Edited by Susan Watson and P. M. Vasudev
Chapter 9: Organizational form and financial stability: lessons from cooperative banks in the US and UK
One of the important lessons of the Global Financial Crisis (Crisis) was that cooperative banks proved considerably more resilient than corporate ones. Many observers have noted that cooperative banks were less prone to the risky practices that led to the Crisis, and attributed this to their organizational structure, which seemingly creates less incentive for profit maximization. This chapter investigates these observations from a legal perspective. It analyses the governing laws of cooperative banks in the US and the UK in order to explain how they may influence financial stability. In doing so, the chapter points out that many of the post-Crisis reforms are already embedded in the governance structure of cooperative banks. Specifically, cooperative banks in both countries face internal limits on growth and investment. More importantly, the cooperative model includes various disciplinary mechanisms to ensure that management acts in the best interests of the firm’s customers, who have little interest in profits. These include clear statutory purposes, democratic governance, fiduciary duties, strict conflict of interest rules, independent oversight committees and restrictions on compensation. Most of these features go much further, and address the profit motive more directly, than the post-Crisis reforms.
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