Home grown banks around the world

Home grown banks around the world

Following the launch of the Move your Money campaign to encourage people to switch to an ethical bank, Ed Mayo of Co-operatives UK explains how co-operative and mutual banks, building societies and credit unions are making a difference from Canada to the Caribbean.

The reason that banking is in crisis is because high street banks operate in the interests of their shareholders, not their customers. The positive alternative are co-operative and mutual banks, building societies and credit unions. These are owned by their customers, operate at more of a local level and stand or fall by how well they serve them.

At one level, we all need banks. Good banks have a helpful role to play in the economy, providing a place for our savings and a source of finance for those who can put it to good use. In simple terms, the money we put on deposit with a bank is the money that goes out in multiples of investment and loans and the bank makes money, to cover its costs, risks and profit, on the difference between what they pay savers and what they charge the borrowers. A good bank is one that treats its savers and its borrowers fairly and offers each a competitive rate.

When banks are owned by shareholders, though, there is always a pressure to put the interests of outside investors first, using depositors' money for example in more risky ways than they should or selling products that profit the bank at the expense of their customers. This is not new. It has long been recognised and is the reason why we have banking regulation - and indeed have had it for hundreds of years.

But over the last thirty years, banks have campaigned vigorously to cut back on regulation and they have created new financial products and accounting devices that sidestep regulators who have simply failed to keep up.

As a result, we have two twin scandals that stem directly from the way that banks are owned and run, as night follows day. The first is the scandal of failed loans packaged and sold between banks that brought on the credit crunch. The second, less well recognised perhaps, is the ongoing tally of consumer misselling, taking advantage of the fact that, compared to buying a toaster or even a car, it can be hard to judge the value of a financial product because it is complex and because it takes time to know.

There has been a drip, drip, drip of financial scandals from banks over recent decades, tracked by journalists, consumer campaigners and, in most cases, eventually the regulators. The best estimate we have of the total cost to UK consumers of these scandals (from misselling personal pensions and payment protection insurance through to punitive charges on current accounts and overdrafts) is £32 billion over the last five years - money which has gone straight from ordinary customers to banks' executives and shareholders. As one bank customer, over sixty, from Wales told the National Consumer Council some years ago ‘They offer you an umbrella when the sun shines but take it down when it’s raining’.

There is a different model though. Co-operative and mutual finance works on the basis that the bank - or building society or credit union, depending on the legal model - is owned by its customers. They are members and have the ultimate say in how things are run, for example by electing the Board. Following the co-operative principle of democracy in business, they operate on the basis of one member, one vote rather than one pound, one vote.

These include high street national names, such as the Co-operative Bank, and specialist local organisations, such as community development finance institutions which are operate explicitly to raise money to reinvest in the local economy. They include building societies, operating across Great Britain, often with a local focus, and, in Scotland, one remaining local trustee savings bank, run akin to a charity.

Over the last three decades, credit unions, first introduced to the UK by immigrant families coming in from the Caribbean, have also spread widely. Glasgow is the credit union capital of the UK, with one in five people who are members. Although not strictly a mutual after it was bought out by the Dutch bank, whose name it now bears, Triodos started in the UK as a co-operative and is owned by ethical investors. Other specialist ethical co-operatives and mutuals include Shared Interest, which invests in fair trade co-operatives overseas, and the Ecology Building Society, for green homes.

For co-operative and mutual banks, building societies and credit unions a combination of regulation or policies, in fact, limited their engagement in the kind of secondary market financial engineering that brought on the credit crunch. They have survived the crisis without government funding and they have outlasted all the former building societies that were privatised at the height of the economic orthodoxy that banks were best run for the benefit of shareholders. Every one of those building societies that demutualised has either failed or been bought up by other banks.

At the time of the credit crunch, the Dutch co-operative Rabobank was the only bank in the world with triple A rated status from both Moody's and Standard & Poor's. The UK's Co-operative Bank has been named the world's most sustainable bank by the FT, while The Banker magazine, in an attempt perhaps to rebrand itself, has awarded "Bank of the Year" prize to Desjardins, Canada's leading co-operative bank.

Co-operatives and mutuals are home-grown and they reinvest in their locality. They tend to act fairly, but they are not infallible, nor will they always, although their track record is good, offer the best deal. But over time, they are far better placed to operate democratically and responsibly, as the interest of their customers is the interest of their members. If you have your money in a shareholder-owned bank, you are always at risk of being part of the problem. Your money has been used in the recent past in a wholly destructive way and it will be again. If you have your current account or savings with a co-operative or mutual bank or credit union, your money is being used for good and you are part of the solution.