What Too Big To Fail Means in the World of Cooperative Banking

A research report by The European Association of Cooperative Banks, “European and Cooperative Banks in the Financial and Economic Turmoil: First Assessments,” delineates five characteristics of the European cooperative banking model that have contributed to its resiliency. These are strong capitalization, a business model that puts members and customers first, built-in anti-cyclical behavior, tight bottom-up control mechanisms, and a democratic governance scheme. Among the anti-cyclical behavior built-ins is a distinctive mechanism that has not only given cooperative banks’ the wherewithal to withstand systemic market shocks but has added resilience to the financial industry as a whole during times of financial crisis: the internal cross guarantee or institutional protection agreement. These agreements, integral to almost all European cooperative networks, require each independent cooperative bank to guarantee the deposits of all members of its network, thus providing an extra layer of protection to depositors in the event of a single bank’s failure.

These guarantees are in addition to any extended by national authorities. According to a special report by Rabobank on cooperative banks, as a result of the mutual guarantees inside the Rabobank Group, “despite the legal independence of the local member banks, the group of banks is viewed as one banking institution by both the regulator and the financial markets.” Indeed, the web of interdependence between cooperative members and cooperative customers, and between independent cooperative banks, gives new meaning to the phenomenon of “too big to fail.”