The Co-operative Bank announced its results this week, with a further spread of red ink since its troubles began in May 2013. It is the right time perhaps to reflect on what next for ethics and co-operative banking.
For anyone who wants to know more about the state of the Bank, there is an investor presentation which tells the story. Put simply, the original plan was to trade out of the troubles back into full health. That has not been possible in current market conditions, despite plenty of hard work and practical achievements. The losses are exceptional – bad loans for example from the past that tend to go bad as they mature – and should be non-recurring costs. But the bank is not covering its operating costs in the current market conditions of interest rates lower for longer, even though those costs have come down, and that can never be a permanent state of affairs. And the bank has to operate with a sufficient capital cushion to satisfy the regulators, who, even if what happens to the bank is not classed as a systemic risk, will be watching like a hawk.
So, we are into Plan C now. The announcement last month of a search for a new buyer, or new capital, means that the next period will be one of flux for the bank.
‘What do I do as a customer?’, asked a friend yesterday evening (I think I encouraged her into the Bank in the first place many moons ago).
Of course, consumer protection in banking gives a guarantee of safety. Plus, the ethics are also strong and that remains a distinctive offer in a pretty despised banking market overall.
Of course, with values, no-one is perfect. You can choose whatever yardstick you like personally, or as a campaign group, to run the rule, but the Co-operative Bank is different. Its ethics are enshrined in the articles and the priorities are those chosen by the customers: that’s pretty much as democratic as you get.
The Bank is also engaging proactively with the rest of the co-operative sector, in particular supporting the cost effective but high impact programme of co-op business support, The Hive, run by Co-operatives UK. We have an agreed voluntary programme of compliance around the use of the word co-operative, in line with criteria that we drew up with the International Co-operative Alliance and in consultation with our members.
One option as a customer is to join the Customer Union formed by the Save our Bank campaign – or just link to it on Facebook. Customers who care what happens can then act together rather than individually.
The investor presentation by the Co-operative Bank CEO Liam Coleman makes it clear how critical it has been to the survival of the bank that it has remained and indeed strengthened its ethics (health warnings of course – nothing is perfect) and the customer base of around four million people has stayed loyal.
One day, that may be a Business School case study for ethical business, but for now that means that the ability of customers to come together and act together is critical for what happens next to the bank. Whether the suits in the Bank of England or potential buyers or investors appreciate that will be the flip side of this – this could yet turn from a survival epic into an unqualified tragedy.
And when we look at what is happening to co-operative banks worldwide, this is the story in every case. If you are owned by your customers, then your customers will tend to keep you on track, whether in terms of integrity or when things go wrong.
In Japan, the Norinchukin Bank made losses that were exposed during the 2008 banking crisis, having purchased worthless US securities at a time when the rating agencies were saying these were triple A secure. The bank turned to its members, who are farmers, to return it to solvency. The financial gap was around $900m, and the members made up the loss.
There are over four thousand co-operative banks in Europe.
A recent study led by the distinguished Professor Hans Groeneveld at the Tilburg University looked at sixteen co-operative banks across around a dozen countries in Europe and North America. The total membership is on the rise, with around sixty million consumer owners. Since 1996, the ratio of co-operative bank members to the population at large has risen from 14 to nearly 19, so that one in five adults in those countries are member owners of a co-operative bank.
Since 1997, their market share of deposits and loans has risen by around six percentage points to just below 25%. The cost-income ratio was comparable to the wider banking sector at large. Since 2008, return on equity has been higher than the wider sector (6.3% compared to 5.9%) – and I expect that is not an iron law but an indication that co-operative banks can perhaps behave differently in tough times, when they are needed the most.
There are regulatory threats and pressures – some moves to consolidation in countries like Denmark and Germany. Those pressures will be recognised by the wider UK mutual sector of building societies and credit unions – and the fledgling community finance sector too. It is great to see that Nationwide, full of confidence and purpose, has taken up membership of the European Association of Co-operative Banks. There will be a convention of European co-operative banks, large and small, in two weeks time.
The key point here is customer owned banking is a good and practical alternative to investor owned banks.
The UK Co-operative Bank is something of a hybrid, and was arguably never fully owned directly by its customers, but it has been a trailblazer on ethics for twenty five years and it matters a lot what happens to it next.
And however this does now play out, the next chapter of banking in the UK needs to be more mutual, more co-operative rather than less.