The co-op bank must not be resurrected

Worrying talk of a push to re-establish a bank which cost us all so dearly

The trigger for writing this article was a discussion on Omega TV last week which raised the possible setting up of a new cooperative bank. Participants in the discussion were Michalis Lytras, honorary president and former long-term secretary-general of the All-farmers Union of Cyprus (PEK); Panicos Champas, secretary-general of the Union of Cypriot Farmers (EKA); Apostolos Skouroupatis, vice-president of the Pancyprian Union of Teachers (Poed) and Andreas Kitromilides, president of the Union of Cyprus Communities.

All four of them are politically active on the leftish end of the spectrum and all have a rich trade union past. Panicos Champas summed up the substance of their intentions with the following statement: “A cooperative society for promoting the setting up of a new cooperative bank has already been established.” The society is chaired by Panicos Champas.

To place the discussion in its proper context, it is necessary to explain and clarify certain basic concepts in the process of resurrecting the defunct co-op bank.

Establishing and operating a banking institution within the European Union is now governed by clear and strict regulations. It is conditional on securing – in advance – the blessing of the base-country’s central bank, which has the responsibility and the obligation to supervise the bank’s compliance. These rules, which are designed to protect the public, are uniform for all banking institutions operating within the euro area. In recent years, these rules have been tightened up to ensure the proper functioning of banks and treating issues that had arisen within the banking industry, some 10 years ago. It follows that the proposed cooperative bank will not be able to have any strategic or functional links with other organisations operating within the cooperative movement (such as those involved in the production and distribution of agricultural produce, fertilisers etc.).

The essence of a bank is two-fold. The first dimension is accepting deposits from customers-depositors and the lending of the money thus raised to customers-borrowers, who are burdened with interest on the amount borrowed, at an interest rate that is higher than the interest rate offered to depositors. The difference between the deposit and the lending rate (the “spread”) must be sufficient to cover the bank’s expenses (payroll, rents, depreciation, taxes, etc.) and to generate a profit for rewarding the owners-shareholders of the bank who risk investing the necessary funds for the bank to operate. The profit margin must be sufficient to cover the loans advanced which – for various reasons – end up being uncollectible.

The second basic dimension of a bank is the provision of various money-related services, such as transferring money, making payments, running credit cards, issuing bank guarantees etc. For providing these banks charge a fee to cover their costs and – hopefully – to produce a surplus.

One could say that the notable difference between the “cooperative” and the “commercial” approach to banking is the large dispersion of the shares of a cooperative bank amongst members-shareholders, whose role successively alternates between a depositor and a borrower, for relatively small amounts, thus securing the maximum dispersion of risks. In the case of cooperative banks, a further reduction of risks is attained by a ban on speculative transactions, such as foreign exchange transactions for the bank’s own account.

All the participants in the Omega TV discussion admitted that the problems, which led to the collapse of the cooperative banking system, were mismanagement resulting in many non-performing loans, the misappropriation of funds, the irresponsible generation of costs and, as Michalis Lytras pointed out, the fact that “some cunning people had penetrated the cooperative movement and, instead of applying the principles and values that form the cornerstone of the movement, led the entire cooperative edifice to collapse. The political parties carry a lot of blame for what happened.”

“We hope that the disaster will serve as a lesson and that uncontaminated people will rebuild the cooperative bank and will not make the same mistakes.”

On the same wavelength, Panicos Champas stressed that “we know very well what we are aiming at and where we are heading. The company that will commission the necessary feasibility study and will draft the relevant application to the Cyprus Central Bank has already been established. Its activities will be financed with individual contributions of €10 per person. We call for the protection and support of parliament and of the Central Bank of Cyprus and – why not – of the European Central Bank. We will fight for this project.”

So, when the huge losses of the cooperative banking movement surfaced, caused by mismanagement, irregularities and the accumulation of non-performing loans, someone had to pay the piper. The choice was either to ‘trim’ the deposits, based on the precedent at the Bank of Cyprus and the Popular Bank, or to get taxpayers to foot the bill. The government, after some ambivalence, opted – probably correctly – for the latter as the depositors of the cooperative banks were as a rule economically weak people who could not be asked to foot the bill. The other option was for the state to continue throwing money into the black hole of the cooperative movement and continue giving the ‘crafty’ ones, as Michalis Lytras described them, to drain the system.

I am concerned that those promoting the idea of resurrecting the cooperative bank are people totally unrelated to today’s banking industry (which substantially differs from that of the early part of the 20th century). I am concerned that their goals are very vaguely defined. I am concerned that they are the same people who had an active role in the collapsed system and failed to prevent it from crumbling. I am concerned about the call in advance for state (taxpayer) support and protection.

The state has neither the slightest inclination nor the ability to foot further cooperative bills. The Central Bank must do whatever it takes to protect the depositors of a new cooperative bank; but they themselves must also be very careful as to whom they entrust with their deposits. Repeating the mistakes of the recent past will constitute a criminal offence.

Christos Panayiotides is a regular columnist for the Sunday Mail and Alithia