Meeting report
“Cooperative Banks Business Models Analysis – Systemic Risk and Institutional Governance”

Academic seminar Cooperative Banks Business Models Analysis – Systemic Risk and Institutional Governance at HEC Montréal

Time : 28 April 2016 – 10h00 to 12h00
Place : Groupe Deschênes Room, HEC Montréal

Following the recent publication of the International Research Centre on cooperative finance (IRCCF) “Banking Business Models Monitor Europe 2015“, an academic seminar was organized at HEC Montreal. Prof. Rym Ayadi held the presentation of the academic seminar on “Cooperative Banks Business Models Analysis” and opened the discussion with ten professors invited on “Business models in cooperative banking, institutional and systemic risk governance”.

Background of the work

Back in 2010, initial work led by Prof. Ayadi at the Center of European Policy Studies (CEPS) in Brussels about the excessive risk taking of financial institutions in Europe, aimed at identifying which business models in the European financial industry contributed most to systemic risk. Policy implications, in terms of the regulatory approach to the industry, were then spelled out. It transpired that financial cooperatives perform better and are far less risky than other financial institutions throughout the business cycle. They appeared less threatening to financial stability than, for example, commercial banks. A defining feature of cooperative banks is that they are stakeholder value institutions, maximizing benefits to their members or pursuing other social objectives, as opposed to shareholder value banks that maximize return on equity.

At IRCCF, those initial studies have been updated and improved in the Banking Business Models Monitors (BBMM) of 2014 and 2015 for Europe. Ongoing extension to this research in the U.S. and Canada points to some differences in the type of activities, governance and organizational structure. A few research questions that have been put forward for discussion are:

• What makes financial cooperatives different from other types of banking institutions?
• Should they be subject to different regulation compared to the other types of banking institutions?
• What are their characteristics (for instance, institutional governance) that can shed light on their contribution to systemic risk and their impact on systemic stability?


Presentation of the Banking Business Model Monitor 2015 Europe

Rym Ayadi at Academic seminar Cooperative Banks Business Models Analysis – Systemic Risk and Institutional Governance at HEC MontréalOur framework of analysis is unique and is a departure from previous attempts to document how the breakdown of bank income has been analyzed. It builds on a behavioral approach that features the assets and liabilities of banking institutions. More precisely, it considers their activities and their funding and whether they are retail or market oriented. It is a data-driven approach, marked by a clustering methodology that looks into the underlying business model structures, without assumptions or restrictions on the data. Our activity-funding approach has recently been adopted by the European Central Bank for their supervisory review process.

The BBMM 2015 Europe uses 13,040 bank-year observations corresponding to more than 2,500 banks, covering 95% of assets of the European Economic Area (EEA) and Switzerland from 2005 to 2014. The instruments used are: bank loans, bank liabilities, customer deposits, trading assets and other activities (derivatives). Five business models are identified: i) focused retail, ii) diversified retail type 1, iii) diversified retail type 2, iv) wholesale and v) investment. The framework of analysis starts with the ownership structure of the banks, which can be broadly classified into two categories: on one hand, commercial and nationalized banks as shareholder banks and, on the other hand, cooperative, public and savings banks as stakeholder banks. Seven dimensions of the business models/ownership structures have been analyzed: migration, internationalization, financial performance, contribution to the real economy, risk, resilience and robustness.

Cooperative banks account for 41% of the sample. The other ownership structures that are well represented are commercial banks (28%) and savings banks (26%). Public banks and nationalized banks have much smaller shares, namely 3% and 2%. The breakdown by business model shows that focused retail banks account for 30% of the observations, while diversified retail type 1 and diversified retail type 2 represent 39% and 15% of the observations. The remaining business models account for 16% (7% for wholesale and 9% for investment banks). However, as a share of total assets, investment banks represent 25% of the sample. Over the ten-year period from 2005 to 2014, migration rates across business models vary between 10 and 20% of the bank-year observations in the sample.

“Unlike in the U.S., cooperative banks are subject to the same regulation as other banks in the EEA and Switzerland, […] which is tantamount to a one-size-fits-all approach.”

Ownership across business models show the predominance of cooperative banks among the retail type banks, with respective shares of 39%, 49% and 45 % of focused retail, diversified retail type 1 and diversified retail type 2. Among investment banks, 24% are cooperatives. The lowest share of cooperatives, 11%, is found in the wholesale business model. These are usually central institutions serving their members. Unlike in the U.S., cooperative banks are subject to the same regulation as other banks in the EEA and Switzerland, with very little flexibility allowed, which is tantamount to a one-size-fits-all approach.

As regards to financial performance, wholesale and investment banks have been severely affected by the financial crisis, whereas the retail-oriented banks have been worst hit in the economic crisis. Cooperative banks have weathered the financial crisis more successfully than the economic crisis. In our study, contribution to the real economy has been assessed by the growth of outstanding customer loans to the non-financial sector. The time profile shows that cooperative banks have maintained loans to the economy through the financial crisis and the economic crisis, though at a slower pace for the latter. The data on loss provisions for Europe shows that cooperative banks suffered moderate loan losses. This explanation has more to do with their business models. Indeed, as mentioned, the diversified retail types 1 and 2 business models are predominantly cooperatives.

“Retail oriented banks, among which cooperative banks are well represented, contribute less to the accumulation of risks and are more resilient to extreme shocks.”

Looking at the distance to default, cooperative banks are far from default, as a result of low leverage combined with low volatility in earnings. CDS spreads that convey the perception of risk by the market, suggest that cooperative banks are risky. Indeed, it seems market perception is more aligned with the regulator than the real economic value. Similar conclusions arise from the comparison of Tier 1 capital ratios, the denominator of which is the risk-weighted assets. The literature on capital requirements has fully documented the manipulative approach that large banks have engineered in respect of this regulatory indicator. To ensure that there is an alignment of the risk profile of the bank and the risk-weighted assets, this metric has to be complemented by the leverage ratio.

Finally, tail-loss estimates imply that commercial and nationalized banks are much less resistant to extremes stress conditions, as opposed to cooperatives and savings banks.

In short, while performing financially, investment banks and wholesale banks tend to accelerate the accumulation of risk at the system level and are less resilient to extreme stress conditions. Retail-oriented banks, among which cooperative banks are well represented, contribute less to the accumulation of risks and are more resilient to extreme shocks. A variety of business models provides diversity in the banking system. A diverse banking system is seemingly more resilient than a system that is converging toward one single business model.


Academic seminar Cooperative Banks Business Models Analysis – Systemic Risk and Institutional Governance at HEC Montréal

Data limitations have been one of the main concerns of those involved in discussion on the subject. Because of the data-driven nature of the methodology, more data granularity is needed. The BBMM 2015 Europe identified five (5) business models resulting from some improvement in the data from the initial screening in 2010, where three (3) business models were elicited. Some key interesting variables are missing from the data: the current SNL database lacks information on non-performing loans for Europe. Also, no breakdown of customer loans into loans to consumers, SMEs or large companies is available. Furthermore, some countries can be overrepresented in the database, as are Italian and German cooperative banks in the BBMM 2015.

Despite recent progress towards a banking union, the single market is not yet effective for banking activities. While the single passport for banks allows them to operate across the European Economic Area, qualitative data can help towards a better understanding of how effective they can be in assessing their risks according to the regions or countries where they have new branches. A textual analysis of knowledge can help to link business strategies to regions.

One of the ways they can stay competitive is to keep a core activity sector while expanding, as illustrated by Rabobank, which has focused on the agro-business in their internationalization strategy. Some aspects of institutional governance can be imposed by regulators, like in Canada, where the Bank of Canada has decreed that boards should recruit administrators who have a good knowledge of the core sectors in which banks are investing.

The bail-in mechanisms that are being set up in Europe and Canada have been of concern to those involved in the discussions, especially in relation to the way they can be applied to cooperatives. Those mechanisms place responsibility upon financial institutions to issue debt that can be converted into regulatory capital when the issuing bank is under stress. They agree that the first conceptual issue in the case of cooperatives, like Desjardins, is the definition of the capital and liability. This issue is compounded in Europe by the fact that some cooperatives have been internationalized by takeovers and become hybrid.

The following topics have been identified as potential areas of further research:

  • Cooperatives and business models: this work has already started at IRCCF.
  • Nationalized banks and business models: some nationalized banks were cooperatives.
  • Determinants of migration: this work is ongoing.
  • Banking business models and innovation: qualitative aspects. The Institute is already undertaking a survey to collect the relevant data.
  • The country effect on business models. This work is ongoing.
  • Contribution of business models to the accumulation of risk: macro and micro-prudential policy implications.
  • Governance, executive compensation and banking business models (possibility to use the Boardex database).
  • Competition and stability in the banking sector.
  • Diversity versus homogeneity of business models and ownership structures in banking.
  • Financial inclusion and business models.


More information


Rym Ayadi, Professor, Department of International Business, and Director of the International Research Center on Cooperative Finance (IRCCF) at HEC Montréal


• François Bellavance, Professor, Department of Decision Sciences, HEC Montréal
• Gilles Caporosi, Professor, Department of Decision Sciences, HEC Montréal
• Ann Langley, Professor, Department of International Business, HEC Montréal
• Aude Le Cottier, Professor, Department of Finance, HEC Montréal
• Jacques Lemay, Professor, Department of Finance, HEC Montréal
• Jacques Robert, Professor, Department of Information Technologies, HEC Montréal
• Jean Roy, Professor, Department of Finance, HEC Montréal
• Bernard Sainclair-Desgagné, Professor, Department of International Business, HEC Montréal
• Benoit Tremblay, Professor Emeritus, HEC Montréal

Institute Team: Ibtihel Sassi, Michel Keoula, Jorge Ruiz, Nabila Ouchène, Clélia Cépède.

Useful links

Study – Banking Business Models Monitor 2015 Europe
Study – Banking Business Models Monitor 2014 Europe