This document has been made available in electronic format by the International Co-operative Alliance (ICA) 

Speaker Etienne Pflimlin (1998)

March, 1998
(Source: Studies and Reports. Thirty-first in the series
The Impact of the European Union’s Enlargement on Co-operatives. Papers presented at a seminar held in Prague 3-4 November 1997,  p. 26-45)

Since 1977, which is the date of the first directive for the co-ordination of banking legislation aimed at organising the “ banking market ” at the level of the European Community, Crédit Mutuel has changed. The impact of its integration into the European banking community has been an essential factor of these changes:

Tax impact: Crédit Mutuel has been subject to general tax rules since 1980 and is currently one of the 20 largest French taxpayers. Since that time, without mobilising outside funding but through reliance on its members and non distributed accumulated earnings, Crédit Mutuel has multiplied its equity by twelve.

Legal impact: until 1984, Crédit Mutuel was governed by a specific statute. Since that time, Crédit Mutuel has become part of the banking community and is subject to the same rules and controls as commercial banks. It is now the fifth banking group according to the amount of the deposits under management.

Commercial impact: until 1985, the French co-operative banking sector was specialised:

Today, Crédit Mutuel has become the second banker for agriculture, after Crédit Agricole, and the first bank for retailers regarding credit card payments at sales points, the first operator in terms of banking insurance for fire, car insurance, and miscellaneous risk (non-life insurance).

This brief description illustrates the main idea of this statement:

Europe is an opportunity for those who are able to seize it without losing their identity. While Crédit Mutuel has impressive growth rates and gains in market share, this performance is also experienced by most co-operative banking institutions of the European Union which, for 15 years, have been advancing steadily and have scored points against commercial banks, their competitors, in all fields of activity, including successful implementation of new technologies.
What is the difference between co-operative banks on the one hand and commercial banks on the other?

The reply is in their organisation and their purpose: in a sense, the difference is to be found in the soul which their members are giving them.

It is unlikely that Europe will pose a threat to this internal wealth. Conversely, our co-operative organisation is called upon to play a significant role.

Banking co-operatives must be able to exist. The European Union allows them to exist. The fact that your countries will belong to the European Union in the future protects your existence against advocates of ultra-liberalism who only see the world though the single model of joint-stock companies. This statement will be focused on two points:

I By recognising the right of financial co-operatives to be different, the European Union recognises their right to exist.

II However only the members of co-operatives are responsible for giving an identity to their organisation and fully using this ability to exist.

I.   This right to a different and specific existence of financial co-operatives has been built gradually as the European Union has been developing its own legal environment. Today, this right has a meaning which is obvious for people who can read the directives* (* The list of texts is provided under Appendix 1.) applicable to the banking sector.

Why should co-operative financial institutions be different?

Before the European Union was established, the following co-operative institutions already existed:

The European Union could not run counter to this movement which represented several tens of millions of consumers. It was also impossible to ignore this diverse group of organisations  which were organised in Brussels within a European Association of Co-operative Banks. While sharing major values of responsibility, solidarity and freedom of organisation, each movement has its distinctive features which it tries to maintain. This is why the co-operative banking movement of the European Union is very diverse. This diversity is authorised by the Union’s operating mode which relies on two major principles in particular: The first consequence for the co-operatives of the Member States: Europe does not mean uniformity nor a single model for the mode of organisation of co-operative banks, but rather implies free competition among all providers of banking services, whether co-operative or not.

As an example, we may cite Irish and British credit unions and building societies which in 1977 refused to accept community rules. They obtained a derogation which means that they may only expand in their respective territories. Today, some of these institutions are pondering over their future in the European environment. However those institutions which managed to survive have used the last 20 years to engineer their own development.

Will Polish credit unions ask to remain governed by a specific legislation? Will the Polish central bank and the European Commission accept such a move? The question remains open, but deserves to be examined in the light of the Irish and British experiences.

This diversity should not be an obstacle to the implementation of basic Community rules which apply to all players, regardless of their mode of organisation.

In the field of savings management and credit, these rules all have one objective: to ensure the safety of depositors through improved awareness and control of banking risks while allowing for the integration of activity within a single market.

This is why directives issued in the field of banking services are organised around three main priorities:

In each of these fields, financial co-operatives have been able to have their specific features taken into account.

Recognising specific features

From a legal point of view, this recognition is reflected either in specific measures or in derogations accompanied by specific constraints:

In respect of specific measures, it is necessary to mention:

This flexibility was introduced at the request of Rabobank which is using it. If savings and credit co-operatives of countries entering the Union wish to make use of this, they must obtain the agreement of their central banks. These co-operatives must convince their supervisory authorities of the solidity of the solidarity bonds that unite them: this is now their challenge. This principle induces strong structures and has led to the taking of specific measures in the accounting directives for the monitoring of major risks.

This principle is applied in the Netherlands, in France by Crédit Mutuel and Crédit Agricole at the regional level, by Banques Populaires with its mutual guarantee companies, and recently in Austria, Spain and Portugal. This principle has been integrated into Polish law and enables independent co-operative banks from the State co-operative network to maintain their independence if they equip themselves with the necessary commercial and financial resources: again this is now their challenge.

Regarding derogations accompanied by specific constraints, there are now two:

Within emerging co-operative movements or within movements that are being restructured, this measure must be enforced cautiously since it involves great financial solidity and control of the management of financial, commercial and technological risks. Such control may only be gained through experience. For instance in Poland, the law requires that the independent  co-operative network becomes a member of the market system. By so doing, the network has been able to receive the restructuring subsidies granted by the central bank. Conversely, the Hungarian banking co-operative network has created its own system which is however largely endowed by the State. These solutions are likely to be assessed by DG XV of the Commission. These movements are responsible for ensuring the lasting validity of the options they have chosen. Indeed, nothing should keep a central bank from an Agenda 2000 country from using this special measure, which should however be seen as a derogation. This is only meaningful if the co-operative which uses such a derogation is able to set off this lack of equity by rigorous management which inspires confidence and by dynamism which will enable the co-operative to become later a fully-fledged financial co-operative institution.

Thanks to this derogation, Hungarian co-operative banks should be able to find their own place in the European Union without any great difficulty, with the support of their central institution and the support of DG Bank, their German partner.

However these requests for derogations and adaptations may only succeed if these specific measures are set off by the co-operative spirit i.e. rigorous management, democratic control and, foremost, actual members’ involvement in the determination of the development strategy.

II. Only the members of co-ops are responsible for giving an identity to their organisation and fully using its ability to exist.

Members’ involvement in their banking co-operative is a key element. This is the best defence against competitors who will try to invade these emerging markets. This involvement is a prerequisite for the success of the technical assistance programmes proposed by co-operative movements such as Crédit Mutuel, Rabobank, DGRV, Crédit Agricole, Banques Populaires and a few other banks. It is not only because one of these institutions has provided the recipe for its organisation that a project is likely to succeed. This is like baking a cake: the know-how and the secrets of the pastry cook and his true identity will always be the most needed ingredients.

A co-operative bank, a network of savings and credit co-operatives, is built from the bottom up. Chances for success rely mostly on the will of the persons who may call upon the co-operative’s services and make joint efforts to obtain the best credit rates and financial services.

These specific efforts are: joint and several responsibility, equity, savings. They are reflected in the definition and implementation of an effective democratic control, the allocation of earnings to a reserve account and the involvement of members.


European legislation sets forth strict rules for the control of banking activities. These rules are to be applied in financial co-operatives. Besides this technical control which is carried out by institutions that are external to the co-operative, it is fundamental for organising control of the adequacy between resources and the approved objective (access to banking services to ensure the member’s economic and social interests) and the means used. This is the purpose of democratic control by members. This is the mandate of the elected representative appointed by the members.

The elected representative promotes the interests of the members. Through its control, the representative ensures that the profit serves the members, and not conversely. This control is carried out in respect of three aspects: technical control, political control and strategic control.

For instance, at Crédit Mutuel, the organisational line of command for strategic and political control starts with local banks and continues with regional Federations and the national Confederation, through two principles:

From the inception of the Raiffeisen co-operative movements, strategic control has been carried out by the member. This control bears on decisions that involve the future of the community, and not on day-to-day management issues. It is strategic in nature and related to key decisions.  At the national and regional levels, this control applies for instance to the development strategy, commercial policy, financial policy and diversification.

In emerging organisations, the joint and several responsibility of borrowers is a major element guaranteeing the strategic control by elected representatives. Of course, our organisations have standard forms of articles of association and financial regulations which may be sent upon request. Nevertheless, only promoters of the projects may assess the individual and collective risk  which they are ready to take for the development of the co-operative. If a joint and several commitment is lacking or insufficient, the co-operative will be obliged to look for external equity and will lose its very nature.

Technical control is related to the adequacy between resources and the objective. This control is most often carried out by professional controllers with a technical expertise. Whether carried out internally  through internal control procedures or by an external body (such as a statutory auditor), this check leads to a diagnosis and conclusions which the representative must know and interpret in respect of the overall project and approved targets. This interpretation is essential, since it is the only check to the power which the technostructure has in the bank.

Two recommendations seem necessary at this level: to protect the independence of technical checks against management and to disseminate the main conclusions of the checks in clear language to the broadest group of parties concerned, i.e. the members.

At Crédit Mutuel:

Political control is carried out through the statutory bodies (shareholders’ meeting, board of directors). To be effective, this process must be organised and its organisation must be controlled. It is essential to create written rules to organise expression and formal democracy and to include compliance with these rules in the scope of the technical control function.

In view of Crédit Mutuel’s experience, we must note the importance of clearly defined rules to ensure that elected representatives are able to make decisions notwithstanding the influence of the technical staff:

However, it is clear that these mechanisms are effective only if elected representatives and employees feel responsible and involved in the life of the company, its prospects and its performance.

To that effect, two key terms have to be borne in mind: training and active dedication. Training may be acquired, and active dedication can become part of daily life provided that members are convinced of the relevance of the co-operative project and are committed to its success.

It is particularly necessary to insist on this point, since members/clients will not be seduced by competition if they are convinced that the financial co-operative is a tool serving only their needs and that they control the major orientations of the co-operative’s future. Subject to this condition also, they will accept making the required financial efforts to contribute the minimum capital necessary to the creation of the co-operative, and renounce the remuneration of this contribution to have it serve common goals and to enhance the competitiveness of services offered.

Only subject to these conditions will they accept making a commitment in respect of equity.


In any company, equity plays an essential role, expressing its degree of independence from the market and its ability to withstand the ups and downs resulting from operating conditions and structural changes which may lead to cyclical losses and threaten its survival, but also require heavy investments.

At the very centre of equity, in a co-operative business, capital represents an ownership right (i.e. the confidence) which the member grants to the community to achieve the common project. This is why traditionally beyond the ownership right which is represented by the purchase of a member’s share, the capital of a co-operative company relies on three elements:

a)  The member’s commitment: this has already been mentioned but it is necessary to emphasise its symbolical value

b)  The member’s shares subscribed in cash: generally in Western European financial co-operatives, this member share is most often subscribed without any real awareness of its meaning and plays a limited role in the equity structure of co-operative banks which is dominated by retained earnings.

In recently created or emerging co-operatives, due to the prudential rules promulgated at the European level and assuming that the return generated allows for covering exclusively banking risks and requirements regarding additional investments, the minimum capital which any new borrower must subscribe must be 8% of the credit which is applied for, unless it is agreed that the members’ joint and several undertaking will be taken into account. This brings us back to the item which we analysed above.

This amount may seem out of reach. This is true if we reason in an environment where the offer of credit is over-abundant. On the local community market of financial co-operatives in Agenda 2000 countries, only a few companies will be able to access this “ Europeanised ” market. Non-local banks must in fact adapt their tools for assessing commercial risks. This effort is expensive and their profitability is therefore not guaranteed.

This time must be used by local co-operative organisations in order to learn the techniques and to adapt them to their local market - which is paradoxically broader than the market covered by European competition - or, by allocating to their reserves the profits generated by better risk management, to reduce the constraints regarding capital contributions to be made by members.

It is necessary to avoid aiming at the wrong target: the vocation of the financial co-operative is primarily its local market, and financial co-operatives must grow with this market.

c) Allocating earnings to common resources: this approach is the specificity and strength of financial co-operatives. More than 50% of Crédit Mutuel’s equity comes from these reserves.

These reserves are indivisible and may not be added to the share capital or distributed to members during the existence of the company and on its termination. They are owned by the co-operative company for its own account which therefore has its own patrimony, contrary to commercial companies which have a patrimony for the account of each of their shareholders, each of which has an ownership right on net assets at any time.

This co-operative patrimony serves as the basis for co-operative banks’ independence vis-à-vis the market, since their reserves are outside of the market. This specificity which was confirmed last year by the statement on co-operative identity approved by ICA’s conference in 1995 in Manchester, is challenged by advocates of ultra-liberalism. These specific features are enshrined in the legislation of the member states: this specific identity depends therefore on each of the co-operative movements, and the European Union may not alter it.

Beyond their legal basis, the necessary condition for the creation of these reserves is the profitability of banking activity, i.e. at the same time, an effective organisation, far-reaching risk control and a proper response to the market and its changes.

Is this a virtuous cycle? It reflects the commitment of members involved in their financial co-operative since it meets their requirements.


This notion refers to members’ involvement in the life of their financial co-operative but also to the financial co-operative’s involvement in the members’ lives. In this field, as in all others, there is no miracle recipe. Each movement must find its own answers.

To illustrate this point, we shall describe briefly the example of Crédit Mutuel members’ involvement in their financial co-operatives and Crédit Mutuel’s involvement in the life of its members.

1.  Crédit Mutuel’s members participate in the life of their group. This involvement is measured both by participation in decision-making bodies and in the control of the local bank and by the commercial relation between the member and its local bank.

In addition to statutory obligations, general meetings provide an opportunity for introducing the co-operative and mutualist report of the bank and for organising an educational and thematic discussion (euro, banking insurance, solidarity, etc.).

The 28,000 elected representatives meet as many times as necessary.

The board prepares the financial statements and the balance sheet and is responsible for the proper operation of the local bank. The board meets on average once a month.

The supervisory board is responsible for verifying the accounting and the financial statements and reporting to the general meeting. Through its supervision, the supervisory board contributes to the proper operation of the local bank. The supervisory board meets at least twice a year.

Members of the board of local banks appoint among themselves representatives to the meeting of the regional federation which meets annually to approve financial statements and to elect the members of the regional banks’ boards.

Members of the board of regional banks appoint among themselves representatives to the meeting of the national federation which meets annually to approve financial statements and to elect the members of the management board and the National Chairman for a term of five years.

For Crédit Mutuel this means 20,000 board meetings per year and 20 general meetings of members. All of this creates a group spirit and a specific corporate relation which is envied by commercial banks. This participation challenge does not depend on the European Union. Much to the contrary, it depends on each of us: we have to avail ourselves of the necessary resources.

The commercial relation is evaluated technically by the degree of equipment of a member with banking products and services supplied by the co-operative:

a.  if a co-operative bank observes that its members deposit their savings with another institution, it has a reason to be concerned: do members distrust solidarity? Is its remuneration out of line with the market? Is the member attracted by a higher rate of return which is incompatible with sound management (as happened in the Albanian pyramid-scheme savings funds)?
b.  and the co-operative bank may react: review of the loan portfolio, information and explanation meeting with members. Members may have information which the co-operative has not received. The co-operative bank must anticipate the environment’s reactions.

2. Crédit Mutuel is involved in the life of its members not only by supplying the financial services which they are entitled to expect  like any other bank, but also:

These actions, within and outside Crédit Mutuel, root the financial co-operative firmly in community life, in a close relation with its environment and enable Crédit Mutuel to offer personalised services which no foreign bank, powerful though it may be in terms of share capital, will be able to provide with such adaptation to local requirements.

Within 5 to 10 years, the European integration of the States of Agenda 2000 will bring about uniform behaviour. However until then the local market will be wide open for co-operatives which are able to listen to their clients and anticipate needs expressed locally, i.e. to be involved in the lives of their members and to mobilise them.

A provisional conclusion

Recent examples of failure of foreign banks which wanted to set up operations in France in the retail banking or community banking segments lead me to believe that these markets will remain local as long as co-operative banks will be there to serve them. Indeed, co-operative banks perform better than impersonal mass-market banks, provided that they are able to monitor two risks:

Because the European Union recognises financial co-operatives and, under the pressure of Western co-operatives, has adapted its regulations to take their specific features into account, and because one of the criteria for admission of countries applying for membership is respect for democracy and the rule of law, your financial co-operatives have all necessary objective reasons to be capable of further development.

They may be able to gather the necessary resources if they mobilise their members. They must gather the necessary resources since their future is our future.

The European Union may not become a reason for success nor a cause for failure. Only the member-client has the key to our future. This is why we are here with you, so that we may all act jointly.

Etienne Pflimlin
President of Crédit Mutuel, France
Member of ICA Board, Member of the ICA European Council
President of the European Committee of the International
Co-operative Banking Association


Appendix 1
European Community Directives Concerning Credit Institutions  as of 31 Dec.1996.
Specific features of co-operatives are taken into account in the following  provisions:

It would be logical that national banking regulations from Central and Eastern European Countries incorporate these advances of Community banking law which recognise specific co-operative features.