This is a CTP of initiative: FEBEA/Merkur Cooperative Bank (Denmark)
The critical turning point refers directly to the 2007-2008 financial crisis that affected the majority of European countries. This crisis provoked that many small banking initiatives (e.g. credit unions, rural banks, etc.) disappeared or where forced to merge with larger banks in order to survive and fulfill new banking requirements. Also, the new banking regulations adopted in Europe (Basel III) directly contributed to this process.
Despite being exclusively dedicated to the real economy and do not conduct a speculative activity, the financial crisis affected Merkur as affected the whole Danish banking system. The previous good financial position of Merkur was compromised due to the fact that its banking activity mostly depends on incomes from loans and rate interests that started to decrease with the impact of financial crisis in the real economy This idea is explained by the interviewee as follows:
The years before the crisis, I would say it was relatively easy to have a good performance as a bank because you've got the income as soon as you've got the deposits from clients. You could already have a good income and, of course, also you could lend it but in a way that you even didn't need to do a lot of lending, you would have the income anyway from the interests. Then, with crisis, property prices dropped in one year so some clients were forced to sell his house or his production building. We had to take part in the costs for cleaning up in the banking sector. And then, when the crisis, few years later, came down in the real economy, it was not just a financial crisis, it was an economic crisis and our clients also started to suffer...Property prices in some regions of Denmark dropped 40-50% so that was really a crisis in the real economy. Beside, unemployment went up, companies went bankrupt...
Due to the crisis, Merkur had to take several decisions regarding the services the bank used to provide –for free- to its customers. Merkur changes some practices, charging a price for services they provided, but they did it with transparency, explaining their customers in advance the reasons that motivate the new costs:
Our losses increased and we had to adjust our income, we had to increase our incomes quite dramatically in order to absorb these losses and these costs for the crisis. The crisis immediately changed all, so we had to be much more clear about which services we were able to give to our clients and what we should charge a fee for
After taken these decisions, the bank managed to maintain a good reputation and continue to finance social and sustainable projects. The bank increased the savings but, due to the impact of financial crisis in the real economy, the loan activity decreased, which eventually diminished Merkur profits:
I would say that during the crisis the request for loans decreased a lot so what we had before, that was a very parallel growth of deposits and loans. During the crisis the lending started to be flat but the deposits kept on growing so we built up a huge liquidity position which we still have today... Our main focus here after the crisis is to find opportunities to get more loans simply, to reduce the gap between loans and deposits
This critical turning point is a direct consequence of the impact of an external game-changer that altered the economic context with serious consequences over Danish economy, which Merkur Cooperative Bank had to deal with. 2007-2008 global financial crisis dramatically jeopardized the existence of many financial institutions in the terms that were explained before.
Besides, in Denmark, the crisis had its own peculiarities, as the CEO of the bank, Lars Pehrson, explained in this opinion Piece [1]:
The crisis had its immediate origin in a housing bubble, which the politicians subsequently have not been keen to discuss, since almost no parties took a critical stand while the bubble was being inflated. The bubble acted as gasoline on a bonfire of lending, where e.g. local and regional banks felt tempted to join the race and copy the big banks’ highly leveraged business model. Much was said and written about the irresponsible and incompetent ‘small banks’, and only now, little by little, it is becoming clear how large the crisis was – also in Denmark’s largest bank. Back then, problems were skilfully glossed over, and, in between meetings with the Danish central bank and politicians, the bank director of Denmark’s largest retail bank had time to lecture society on the fact that Denmark only needed 15 banks all in all
Merkur Cooperative Bank was founded over 30 years ago, in 1982, in the North of Denmark, grounded on the principles of transparency, equality, social economy and sustainability. In the first few years of its existence, Merkur developed very gradually, growing step by step, gaining in the number of shareholders and clients and expanding over Danish territory with offices in the four main cities of Denmark. However, after the outbreak of the financial crisis in 2008, the bank incomes decreased in a substantial way and Merkur leaders had to adopt some tough decisions in order to deal with such situation and revert the losses.
Surprisingly, despite the downsides that new decisions involved for Merkur customers, most of the people continued being clients and, to some extent, they were comprehensive with the decision taken by the board of directors.
During the crisis, Merkur increased its reputation being transparent, providing appropriate information to their customers regarding the situation of the bank and new policies adopted. The spokespersons of Merkur attended mass media requirements and took advantage of the rising interest that Danish press showed in ethical and alternative banking.
According to the interviewee, due to to the previous good performance of the bank and the core values that Merkur sustained over almost 30 years, the crisis become an opportunity to demonstrate that ethical and sustainable banks can be better and more trustable than larger banks that are partly sustained on speculative activity. Thus, Merkur became an example of good banking practices and successful grassroots banking initiative.
References:
(1) Lars Pehrson. Merkur Cooperative Bank (Denmark): Price Of Politics. Opinion article published in The Global Alliance for Banking on Values´ Website. Retrieved from: http://www.gabv.org/opinions/ceo-merkur-bank-lars-pehrson-on-the-price-of-politics-in-regulation
Resulting from the financial crisis, a kind of social debate was launched in Denmark concerning banking models and existing alternatives, stimulated as well by the Danish media. However, the general lack of knowledge on financial issues –even among politicians- makes complicated an open discussion about the regulations that should be approved to avoid a new banking crisis.
The interviewee regrets that, despite the intentions to transform the economic and financial system, only a few years later, everything appears to be similar to before 2008. However, after the 2008 financial crisis, in Denmark, sustainable banking gained in popularity, increasing the number of people who endorse ethical banking, claiming more transparency in the banking system.
The financial crisis was a critical turning point also for Danish society, who showed their indignation about banking practices. The mainstream financial sector lost the trust of society for a while. On the contrary, as an ethically driven, transparent and democratic bank, Merkur cooperative bank experienced - in the period 2008-2010- a sharp increase in the number of customers, who deliberately entrusted their saves to the bank, as the perfect way to save money in a bank which supports the local economy and socially-oriented and sustainable projects.
A third related event mentioned by the interviewee is the foundation of the new international network “Global Alliance for Banking on Values” (GABV). In March 2009, Merkur co-founded (altogether with Triodos Bank and others) a global network of banks with a value-based and societal oriented business profile aiming to demonstrate a strong alternative to the financial and economic models that led to the financial crisis.
One of the main objectives of GABV is to prove that sustainability-focused banking can have profit as well as positive impact. For this reason, the network published in the last two years a study that compares ethical banking performance with global financial institutions. The research proves that GAVB members can have good rates and benefits by putting money to common good and sustainable real economy projects.
We were one of the founding members, in 2009, of the Global Alliance for Banking on Values. One of the ideas behind the GABV was to show a different banking model is possible so that was one of the reasons to found the Alliance.. I think that what unites us is that all of the banks in the Alliance has this strong wish to impact the community or the society in which we work, to improve the quality of life, to improve the environmental conditions, social conditions....through banking operations so that is really what unites us...Even if we work in very different circumstances, it's very different to work in Denmark or in Bangladesh or in South America but we all have this strong intention to make a positive difference in society
Moreover, changing the financial system has political implications. Thorough the GAVB, the leaders of ethical banking movement elaborated a set of policy recommendations to transform the financial system “from a short to a long-term resilient financial industry capable of providing long-term improvements to people’s quality of life”.
As an example, the interviewee attended the Rio+20 Conference (hosted in Rio de Janeiro, 2012) pursuing to launch a global initiative aiming at “Building a Financial System to Support a Green, Fair and Inclusive Economy” (1).
References:
(1) GABV (2012). Banking – Because the future matters. Building a Financial System to Support a Green, Fair and Inclusive Economy. Retrieved from: http://www.gabv.org//wp-content/uploads/Banking-because-the-future-matters-final-clean.pdf
The Critical Turning Point described – the 2008 crisis- had strong consequences on the financial situation of the bank in terms of the loss of incomes that we previously described. Merkur leaders were aware of the need of readjusting the cost of the banking services that the bank offered to its clients, in order to deal with the unintended situation.
Of course, these decisions were a matter of discussion within the bank and some associates manifest their concern because increasing the fees could make people abandon the bank. However, as the interviewee explains, all banks were obliged to adopt similar decisions and most of the people remained as customers:
Of course there was a debate but, since it was a general practice, it was also accepted as a consequence of the crisis and I think we were quite good at explaining our clients why we had to change things
Despite Merkur´s customers seem to be the more critical-thinking people, the Merkur spokespersons were able to explain the reasons that lead them to adopt these negative decisions and convince them about the necessity of these changes. The interviewee highlights that openness and transparency were the reasons that contributed to overcoming the possible opposition to the decisions adopted:
Simply by telling it as it is...It is relatively simply I would say but I have seen a lot of bad examples from other banks where they don't manage to get the message through and it is not because this is complicated. My experience is that we just put it out openly and say: this is how it is and therefore we need to do this
Besides, Merkur´s customers seem to be more interested in knowing the impact of their savings and investments. The members of the cooperative bank are proud of their good client relations and claim to be in daily contact with customers, establishing a relation of confidence and trust over 26 years of existence. Also, Merkur publishes its own environmental and social annual report and keep its clients informed about the impact of the projects that the bank funds, supporting real economy investments.
These practices are perceived as positive forms to maintain their member´s and clients engagement over time. Going further, Merkur increases people´s knowledge on social and green economy and uses “storytelling” to demonstrate the social benefit of supporting ethical banking.
Going further, the Global Alliance for Banking on Values launched recently a “storytelling exhibition”, which was accompanied by the book “Change Makers. The Stories Behind the Values-based Banks Transforming the World"[1]. Such publication shares a series of successful sustainable projects.
Merkur bank, as well as most of the European credit cooperatives, actively shares those stories with their customers, which are examples of transparency policies that are not so usual within the financial sector.
References:
GABV (2013). Change Makers. The Stories Behind the Values-Based Banks Transforming the World. Retrieved from: http://www.gabv.org//wp-content/uploads/GABV_Change_Makers_Book.pdf
Regarding the anticipation, the respondent does not refer to the capacity of anticipating the financial crisis but he explains that the managers of the bank were able to foresee that the 2007-2008 financial crisis was meant to be a critical turning point that could compromise Merkur´s viability.
Indeed, more than ten banks in Denmark were affected by the consequences of the crisis and Merkur had to anticipate possible cost and losses that eventually occurred:
In Denmark there was a quite severe banking crisis. In fact, the whole Danish banking industry was really having a hard time... more than ten banks closed or were closed by the authorities and also a number of banks were forced to merge. So there were really many things going on and there was a quite tough scheme that forced all banks to contribute to the clean-up. So, from the beginning, we had costs due to the cleaning-up of the banking system
As the Merkur credit activity serves mainly to fundraise "real economy" projects, the bank avoided many of the risks that traditional banks take in order to maximize their share price and the dividends or benefits that banks usually return to their shareholders. However, ethical banks are not immune to the general economic trends and when the crisis spread into the real economy - a couple of years later-, Merkur had several difficulties and faced higher risks.
Due to banks “need to earn money to survive and to develop the business”, the board of the bank prepared for the worst expected scenarios, being able to anticipate them and readjusting the services they offered to customers in order not to compromise the future of the initiative.
Furthermore, the financial crisis happened to position Merkur as the better alternative to the mainstream banks. During the global financial crisis, Merkur client numbers increased from 10.000 in 2008 to a more than 25.000 in 2015 as consequence of increasing social awareness or frustration with the financial system and speculative activities. This was described as one of the most surprising outcomes of the CTP.
The first lesson that the interviewee draws from the critical turning point, is related to the existing different alternatives to face the banking crisis and how to communicate negative news or decisions (and new banking policies) to customers and to the general public.
The people in charge of running the bank observed, in 2008 and 2009, how other banks faced these challenges and, learning from such experience, Merkur did the opposite. Instead of increasing banking fees without any explanations to their clients, the directors of the bank decided to be "more open and more clear and transparent regarding the conditions of being a client or working with Merkur", as the respondent explains in the following:
I would say we learned to be much sharper, to be very clear on priorities and also the quality of the loans was improved. Even in the good years, a loan that was not very good was often covered any way by the collateral behind it because of the high property prices. Since 2008 crisis, this was no longer automatically the case, but we should be much more sharp in our decisions
The second lesson relates to the neediness of coherence and confidence in own values and maintaining good performance. The global financial crisis reinforced the strength of Merkur´s core values and challenges, as well as the necessity of gaining in autonomy and resilience to deal with the next crisis:
Our goals are still the same. We still want to drain-back society in a sustainable way through our banking operations but we have sharped ourselves. We are much more clear today, we are better at making priorities. That is our main learning from the crisis and we should be aware of the fact that we have to work for income. The time of the free income from the money market is over. The zero interests from the Central Bank or even a negative interest has, as a consequence, that no income is coming from liquidity anymore. If the liquidity position we have today in theory was combined with the interest conditions we had that 10 years ago we would be overflowed with income!
In order to be able to develop innovative concepts and products that fulfil customer´s needs, the interviewee also acknowledges that Merkur –and the rest of ethical banks- should build new relations and partnerships with external institutions or other alternative banks.
After the outbreak of the financial crisis in 2008, Merkur co-founded the Global Alliance for Banking on Values. Also, Merkur is a member of the European Federation of Ethical and Alternative Banks (FEBEA). According to the interviewee:
it is highly inspiring, for practitioners, to collaborate with similar grassroots cooperatives or sustainable banks in both Europe and worldwide
Also, Merkur's shareholders and clients find it motivating to know that they belong to a global movement. Being aware about what banks do with their money has become something estimable. Nowadays, people have learned that, with their money, they can contribute to sustainability, to support innovative projects that provide new solutions to social issues:
We need our peers and we learn from the other banks and our clients are also happy that they can see that they are part of something bigger...that is really a positive message to the clients
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