Raiffeisen report raises questions for Europe’s co-operatives

Raiffeisen delegates had a lot to talk about at a meeting in June in Lugano. Keystone

In his 16 years as chief executive of Switzerland’s Raiffeisen group, Pierin Vincenz aggressively expanded the country’s third-largest bank by assets. 

A network of local co-operative banks, Raiffeisen is the biggest mortgage lender in the affluent Alpine state, where house prices scaled dizzy heights as its central bank drove interest rates deep into negative territory to battle a strong franc.

But Mr Vincenz’s reign has attracted the attention of Swiss authorities for a different reason. A scathing report recently by the Finma financial supervisor into Mr Vincenz’s business dealings found serious corporate governance failings by Raiffeisen’s board, which allowed him “at least potentially, to generate personal financial gain at the bank’s expense”. Mr Vincenz, who left the bank in autumn 2015, is under investigation for mismanagement by public prosecutors in Zurich, and has spent 15 weeks held in jail.

Mr Vincenz denies allegations he abused his position as chief executive. Nevertheless, the control weaknesses identified are reminiscent of the troubles which plagued the UK’s Co-operative Bank in 2013, when reputational damage caused by unexpected financing problems worsened after its former chairman was filmed allegedly buying illegal drugs.

Finma apparently believed Raiffeisen’s co-operative structure was at least partly to blame. More than 250 legally autonomous Raiffeisen co-operative banks dating from the 1890s operate under the umbrella of Raiffeisen Switzerland, based in St Gallen, near the German border. As part of its sanctions, Finma demanded a detailed inquiry into “the pros and cons of converting Raiffeisen Switzerland into a limited company”.

If Finma is right, there could be repercussions across Europe. Co-operative banks are entrenched across much of the continent, with market shares of more than 50 per cent in Germany and France and almost 30 per cent in the Netherlands, according to Moody’s.

Finma’s concern, however, has met with scepticism. “We were a bit surprised,” says Carola Schuler, managing director at Moody’s. The rating agency’s research suggests the record of co-operatives is no worse than that of listed companies. “What matters more is corporate governance rules in individual countries and whether they are really being adhered to,” says Ms Schuler.

Manuel Ammann, professor of finance at the University of St Gallen, adds: “Many stock companies are similar to co-operatives in that their ownership is widely spread among small stakeholders — so standards of corporate governance could be similar.” Co-operative structures may even be less accident prone. They do not pay regular dividends, so there is less focus on short term results. Decisions are based on democratic processes.

Co-operatives also have social obligations. Switzerland’s co-operatives include the two main supermarket chains, Migros and Coop. Having customers as members builds brand loyalty, especially in countries such as Switzerland that are built on political consensus and social partnership.

So why did Finma call into question Raiffeisen’s structure? Where co-operatives could have weaknesses is in raising money quickly in capital markets. That matters especially at times of financial tension. Bruno Gehrig, former president of Swiss Life, which controls assets of SFr270bn, told an interviewer recently that the Zurich-headquartered life insurer would not have survived the 2007-08 global financial crises if it had remained a co-operative. “When you buy groceries, you don’t worry how well capitalised Migros is, but banking is a trust business,” says Prof Ammann.

Raiffeisen is deemed “systemically important” by Swiss authorities, with SFr181bn in loans to clients at the end of last year, and is highly exposed to the housing market. Official concern is not yet at panic levels, but the Swiss central bank’s latest financial stability report warned that “the risk of a price correction in residential investment property has risen substantially”.

The word among bankers is that Finma’s rap for Raiffeisen might reflect broader worries about a property crash sending tremors through the financial system. One local finance expert says: “Maybe they have a hidden agenda.”.

Copyright The Financial Times Limited 2018