Many European countries have co-operative banks. Germany’s Volksbanken and Raiffeisenbanken are perhaps the best-known, but France, Italy, the Netherlands and Austria also have important systems of co-operative banks. France’s co-operative banking sector (Credit Agricole, Credit Mutuel and BCPE) has an estimated 45% market share, while the Netherlands’ Rabobank has 10 million customers and a 40% market share. Co-operative banking can be highly successful.
But it can also go horribly wrong. And in Austria, it has.
Like Germany, Austria has two co-operative banking systems – Volksbanken, which are similar to the credit unions first established by Franz Schulze-Delisch in Prussia, and Raiffeisenbanken, which were founded by the father of co-operative banking, Friedrich Raiffeisen.
Austrian Volksbanken and Raiffeisenbanken are small local banks linked by a common system of guarantees. There are about 1,600 Raiffeisenbanken grouped into eight regions, each with its own regional bank which the Raiffeisenbanken collectively own. Volksbanke are far smaller in number (41 instead of over 600) and have no intermediate regional structure. The Volksbanken and Raiffeisenbanken networks each has its own “central bank”, which provides liquidity and payments facilities. For the Volksbanken, that is Oesterreichische Volksbanken AG; for the Raiffeisenbanken, it is Raiffeisen Zentralbank Oesterreich AG.
It is at the “central bank” level that Austrian co-operative banking has gone wrong.
Oesterreichische Volksbanken AG (VBAG) was created in 1922 to provide clearing services and liquidity support for the Volksbanken. It was originally a co-operative, but in 1974 it was converted to a co-operative public limited company. In 1991 its “central bank” function was extended to allow it to act as a commercial bank in its own right. And in 1996 the German bank DZ Bank AG bought a 25% stake, apparently to improve “co-operation” between the Austrian and German co-operative banking systems.
How a foreign bank buying shares in a supposedly co-operative bank is consistent with co-operative principles is difficult to imagine. Cross-shareholdings should be a feature of joint stock ownership models, not co-operative models.
And that was when the rot set in. The following year, VBAG founded an international division which, it said, was “to streamline banking activities in central and eastern Europe (CEE) and deploy capital more effectively”.
The principle of localism had been abandoned. And the principle of self-help soon followed. In 1999 VBI became a joint stock company and was renamed Volksbanken International AG (VBI). Meanwhile, VBAG itself remained in majority ownership by the Volksbanken. A joint stock international bank owned by a co-operative … What could possibly go wrong?
Over the next decade, VBAG expanded its operations in CEE and acquired interests in insurance, corporate finance and public finance. By 2004 it had branches in eleven CEE countries and its balance sheet had been massively expanded with risky loans.
Raiffeisen Zentralbank Oesterreich AG (RZB) was created in 1927 to provide clearing and liquidity services to the Raiffeisenbanken, which collectively owned it. It was briefly nationalised in 1938 under German occupation, but restored to co-operative ownership in 1955. It remains 87% owned by the Raiffeisen regional banks.
RZB, too, expanded into CEE. Indeed it says it still regards CEE, along with Austria, as its “home territory”. The fall of the Iron Curtain encouraged both Raiffeisenbank and VBAG to re-establish old trading links with countries in the former Austro-Hungarian Empire and in the Balkans. But they did this not by establishing small local co-op banks to help rebuild local businesses, as Germany did after WWII, but by establishing branches and lending cross-border.
Then came the 2007-8 financial crisis. Although we think of this as primarily an American disaster, the crisis in fact caused bank failures all over Europe. Including VBAG.
VBAG was initially damaged by the failure of Austria’s infrastructure bank Kommunalkredit AG, in which VBAG had a 50.78% stake; the other principal shareholder was the Belgian/French bank Dexia. VBAG’s stake in Kommunalkredit AG was bought by the Austrian federal government in November 2008 for a symbolic €1, forcing VBAG to realise a loss of €420,000.
Dexia suffered a similar fate. But worse was to come. Central and Eastern Europe (CEE) was badly affected by the 2008 financial crisis. As investors spooked by the turmoil in the markets moved money to safe havens, several CEE countries slid into deep recession: the worst affected were Romania, Hungary and Latvia, all of which required EU/IMF assistance. Banks exposed to CEE suffered collapsing asset values and destruction of shareholder value. RZB at this stage did not suffer serious losses, but VBAG was badly hit in 2009, losing €1.1bn due to losses on CEE loans and real estate. It was bailed out by the Austrian federal government, which provided it with €1bn of subordinated debt.
Significant restructuring followed. In 2010, VBAG sold its troubled real estate arm Europolis to the Austrian real estate company CA Immobilien Anlagen AG. It also sold its 25% stake in Victoria Volksbank Versicherung to ERGO insurance. After considerable negotiations, most of VBAG’s CEE assets were sold to the Russian bank Sberbank in 2012 at a much reduced price, though VBAG’s loss-making Romanian arm was not included in the transaction.
Despite this, VBAG continued to make losses. In 2011 it lost €1.3bn due to write-downs on Greek debt and further losses on its CEE assets and in its corporate finance subsidiary Investkredit AG. VBAG received capital injections from both its Volksbanken owners and the Austrian federal government, which now owns 43% of its shares.
Since then, VBAG has reduced its asset base from €41.1bn to €15.9bn, an astonishing drop. But it is still insolvent. In May 2014, Moody’s downgraded VBAG to one notch above junk, and also took the unusual step of warning that the whole Volksbanken network – which Moody’s does not rate – would need more capital. But further support from the Austrian federal government was not forthcoming. In October 2014, pre-empting expected failure of the ECB/EBA stress tests, VBAG announced that it would go into voluntary liquidation, surrendering its banking licence and transferring to Volksbank Wien-Baden the clearing and liquidity services that it is required to provide to the Volksbanken.
So ends a beautiful dream of Eastern European dominance.
And it doesn’t stop there. The Volksbanken themselves will now be consolidated into eight regional co-operative banks, thus making better use of their limited capital – but perhaps losing their local distinctiveness.
But what of RZB? RZB survived the financial crisis apparently unscathed, only to suffer catastrophic losses more recently due to the Ukraine conflict and its spillover effects in CEE. If it had stuck to Raiffeisen’s principles, it would have been less exposed.
Raiffeisen’s principles are “Self-help, self-governance and self-responsibility”. Raiffeisenbank broke all of these in choosing to expand into CEE through branches and cross-border lending, rather than establishing small local banks as part of the Raiffeisenbanken network. And it paid a heavy price. VBAG, which also broke co-operative principles by running its international operations as a joint-stock company and acquiring stakes in non-co-operative insurance and investment companies, as well as expanding into CEE through cross-border lending and branching, paid with its life.
For me the message is clear. Abandoning co-operative principles is deadly for co-operative banks. Indeed, all banks would do better to adopt co-operative principles. It is abundantly clear that the co-op approach is more stable and resilient in a crisis: those “co-operative banks” that failed, such as the UK’s Co-op Bank and Austria’s VBAG, were those that had abandoned their co-operative principles in search of profits. We in the co-operative movement should be shouting this message from the rooftops. The safety and stability of the banking system lies in co-operation, not competition, and self-help, not commercial gain.
