Alternative Banking and Financial Crisis
eBook - ePub

Alternative Banking and Financial Crisis

Kurt von Mettenheim, Olivier Butzbach, Kurt von Mettenheim, Olivier Butzbach

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eBook - ePub

Alternative Banking and Financial Crisis

Kurt von Mettenheim, Olivier Butzbach, Kurt von Mettenheim, Olivier Butzbach

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About This Book

The recent banking crisis has brought into question the business model used by most large banks. This collection of essays explores the success of 'alternative banks' – savings banks, cooperative banks and development banks, using case studies from around the world and discussion of both the historical and theoretical context of banking practices.

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Information

Publisher
Routledge
Year
2015
ISBN
9781317318637
Edition
1
1 ALTERNATIVE BANKING HISTORY
Kurt von Mettenheim and Olivier Butzbach
Alternative banks with social missions were founded alongside private commercial and merchant banks very early in European history. Religious orders founded savings and pawn banks throughout Italy in the fourteenth and fifteenth centuries that were often consolidated into large institutions such as the Bank of Naples in 1463. Savings banks emerged throughout Northern Europe in the late eighteenth and early nineteenth centuries. Credit cooperative were founded to avert hunger after crop failures and crisis in the late 1840s. Development banks were founded across continental Europe during the nineteenth century to accelerate industrialization and finance infrastructure. Alternative banks rapidly attained large market shares and created unique organizational structures and governance traditions to manage risk and sustain profit while serving social, political and public policy missions. This chapter reviews the historical development of competitive advantage (stakeholder governance, two-tier organizational structures, long-term profit sustainability orientations, relationship banking, greater trust, lower cost of capital) to help explain how alternative banks, where they were not privatized or demutualized, modernized to maintain or expand market shares since the liberalization of banking in the 1990s and the financial crisis in 2008.
The structure of this chapter is as follows. First, antecedents to alternative banking are reviewed in ancient Roman financial statecraft, early Christian fund management, and social and pawn banking in medieval and early modern times. Second, we explore the early history of savings banks in two periods. The first is the consolidation of savings and pawn foundations of religious orders into the first savings banks such as the Monti di Pieta in Naples (1463) and, by grant from the republic of Siena, the Monte dei Paschi di Siena (1472). The second period is that of the founding of savings banks throughout Northern Europe in the late eighteenth and early nineteenth centuries. We then turn to the creation of credit cooperatives across Europe, beginning in responses to crop failures in 1845–6 and the 1848 economic crisis.
The fourth section examines the crowding out of savings banks and cooperative banks by postal banks that were created by central governments in the latter nineteenth century. Official postal savings banks grew rapidly through the use of postal branch office networks and served as a new channel for central government finance that bypassed parliaments. The final section reviews the emergence of development banks (special purpose banks) in France, Germany and other late developing nations as central agents for industrialization.
A historical perspective indicates how alternative banks developed specific organizational solutions to agency risks, transaction costs, liability risk and other matters at the core of banking. Savings banks emerged with strong roots in local communities, political movements and public agencies. Cooperative banks were created by the Raiffeisen and Schulze-Delitzsch social and religious movements. Savings banks and credit cooperatives thereby acquired powerful competitive advantages in terms of retail networks and relational banking in local communities. Independent local savings banks and cooperative banks then created a second tier of shared joint operations for giro payments and other wholesale banking services to reduce costs, achieve economies of scale and manage risks.1 The social missions of savings banks and cooperative banks also sustained socially oriented corporate cultures and long-term profit sustainability orientations that helped to manage risks and avert losses in capital markets.
The lean organizational structure of development banks created by continental European governments provided a different competitive advantage. Without expensive branch office networks or large staff and operational costs, and with cheap access to official savings or other capital at low or zero cost, special purpose banks were able to direct credit to strategic economic sectors at below market rates, a powerful comparative advantage for continental European policymakers and governments.2 Special purpose banks reduced the cost of policies for governments and helped alleviate fiscal constraints.
Four groups of theories about alternative banking history inform this chapter. The first is social economy. For theories of social economy, savings banks and cooperative banks were founded to help poor farmers and urban residents not served by private and commercial banks. Special purpose banks were founded as agents of national or regional development and financiers of public policy. Alternative banks therefore differ fundamentally from joint-stock private banks. The missions, governance and performance of alternative banks are not designed to maximize profits. They are designed to assist those excluded from banking. From the perspective of social economy, savings banks and cooperative banks should therefore be evaluated by the degree to which they help excluded groups accumulate savings and obtain credit, finance and banking services. Special purpose banks should be evaluated by how they contribute to development.
In terms of history, theories of social banking mirror Polanyi’s focus on social reactions of self-defence against free markets.3 Polanyi describes how British policies in the 1830s (enclosures, the poor law and free banking) overturned traditional institutions to transform land, labour and money into commodities for free exchange. His argument about social reactions of self-defence in the latter nineteenth century is of special interest. Polanyi describes how agricultural tariffs, labour unions and central banks were social reactions of self-defence against the imposition of markets in the late nineteenth century, especially after the 1873 depression. Polanyi did not refer to alternative banks. However, savings banks and cooperative banks also were social reactions of self-defence against markets, albeit earlier than the late nineteenth century. The dates differ. However, Polanyi’s argument about social economy holds. Savings banks and cooperative banks were founded as reactions of social self-defence in the late eighteenth and early nineteenth centuries.
The second theory about alternative banks is that of political capture. Savings banks and cooperative banks were founded with social missions. However, once these institutions obtained substantial market shares of banking, their liabilities and assets, policies and investment capacity attracted the attention of monarchs and politicians. Italian savings and pawn banks were used in the eighteenth century to finance war and defeat revolutions. Postal banks were used in the 1890s and 1900s to finance imperialism and war. Savings banks and cooperative banks helped mobilize savings to purchase government bonds and finance World Wars I and II. In the 1920s and 1930s, fascist and falangist movements and governments took over cooperative banks and savings banks. Political capture haunts the history of alternative banks. However, the worst abuses occurred because of nationalism, xenophobia, fascism and war rather than democracy.
A third group of theories about alternative banks comes from banking theory proper. Banking theory clarifies how alternative banks must perform adequately as banks to realize their social and public policy missions. Banking theory often provides powerful micro-explanations for why alternative banks succeed or fail. Fundamentals from banking theory about asset and liability management, corporate governance, balance sheet mismatch, credit portfolios and liquidity risk therefore inform this chapter. Further concepts about agency costs, transaction costs and bank governance also help describe why alternative banks, as banks, have often proved superior to private commercial and investment banks.
Fourth, emphasis on the institutional foundations of competitive advantage in comparative political economy extends the analysis beyond banks to describe how broader social, political and public policy settings are critical for alternative banks. To date, most research in this approach of new institutionalism has focused on firms, not banks. Nonetheless, concepts and theories about institutional foundations and firms help explain how savings banks, cooperative banks and special purpose banks have realized competitive advantages over private banks. Because of the greater trust of clients, consumers and depositors, alternative banks are able to manage liability risk and avert runs on deposits better than private banks. Because of their presence in social and political networks and government policymaking, alternative banks retain powerful competitive advantages in relational and retail banking. The small central offices of special purpose banks provide cost advantages over private banks with large bureaucracies and branch office networks. And while savings banks and cooperative banks remain independent local and regional banks, they reduce costs, achieve scale and improve control of risks and management by sharing wholesale operations.
Four theories about alternative banking help explain the diverse and complex phenomena encountered in the histories of these institutions. However, before turning to savings banks, cooperative banks and special purpose banks, a look back at antecedents of social and public banking is in order.
Credit and Banking in Ancient Greece and Rome
A brief consideration of banking and credit in ancient Greece and Rome clarifies the classical references for the social missions and structures of alternative banks that emerged in the late medieval and early modern periods. Classical studies also focus almost exclusively on private banking. Nonetheless, evidence of the social and political character of banking and credit appears in primary and secondary sources on ancient Rome and the early Christian church.4 Observations from Plutarch and Tertullian on financial statecraft, and Sallust and Livy on the abolition of debt bondage, suggest that the economics of banking and credit relations were understood by the classics.5 However, credit, banking and finance were also considered as political and social phenomena and objects of financial statecraft. Early Christians also ran savings and pawn banks far earlier than standard histories of banking suggest. Alternative banking can thus trace traditions, policies and practices back to Roman financial statecraft and early Christian charity and savings banks.
Evidence is tangential from ancient Greece. Indeed, for Plato,6 credit in the sense of formal agreements to transfer property rights for money or goods was abhorrent because it implied a lack of trust. Hesiod refers to loans of seeds and implements by peasants,7 while Theophratus describes lending of small sums and household objects by city dwellers.8 Demosthenes mentions borrowing by citizens to cope with bad times and crises. Aristophenes9 and Plutarch10 refer to substantial cash loans between the wealthy to support elite lifestyles. Standard accounts of ancient economic history suggested that banking was unimportant in ancient Greece and Athens.11 However, recent research has reversed this view to suggest that private banking was indeed central for commerce and trade. Remarkably, Cohen justifies this focus by stating that private banks were not ‘merely pawnbrokers’.12 This begs the question of how pawnbrokers (a precursor of alternative banking) were, in fact, organized in ancient times.
In a broader sense, debt is central to classic and contemporary accounts of change in ancient society. From the Solonic crisis in Athens through late antiquity, creditors and debtors were often critical social groups that decided the fate of sieges and/or revolutions. Few events are cited more often in Athenian history than Solon’s abolition of debt peonage and imprisonment. The Roman Lex Petelia de Nexis (326 bc) also prohibited imprisonment for debt. The debts of elites in ancient Rome are also widely cited as causes of crises and conspiracies. The debt crisis of 49 bc on the eve of civil war and the Catiline revolution-conspiracy are perhaps the most important examples. Debates about abusive interest rates also pervade Roman sources.
The political and social economy of debt was also central to classical policy. Accounts of Roman financial statecraft describe imperial management of debts and interest payments as matters of politics and social economy. For example, Plutarch praises Lucullus for policies adopted in near Asian cities that radically intervened to ‘haircut’ accumulated debts.13 In ancient Rome, unless controlled, interest rates and debts may alter the legitimacy of imperial governance and the social fabric of cities. Imperial financial statecraft is thereby reference and antecedent for alternative banking and money management, a tradition that balances understanding of money and markets with understanding of political imperatives and social context. However, the most important antecedent of alternative banking in ancient societies is the emergence of savings banks as part of charitable organizations in the early Christian church.
Christian Charity and Savings Banks in th...

Table of contents