. They enjoy a strong

capital base, stable proit growth, satisactory eiciency levels and

relatively high ratings. Consequently, they exert a positive impact on the

stability o national inancial systems. These are great and promising

achievements, which create conidence or the uture and lead to the

conclusion that the overall business proposition o mature co-operatives15

and the immaterial membership advantages have maintained their

appeal. Hence, co-operative banks ind themselves under a lucky star

and have a good starting position or the upcoming years. There is,

however, no room or complacency. Co-operative banks must ind

adequate and timely answers to existing and emerging challenges in

banking, which is the topic o chapter .

The overall business proposition encompasses a wide range o aspects, including prices,

products, services, distribution concepts and business philosophy.



Co-operative banks in the new fnancial system | 29

Ater the house price bubble burst in , governments and monetary authorities took

a broad range o drastic measures to avoid the collapse o the global inancial system.

The need to remodel the global inancial architecture became apparent. In and, many banks were engaged in a proound reorganisation o their businesses.

Some returned to the basics o traditional banking and others needed to strengthen

their capital position. Banks also took steps to restore conidence among the public.

To date, the banking industry inds itsel conronted with a deep economic recession

and will suer additional loses in their credit portolios. Meanwhile, government and

inancial authorities have announced more stringent banking rules and supervision.

It cannot be excluded that governments will have to interere once again in thebanking sector to saeguard inancial stability. It goes without saying that the eatures o

the inancial system will have to change (chapter ). This means that banks will be

required to adjust their business principles, strategies and structures to meet a set o

new banking conditions in the near uture.

a wide range o challenges which require a proactive and innovative

attitude. The long history o co-operative banks shows, however, thatthey are able to adapt to changing circumstances and re-invent

themselves. Key opportunities and challenges o co-operative banks

or the next ive years have been outlined below.

5.1 Opportunities

A. Customer centricity

Customer centricity, integrity and ethics will play a more important role

in retail banking than in the past. These ‘new’ characteristics o the global

inancial system have been part o the co-operative banks’ DNA rom

the start and are considered to be their main comparative advantages

to date. As consumer-owned institutions, co-operative banks now have

the opportunity to turn the new rules and ethics in banking to their

advantage through well-designed public relations campaign. I they

Co-operative banks were and are not sheltered rom these extraordinary

events. They have also suered losses and incurred write downs whichare directly related to the inancial crisis. They appear, however, to be less

impacted than private banks and did not need large scale government

support. They have also been hurt by the general loss o conidence in

the banking sector and are aced with large distortions in the competitive

environment. With their strong position in the retail markets, they will

now eel the negative impact o the deep economic recession. Rising

unemployment and increasing ailures o SME’s will exert a negative

pressure on co-operative banks.

I we consider the characteristics o the new inancial system, we can

conclude that the unique eatures and natural core competences o

co-operative banks (section .) provide good starting points and

opportunities in this turbulent banking environment. This does not mean

that these opportunities can just be cashed in. Co-operative banks ace

Co-operative banks in thenew inancial system




times where the inancial markets and authorities are urging banks to

hold more capital. How much and in what orm are less straightorward

questions. More capital will make the industry saer, but will also lower

returns and, as a result, most likely raise prices or customers. Their startingposition oers good growth opportunities. The need to attract extra

capital is less pronounced, giving co-operatives a comparative advantage

over many other banks which have to obtain resh and more expensive

unding on the capital markets.

C. Corporate governance structure

The inancial crisis has demonstrated the necessity o improving banks’

internal control mechanisms, corporate governance and compensation

schemes. However, the required changes apply to a lesser extent to

co-operative banks, because they have always had a solid and balanced

corporate governance structure, due to member ownership.

Member ownership entails a more consensus-driven approach which is

accompanied by a longer term, risk-averse view and, last but not least,

the absence o option packages intended excessively award managers.

Many private banks are currently adjusting their corporate governance,

internal (risk) organisation or business model, providing co-operative

banks a good opportunity to be more externally ocused: they do not

have to adjust their business model and culture that extensively.

D. Gaining market shares

The ‘trust or reputation premium’ over shareholder-owned banks dueto their proclaimed conservative approach to banking and high

capitalisation could be very useul in the ace o the expected surge in

retail banking competition. Indeed, co-operative banks are likely to be

‘attacked’ in the higher segments o the retail markets and their business

model will be - partly - copied by private banks. Co-operative banks may

try to turn their disproportionate branch networks into an important

comparative advantage, which would provide access to a huge deposit

base, at least in the short to medium term.

E. Closer international co-operation

Co-operative banks are still primarily national based inancial institutions.

In the past decades, mature co-operative banks have gradually expanded

their business abroad. But in the uture, the scale o operations will

are able to successully demonstrate these issues, rising numbers o

members and increasing market shares can be expected. In addition,

their customer-centred business model may discipline the inancial

sector as a whole.

B. Strong capital base and high ratings

High capitalisation and relatively high credit ratings are powerul assets

o co-operative banks. This is especially true in these current turbulent

Table 5.1 Main eects o the inancial crisis or the entire

banking industry

Main eects Characteristics o the new inancial system

New rules o

the game

- Corporate governance, clear attention to risk management

- Compensation schemes to introduce the right incentives

- Tighter supervision and regulation or banks and other

inancial institutions on an international level

- Higher capital and solvency requirements or banks

- Policy measures: government intervention, exit strategies,

extraordinary monetary actions, early warning systems or

risk events

New business

principles

- Customer centricity

- Morality and integrity

- Healthy risk attitude

- Long-term perspectives instead o short-term proits

- Attention to all stakeholders, not just shareholders

- Attention to externalities o behaviour

- Transparency in products and organisation

New business

models

- Less, but simpler and transparent products and activities

- Focus on retail banking

- Reorientation towards home markets due to national sup-

port

- Less scope or large-scale international aspirations, partlydue to support rom national governments

- Dismantling o some large inancial conglomerates




Co-operative banks in the new fnancial system | 31

5.2 Challenges

In the upcoming years, the entire banking industry will have to adjust its

strategy and organisation undamentally to meet the requirements o the new inancial system and restore public conidence in the integrity

o banks. Co-operative banks will also be aced with great challenges

to meet new banking conditions ater the crisis. Given the current

perspectives on the market and society as a whole, the most important

challenges in the years to come are:

A. Proactive and innovative attitude

Many competitors are redeining (with government support) their

strategy and business models, reorganising their businesses and ocusing

on the retail market. Within approximately two years, competitors will be

leaner and meaner and some o them will want to re-enter the market

aggressively to (re)gain market share.

B. Improving eiciency levels

Pressure to oer competitive and innovative products/services in the

market is surging, while margins tend to shrink. This requires a critical

evaluation o the costs and beneits o the extensive distribution

network. Integrating physical and virtual distribution channels and

inding ways to personalise customers contact via virtual channels is a

key component o this process. In addition, continuous training and

education are necessary to provide employees with state o the artknowledge. In act, the attitude, knowledge and competences o sta

are the main distinguishing actors in banking competition.

C. Strategic choices: dierences compare to other inancial

services providers

Competitors tend to copy business models and products/services quickly.

Co-operative banks have to communicate their unique eatures clearly.

Products and prices are no longer discriminating actors, but other

elements that come into considerations. It is necessary to make

strategic choices or servicing customers eiciently and maintaining a

strict ocus on core activities and businesses. Modern co-operative banks

have to be entrepreneurial, cost-eicient and businesslike organisations.

become increasingly important to remain competitive, operate eiciently

and attract customers. When joining orces in certain banking areas,

co-operative banks may realise suicient scale among their counterparts

to diversiy the risks o cross border activities. To this end, ways o closerco-operation must be developed. This demands acceptance o the act

that noncommittal attitudes and partnerships belong to the past. These

collaborations could in certain banking areas lead to the creation o

European co-operative institutions. The easibility o this road should

be investigated urther, but should be an attractive prospect or

co-operative-minded bankers. The existing platorms or mutual

international co-operation, the European Association o Co-operative

Banks and Unico Banking Group could play an initiating role in the

creation o such institution.

F. Introducing the co-operative model abroad

Many co-operative banks were established over a century ago in rural

areas where people were deprived o inancial services. Although the

original ‘raisons d’être’ o mature co-operative banks have disappeared,

this is deinitely not the case in many other countries throughout the

world. Here lies a noble task or co-operative banks. They are well

positioned to help these countries in setting up inancial inrastructures.

This is one ield where they can visibly contribute to economic and

social development. By being present in these emerging or developing

countries, co-operative banks can clearly demonstrate the ‘presence

value’ o co-operative principles, which is vir tually impossible to show inWestern countries. O course, the co-operative model cannot just be

copied and pasted to other countries. Adjustments are necessary to

account or historical and cultural dierences. Microinance is the place

to be or co-operative banks in emerging and developing countries

and they should take a claim on this promising banking area. When the

inancial sectors in these countries mature, co-operative banks will

possess a strong oothold based on a long-term commitment. Given the

viability, solidity and added value o co-operative banks, the governments,

regulators and inancial sectors o developing countries should also

embrace co-operative principles, since they would contribute to the

necessary access to inance or enterprising poor people.




D. To balance beneits and risks o international versus national

(home market) activities.

It will be a balancing act to reconcile the interests o domestic

members, i.e. the co-operative part o the organisation, with the sizeand risks o international activities. I the operations abroad become

substantially larger than the co-operative part, the dilution o the

co-operative nature will be looming. Furthermore, adding international

businesses may increase the overall risk o the organisation and

destabilise the co-operative banking business.

E. To balance local delivery and central management

It has become more diicult or members to monitor the organisation

due to the increased organisational complexity o mature co-operative

banks, where management is carried out by dedicated proessionals.

A transparent and an endurable balance between local delivery and

central management is needed to saeguard engagement and

involvement o local banks members.



The Rabobank Group case study | 33

This case study deals with the history and evolution o the largest retail bank in the

Netherlands, the co-operative Rabobank.16 Like all other banks, Rabobank has aced

social, economic, technological and regulatory challenges throughout its existence. These include, or example, the Great Depression o the s, the World Wars, the

reconstruction o the Dutch economy, the IT revolution and the liberalisation and

globalisation o the economy. Despite the act that Rabobank has not always made the

optimal decisions, it has mostly chosen the right answers to changing circumstances,

thereby preserving its co-operative identity. This is clearly relected in a large Dutch

customer base (. million), comprised o . million members, and a Triple-A rating.

This chapter will irst discuss the history and strategic positioning o Rabobank. It willconclude with an overview o the opportunities and challenges or Rabobank or the

upcoming ive years as a result o the recent inancial crisis.

.1 History and evolution o Rabobank

Origin o co-operative banks in the NetherlandsAs in many other Western European countries, the irst co-operative

banks in the Netherlands had their roots in the local agricultural sector.

Situated in the Rhine delta, a geographically strategic position as the

gateway to Western Europe, agriculture and international trade have

historically played a major role in the Dutch economy. The rapid

improvement in transportation possibilities by sea and over land in

the second hal o the nineteenth century made Europe accessible to

commodities, especially massive cheap grain imports rom the United

States. Farming prices in Western Europe dropped by more than

percent in the s, leading to an agricultural depression. This caused

great scarcity o capital among armers, which led to social abuse such

as buying by instalments and the provision o loans at exorbitant rates.

In , an advice committee appointed by the Dutch government

emphasised the need or an agricultural credit system based on sound

and air principles. Moreover, this was to be set up by the concernedarmers themselves. The committee recommended the establishment

o credit co-operatives based on the principles o the German

Raieisenbanks. Around , the irst co-operative agricultural credit

banks were set up in the Netherlands. Soon ater, many other banks were

launched throughout the country. Although every local co-operative

bank had its own unique historical background, there were also large

similarities. For instance, armers and dignities o the local community

were oten the bank’s ounding athers. As early as , the local

co-operative banks started to work together by setting up two central

The Rabobank Groupcase study

See Rabobank () or an extensive exposition o the development o Rabobank Group.




and a centralised approach. To reach economies o scale and to avoid

ineiciencies rom growing competition between the local member

banks o the two organisations, the two central organisations decided to

merge in to orm Coöperatieve Centrale Raieissen-Boerenleenbank,

known as Rabobank. In this way, the co-operative banking group was also

able to improve its competitive position in a urther consolidating Dutch

banking landscape. This led to a solid national network organisation.

The merger eventually resulted in substantial cost reductions and a

avourable scale or large investments to acquire market share and to

serve the emerging mass markets and new economic sectors eiciently.

organisations, one in the northern and the other in the southern part

o the country. These central banks were necessary to overcome the

disadvantages o the local banks’ limited scale and to oster their

development by perorming the co-ordinating role o a ‘banker’s bank’.

In the ollowing years, local co-operative banks lourished due to their

strong roots in local communities, their appealing democratic structure

and their attractive loans and savings rates as compared to private banks.

Since the irst credit co-operative in the Netherlands was ounded, the

number o local co-operative banks and members increased sharply to

more than , local member banks and , members around .

Evolution o Rabobank: local-national The inancial services industry has changed undamentally over the

years. As in other Western countries, the original ‘raisons d’être’ o the

co-operative banking model largely disappeared ater World War II.

The Dutch co-operative banking group developed rom a local

agricultural credit co-operative to a retail bank with nationwide coverage.

All these developments led to adjustments in organisational structures,

consolidation, domestic diversiication, other sources o unding and

new business models.

Especially ater World War II, the central organisations became more

and more important or the urther development o the local member

banks. The increasing complexity o inancial products as well as the

establishment o subsidiaries or international activities, corporate

banking, insurance and investment banking called or proessionalisation

Box .1 Governance and comparative advantageo local co-operative banks

Historically, local banks in the Netherlands were autonomous

agricultural credit co-operatives, each with its own Board and

responsible or its own balance sheet and administration. The Board

o Directors and the Supervisory Board received no remuneration

(only the cashier received a small salary) and were elected at the

annual general meeting. The banks were deeply embedded in the

local community and were thereore able to gather relevant

inormation and knowledge about the development o businesses

and members/customers. This gave agricultural credit banks a strong

competitive advantage in the credit and savings market.

Scheme .1 Governance structure o Rabobank

Regional Delegates Assembly Regional Delegates Assembly

Central Delegates Assembly

General Assembly

Regional Delegates Assembly

Local Member Bank Local Member Bank Local Member Bank Local Member Bank Local Member Bank Local Member Bank

Source: Rabobank




Facilitated by regulatory changes, this centralisation o activities and the

creation o scale advantages made it possible to diversiy and expand

inancial activities as well as to launch virtual distribution concepts like

internet banking. Like its main competitors, the Rabobank Group

entered into the ields o private banking, asset management, and lie

insurance via organic growth, joint ventures or acquisitions (scheme .).

The total volume o inancial services developed prosperously and

inancial perormance indicators such as solvency, eiciency and proit

improved constantly. This resulted in the highest possible credit rating:

Triple-A status.

The national and international expansion o the Rabobank Group, the

disappearance o the original motives or the establishment o the

co-operative banking group and the emergence o large domestic

competitors via consolidation17 provoked a undamental sel-assessment,

culminating in the Great Co-operative Debate in the years through

. Since the merger o the two central organisation, the perception

In , ABN merged with AMRO to orm ABN AMRO. In , the ormer

‘Nederlandse Middenstandsbank’ and ‘Postbank’ merged with the insurer ‘National

Nederlanden’ to become ING.

Scheme .2 Organisation o the Rabobank Group Situation at 1 July 2009

1.7 million members

152 local Rabobanks with 1,01 branches

Rabobank Nederland

Labels

Support o local Rabobanks

Corporate clients

Private individuals

Private Banking

Other support units

Asset management

Orbay

RobecoSarasin (9%)

Schretlen & Co

Leasing

De Lage Landen

- Athlon- Crediam

- Freo

Real estate

Rabo Real Estate Group

- Bouwonds PropertyDevelopment

- Bouwonds REIM

- FGH Bank

- Fondsenbeheer

Nederland

- MAB Development

Insurance

Eureko (39%)

- Interpolis

Housing

Obvion

Business

Rembrandt

Mergers & Acquisition

Rabobank International

Food & agri business

International retail banking

Wholesale banking

Rabobank Group sta unctions

CSR

Investor Relations

Long-Term Funding

Other sta units

The local Rabobanks and their members make up the core o the banking business. They are Rabobank’s key stakeholders. Being the central (legal) entity,

Rabobank Nederland acilitates the local Rabobanks, or instance by providing marketing and product development support, but also by oering competence

centres in the areas o operations management, ICT and governance. Rabobank International applies its knowledge and experience o the ood & agri business

towards serving corporate and retail customers globally.

Rabobank Nederland carries out several sta unctions or Rabobank Group as a whole, including Corporate Social Responsibility, Investor Relations, Long-Term

Funding, Human Resources, Legal and Tax Aairs, Knowledge and Economic Research and Communications. The bottom part o the diagram shows R abobank

Group’s chie labels that operate in the dierent markets under their own brands and together comprise the bank ’s all-fnance services.

9.5 million customers

Source: Rabobank




was that the co-operative philosophy18 had been subject to considerable

erosion. Local member banks were no longer active in engaging or

attracting members. A local member bank acted and operated more

and more like a ‘private bank’. In this context, some elt that Rabobank could equally well become a listed bank. This would oer Rabobank

better development prospects and access to more unding sources

to resist the increasing competition. Additional arguments were the

rapidly growing costs and the required large investments in new

banking technologies.

Though internal sceptics o the continuation o the co-operative

banking model remained a minority, they actually pointed out highly

relevant questions about the meaning o membership in the context o

globalisation o the economy and the added value o the co-operative

model in mature inancial systems. Ater intense discussions, it was

decided to retain the co-operative identity. This decision was mainly

based on the act that Rabobank was and remains to date an organisation

o, and or, enterprising people. A dierent legal ormat with airly

uncertain eects would diminish the countervailing power o members’

inluence on the day-to-day business decisions o proessionals managing

the co-operative group. The conviction was that there were great

opportunities or a viable and strong co-operative bank amidst private

banks. It was deemed highly desirable to obtain more and engaged

members19 and to extend the autonomy o the local member banks.

The new governance model reconirmed the core principles o deliveringcustomer value, contributing to social commitment, realising employee

value and revitalising the membership policy. It was acknowledged that

only a inancially sound organisation could meet these ambitions.

In , Rabobank ormalised its strategic ambition to be an Allinanz

services provider in the Netherlands. Since then, new challenges have

arisen. In order to maintain its position as Allinanz market leader, strategic

adjustments were necessary (box .). To this end, the Rabobank Groupormulated so-called Strategic Frameworks that outlined the uture

course o action or the upcoming three to ive years. The most recent

Strategic Framework covers the period - and gives directions

or Rabobank’s course in light o the eects o the current inancial crisis.

Evolution o Rabobank: national-internationalInitially, the leading motive or starting cross-border activities was the

need to serve customers with international activities and aspirations,

especially rom the Dutch F&A sector. In the ’s, this was done

through collaboration agreements with banks in the UK (Continental

Bankers) and the USA (Bank o America). In order to improve the level

o co-operation between European sister organisations, the Unico

Banking Group () was established by Rabobank and ive other

banks. The aim was to support the expansion o the partners’

international operations.

Thereater, Rabobank pursued dierent international strategies, with

varying degrees o success: takeovers, co-operation agreements and

alliances with other partners, as well as setting up its own representative

oices across the world. The most salient steps and evolutions are

presented in box .. Evidently, Rabobank has gone through aninteresting, but sometimes diicult learning process, just like other

co-operative banks and private banks. Step by step, Rabobank has

discovered the international strategy that suits it best. To date, ollowing

local customers, taking small, well-considered steps and linking up with

existing activities and core competences are the basic principles driving

international businesses. A relatively new shoot concerns the activities

o the Rabobank Development Program. Under this programme,

Rabobank tries to introduce and acilitate agricultural co-operatives

in emerging or developing countries. The Rabobank’s Dutch model

cannot simply be ‘exported’ to other countries that have dierent

historical backgrounds and legal structures. Today, the Rabobank Group

is active in roughly locations spread over oreign countries.

The deinition o a co-operative remains the same as in the nineteenth century:

A strategic alliance o people who are willing to promote each others’ material interest

and to help each other realise their ambitions. They do this by running a business

- the co-operative - jointly and or their collective beneit.

Every customer o a local member bank is ree to become a member, but the Board

o the bank decides whether or not a customer becomes a member o the bank.

Members are engaged in the policy o the bank regarding activities and sponsoring o

the local community. A Members Council connects the Board with members. With respect

to inancial services, members have no substantially privileged position compared to

non-members. An exclusive product that only members can acquire is a Member Certiicate,

which is issued by Rabobank Nederland.




.2 Position o Rabobank Group

Financial and economic turbulence The inancial crisis has had a huge direct impact on the Dutch banking

sector. The Dutch government and Dutch Central Bank had to take

extraordinary measures to saeguard inancial stability. For instance, the

Dutch part o both ABN AMRO and Fortis was nationalised and many

other inancial players needed government support in the orm o

capital injections or state-guaranteed inancing programmes. Rabobank

ully supports these measures, because inancial stability is o utmost

importance or every bank. All in all, ity percent o the Dutch banking

sector received government support. Since the beginning o the

inancial crisis, Rabobank incurred losses and write-downs o around six

percent o its total equity, but did not need any orm o aid due to its

strong capitalisation.

This massive government intervention has o course had major

consequences or the competitive environment and uture trends in

the Dutch banking sector (Dutch Central Bank, ). Partly orced by

this government aid, banks are reconsidering their business strategies

Box .2 Strategic Framework

At the turn o the century, a new course was needed as undingbecame more and more expensive and downward pressure on credit

and lending margins led to a structural reduction in the interest

revenues. Rabobank tried to compensate or the lower interest

revenues by generating commissions rom new activities, but this

shit was insuicient to ully compensate or the loss o interest

income. In close co-operation with Rabobank Nederland, local

member banks developed a strategic vision to counter this trend,

which can also be attributed to increasingly competitive market

conditions and changing customer needs. The 2005-2010 Strategic

Framework mentioned three ambitions:

1. Retaining Allinanz market leadership in the Netherlands.

2. Achieving urther growth o and strengthening synergies with

subsidiaries and partners.

3. Strengthening the bank’s position as a leading international

Food & Agri bank.

The underlying business principles o this ramework are:

1. Maintaining the co-operative identity (long-term relationships

with customers and keeping the member base active by investing

in young people).

2. Working towards Allinanz market leadership in the Netherlands.3. Working towards a global F&A bank as a natural ocus.

4. Maintaining Triple-A status (requires a strong balance sheet,stable proit growth and a tier-1 ratio o at least 10%).

5. High CSR policy standards (maintaining a position as one o the

most sustainable banks).

Upscaling and reorganising the operational management and

customer service o local Rabobanks were important measures

to achieve the goals.

The inancial crisis called or a review o the 2005-2010 Strategic

Framework, but the business principles remained the same. The crisis

led to proit declines or Rabobank International (RI), higher capital

requirements and higher costs o attracting external unding, which

in turn resulted in the introduction o liquidity mark-ups on transer

prices and strong reduced opportunities or attracting longer-maturity

unding. The crisis also gave rise to opportunities in the deposit

market, the corporate market, mainly as a result o Rabobank’s solid

image (Triple-A rating). The strategic review resulted in a ew

accentuations. The acknowledgement that capital and unding

will be scarce in the upcoming years requires a sharper ocus on the

international ood & agribusiness as RI’s core business, the integration

o physical and virtual channels and the streamlining o processesbased on validated best practices.




Co-operative Debate, it was decided that RI would need to cut back

its investment banking activities.

2. Another noteworthy episode was the attempt to orm a strategicalliance with the German DG Bank, a co-member o Unico, in 1999.

The alliance would be in line with the ‘multi-domestic concept’ that

had recently been ormulated within Rabobank. This concept meant

that the European partner banks - preerably co-operatives - would

continue to serve their customers in the domestic market, but at the

same time they would work together in a number o product areas

where a pan-European scale was deemed necessary. The irst step

in the alliance with DG Bank would have been to amalgamate all

activities in the area o corporate and investment banking.

The ultimate aim o this collaboration was to create a single European

co-operative inancial group. In practice, the venture proved to be

too complex, too time-consuming and was beset by too many

uncertainties. This project was consequently abandoned in 2000.

3. Just ater the beginning o the twenty-irst century, RI positioned

itsel more and more as the world’s leading Food & Agri bank.

Alongside traditional inancing packages, it started to oer highly

proessional products and advice including inancial market

derivates, structured inance solutions, commodity trade inance

and investment banking services such as advice on M&A. RI also

played an innovative role by stimulating, marketing and trading inagricultural product derivates such as weather derivates. In this period,

the international ambition was to have at least one oice in all

important F&A countries and regions o the world and also to achieve

a prominent market position among the larger, well-run primary

agricultural companies in key agricultural production countries.

4. The most recent strategic reorientation o RI can be attributed to

the general eects o the inancial crisis on the Rabobank Group.

In the 2009-2012 Strategic Framework, a radical ocus restriction is

proposed or RI, both abroad and in the proessional markets.

This shit implies a strong curtailment o activities with an elevated

operational, reputational or credit risk and the phasing out o

lending to non-core customers outside the Netherlands.

Box .3 International steps

International retail banking

In the past decades, the retail customers o local Rabobanks have

been mainly serviced by so-called international Rabodesks abroad.

These desks, with Dutch-speaking sta, help and advise theircustomers on a wide range o international banking issues in dierent

countries. They typically work closely together with partner banks

since it is rather diicult and expensive to build a sel-owned retail

network in other countries. To date, there are still many dierences

between European countries regarding the modalities o retail

products. From 2002 onwards, there has been an acceleration o

out-o-country activities in the ield o international retail banking,

aimed at securing a solid retail base in a number o strategically

important countries and supporting its international direct banking

activities. Rabobank has acquired stakes in several retail banks and

initiated internet banking activities in a number o countries.

International wholesale banking

In 199, most o the international wholesale activities were brought

together in a new group entity: Rabobank International (RI). This entity

has adjusted its main ocus and strategy several times, mirroring

changes in international trends in banking and the search or the

optimal international group strategy.

1. Initially, RI pursued a ‘customer ocus strategy’ based on our

geographical areas, three main activities and three sectors.The geographical areas were Europe, North and South America,

Asia and Australia and New Zealand. The activities concerned were

corporate banking, international private banking and investment

banking. The three ocus sectors were agribusiness, the ood sector

and healthcare. It became apparent during the irst years o RI that

the perormance o international activities was much more volatile

than that o the domestic retail business. This was clearly and painully

illustrated by the overly ambitious strategy to expand and intensiy

investment banking activities. It soon turned out that investment

banking did not match the co-operative principles and customs o the

domestic retail business. Building a signiicant position in investment

banking appeared to be very costly and the required competences

were absent. In September 1999, in line with the results o the Great




Regarding domestic market shares, Rabobank has succeeded in keeping

its originally strong position as market leader in the Food and Agri sector

(%). However, the size o this sector in the Dutch economy has shrunk

over time and currently accounts or roughly percent o Rabobank’stotal loan portolio. Competitors have tried hard to acquire substantial

market shares in these sectors over the years. One o the reasons is that

these sectors tend to be relatively stable and less risky than many other

economic sectors. In almost all other areas o retail banking, Rabobank

has managed to strengthen its position over the last decade (appendix

A). The market share or branches exceeds the one or deposits; this

conirms the divergent business model o Rabobank, where being

‘nearby’ customers is an important element. Rabobank has nonetheless

cut back on the number o branches as a result o changing customer

preerences or virtual distribution channels.

Another strategic goal o Rabobank is to be among the top three o

best perorming banks in the area o corporate social responsibility.

Rabobank was recently ranked as one o the top Corporate Social

and it seems that they are primarily reocusing on retail markets, which

is a European-wide phenomenon. Rabobank oresees an increase in

competition and hopes that government aid will be terminated as

soon as possible.

As has happened in other countries, the reputation o all Dutch banks

has been damaged. Public and political discussions about the social role

o banks and reorms o the compensation schemes have blazed up.

To restore conidence, the sector itsel installed an advisory commission

(Commission Maas, ). This commission has ormulated

recommendations about governance and risk management, the public

role o banks, supervision and regulation, and the uture o the banking

industry in the Netherlands. In July , the Dutch government

published its vision on the uture o the Dutch inancial sector (Ministry

o Finance, ). Improvements in banking supervision, higher capital

requirements, and acceptable compensation schemes are important

elements.

Following the direct eects o the inancial crisis, the banking sector is

now conronted with an economic recession. Credit losses and write-

downs will be unavoidable. Banks are reocusing their activities, improving

their risk proile, cutting costs and tightening their credit criteria.

The sector will consequently ace many challenges in the near uture.

Size and position o Rabobank O course, Rabobank cannot hide rom these diicult inancial and

economic times and intense debates. Rabobank too is conronted with

negative sentiments towards banks. Rabobank is, however, able to explain

that it has always steered a prudent course and is notably dierent rom

private banks due to its conservative banking model and speciic

corporate governance based on member ownership. Viewed over a

longer period o time, the vitality o the co-operative banking model

clearly stands out when looking at the development o members and

customers. Over the past ten years, the total number o members grew

rom , in to more than . million to date. Rabobank currently

has . million customers o whom . million are located in the

Netherlands. Local member banks are owned by . million members,

which equals more than percent o the Dutch population. Worldwide,

Rabobank employs around , employees.

Revenues generated outside the Netherlands as a percentage o total revenues

o the Rabobank Group (end o year)

Balance sheet total o Rabobank Group

45

40

35

30

25

20

15

10

5

0

1980 1985 1990 1995 2000 2005 2010

Chart 6.1 Contribution o perormance abroad versus domestic

in %

Source: Rabobank




Box .4 Rabo Development and Rabobank Foundation: a co-operative mission abroad

To co-ordinate and manage the increasing activities in this ield, a

new subsidiary was established in 200: Rabo Financial Institution

Development B.V. (Rabo Development). To date, Rabo Development

holds stakes in partner banks in Arica (Tanzania, Zambia, Rwandaand Mozambique), South America (Paraguay) and China. Technical

assistance to these banks is provided by consultants o Rabo

International Advisory Service B.V. (RIAS) which was set up in 1989

and has been active in more than 50 countries. Rabobank executed

the co-operative mission through Rabobank Foundation which this

year celebrated its 35 years o enhancing rural welare, empowerment

and income by assisting recipient organisations to develop into

sound institutions. The Foundation is currently active in about 25

developing countries and works in co-operation with microinance

institutions, co-operatives and NGOs.

In line with its co-operative roots and aspirations, Rabobank took the

initiative to help partner banks in a number o developing countries

on a long-term basis. In most cases, Rabobank takes a stake in these

banks in exchange or a seat on the board, in order to be able toinluence the partner bank’s strategy. Rabobank’s contribution is not,

nor has it ever been, solely inancial. Rabobank also provides input

in the orm o experience, know-how and expertise. Rabobank is

committed to assisting the partner bank in giving small agricultural

and commercial companies and private individuals access to

aordable credit acilities and other banking services. The partners

do not necessarily have a co-operative structure. A number o these

banks, however, ocus speciically on rural areas and aspire to serve

everyone, not just the ‘better’ market segment. The underlying idea

is that partner banks will eventually develop into ully ledged and

strong institutions, which in the long term will give Rabobank a

presence in countries that are gaining in importance in the world

economy, especially in the ield o agribusiness.




Responsibility (CSR) banks o the world. The Group has identiied our

goals or its CSR policy: introducing sustainability in F&A, encouraging

new production methods and renewable energy sources, promoting

economic participation and diversity and ostering social cohesionand solidarity.

Lastly, the importance o Rabobank’s international activities has grown

over the last three decades. The uneven expansion and strategic moves

abroad are visible in the international assets and oreign revenues as a

percentage o total assets and revenues respectively. This shows the

diversiication o activities. It appears that international activities have a

higher risk proile than the activities o local Rabobanks in the Netherlands,

with the latter ocusing primarily on retail banking. The higher revenues

that can be expected are sometimes counterbalanced by a greater

volatility in returns caused by the deterioration o particular international

markets or a rise in the level o credit or country risks. This is also the

case in the current crisis. Most o the losses and write-downs were

concentrated in the international activities.

Financial perormance o the Rabobank GroupOverall, the inancial perormance o Rabobank Group is strong.

With solid capital buers Rabobank has recorded stable proit growth

and improved eiciency over the last ew years. Appendix A shows the

key igures o the Rabobank Group. Chart . shows the tier- ratio

(minimum requirement o %), whereas chart . displays the avourable

development o net proit in de past decades.

Rabobank has been awarded the highest rating - Triple-A status - romrating agencies Standard & Poor’s and Moody’s or many years.

Determinants o the rating are the risk proile, capital buer, stability o

income lows, market shares, strategy and diversiication o the activities.

The existence o the internal cross-guarantee scheme is also an

important actor. It can be said that this rating has proven extremely

important in the current turbulent times. Due to this status, Rabobank

has been able to weather the storm very well to date. Rabobank has kept

access to the capital markets and is able to preserve its independent

position. Customers urthermore consider Rabobank as a sae haven.

.3 Rabobank in the new inancial system

As or all co-operative banks, the external environment has altered

dramatically or Rabobank. Competitors o Rabobank in its home market

received government support in order to guarantee inancial stability.

At the same time, initiatives were taken to repair the damaged reputation

o banks. New ethics and business models were proposed by the sector,

policy makers and regulatory authorities. Due to its speciic structure

and eatures, Rabobank already complies with most o the suggestions

and recommendations. This opens up new opportunities.

12

10

8

6

4

2

0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Chart 6.2 Tier 1 ratio

in %

Source: Rabobank

3,000

2,500

2,000

1,500

1,000

500

0

Chart 6.3 Net profts

in millions o euros

Source: Rabobank

’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08




Last but not least, the need or highly educated and qualiied sta

constitutes a critical success actor. The attitude, competences and

knowledge o employees are known to constitute the main

distinguishing actors in tomorrow’s competition. This point is clearly

stressed in the Strategic Framework. Thereore, Rabobank will have to

strongly ocus on management and employee development.

At an early stage, Rabobank recognised the severity o the inancial

crisis and its implications. In the irst hal o , Rabobank started a

large-scale assessment o the situation which eventually culminated in

a revision o its strategic course. This was laid down in the -

Strategic Framework. Rabobank has taken into consideration the

extraordinary competitive environment and is anticipating remarkable

shits in its competitor’s business models and strategic ocus. It is

expected that they will concentrate more strongly on their domestic

retail markets, which have traditionally been the domain o Rabobank.

An increase in competition and a greater urge or cost-cutting andeiciency are oreseen. It will no longer be suicient to employ general

cost reduction targets. This time, undamental choices will have to be

made regarding targeted product-market combinations.

The Strategic Framework provides guidelines or the assessment o the

possible choices. For the upcoming years, the availability o capital has

been identiied as the bottleneck or national and international growth.

This implies that or operations that are urther removed rom the

Group’s core business - co-operative banking - other criteria apply.

These activities must meet higher proit targets and must have lower

capital requirements. The scarce capital will be primarily used or the

member banks (scheme .).

Scheme 6.3 Capital allocation policy o scarce resources

Source: Rabobank

Leveraging specialisations and benefts o scaleLeveraging specialisations and benefts o scale D e c l i n i n g a v a i l a b i l i t y o f f u n d i n g a n d e q u i t y

D e c l i n i n g a v a i l a b i l i t y o f f u n d i n g a n d e q u i t y

M o un t i n gr e t ur nr e q ui r em en t

M o un t i n gr e t ur nr e q ui r em en t

Food & agri outside NLFood & agri outside NL

All-fnance market

leader in NL

All-fnance market

leader in NL

Member

banks

Member

banks



Appendix A | 43

Key igures Rabobank Group (consolidated, group level)

IFRS DUTCH GAAP

2008 2007 200 2005 2004 2004 2003 2002 2001 2000 1999

Volume o services

(in millions o euros)

Total assets , , , , , , , , , , ,

Private sector lending , , , , , , , , , , ,

Due to customers , , , , , , , , , , ,Assets managed and held

in custody , , , , , , , , , , ,

Financial position and solvency


Equity , , , , , , , , , , ,

Tier I capital , , , , , , , , , , ,

Qualiying capital , , , , , , , , , , ,

Risk-weighted assets , , , , , , , , , , ,

Tier I ratio . . . . . . . . . .

BIS ratio . . . . . . . . . .

Eiciency ratio . . . . . . . . . . .

Proit and loss account


Total income , , , , , , , , , , ,

Operating expenses , , , , , , , , , , ,

Value adjustments ,

Taxation

Net proit , , , , , , , , , , ,

Nearby

Member banks

Branches , , , , , , , , , , ,Cash dispensing machines , , , , , , , , , , ,

Foreign oices

Employees

Number o employees (in te) , , , , , , , , , , ,

Client data

Members (x ,) , , , , , , , ,

Market shares

(in the Netherlands)

Mortgages % % % % % % % % % % %

Savings % % % % % % % % % % %

Small and medium-sized

enterprises % % % % % % % % % % %

Food & agri % % % % % % % % % % %

Source: Rabobank

Appendix A



Reerences | 45

European Central Bank (a), ‘EU Banking Structures’,

Frankurt am Main, October .

European Central Bank (b), ‘Financial Stability Review’,Frankurt am Main, December .

European Central Bank (), ‘Financial Integration in Europe’,

Frankurt am Main, April .

Felton, A., and C.M. Reinhart (Eds., ), ‘The First Global Financial

Crisis o the 21st Century’, Part I and II, Center o Economic Policy

Research, VoxEU.org Publications, London.

Financial Stability Forum (), ‘Report o the Financial Stability

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Colophon | 47

ColophonArt Direction and DesignBorghouts Design, Haarlem

CopyrightNo part o this publication may be reproduced in any orm by print,

photo print, microilm or any other means without written permission

o Rabobank.

DisclaimerNeither Rabobank nor other legal entities in the group to which it

belongs, accept any liability whatsoever or any direct or consequential

loss arising rom any use o this document or its content or otherwise

arising in connection herewith.

DateOctober

The report ‘Co-operative banks in the new inancial system’ is a product

o the Economic Research Department o the Rabobank Group in

co-operation with the internal departments ‘Group Finance’ and

‘Multilateral Development Banks’. It is part o a comprehensive studyabout co-operative banks and the impact o the inancial and economic

crisis on the banking industry. The report is prepared or the ‘Duisenberg

Lecture’ at the annual meeting o the IMF and World Bank in Istanbul,

Turkey in October .

AuthorsHans Groeneveld ( [email protected])

August Sjauw-Koen-Fa ([email protected])

Contact addressRabobank Nederland

Economic Research Department

Postbox

HG Utrecht

The Netherlands

Telephone +

Co-operative banks in the new fi nancial system

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