Cooperative and community banks enjoy a special place in the hearts of the people, often giving them special regulatory status too. However in an age that has debunked many of the theories of capitalist economics, it worth noting that the cooperative theory of ‘Friendly Societies’ is failing too.

Rabobank’s rating downgrade by Fitch last Thursday comes at a time when the bank is too frequently in the headlines for the wrong reasons; job cuts and its involvement in the London Interbank Offered Rate (LIBOR) scandal, to name two.

However the ratings agency was not interested in the headline grabbing stories, but in the relative fall in certain debt assets at the firm and in its lack of impetus when seeking to recover from the recessionary market.

It specifically attributed this to the “cooperative nature” of the banking group, saying, “…while this provides the group with stable profit generation, it has also led to less focus on costs than at other banks, resulting in weaker cost efficiency. Cost-cutting measures in the Dutch retail banking operations will start to feed through in 2014, but the benefits are likely to be somewhat offset in the short term by subdued revenue generation, from depressed credit demand and re-pricing initiatives feeding through only slowly.”

In other words, not very driven. One should not single out Rabo in the LIBOR scandal, but note that the €1 billion settlement it has made with regulators over the scandal equates to around €1.8 million per employee in its investment bank operations.

The UK has seen its own issues with The Cooperative Bank, which has been commandeered by its creditors as part of a restructuring. The senior creditors are taking a 70% equity stake, swapped out for their bonds worth over £940 million and cash taking the total value past £1 billion.

The poor performance of the bank that led to this takeover was followed by a, frankly, bizarre turn of events when its former chairman was arrested on the suspicion of intent to supply drugs, having already been filmed apparently trying to buy some.  

As this was the man who had failed to recall the bank’s correct assets when speaking to a government inquiry, reducing the number from nearly £50 billion to just £3 billion, there are questions being asked about how he was made chairman in the first place.

It’s not all bad for co-operatives. In France, Credit Agricole is in recovery, although only after having sold off its bad investments in euro periphery countries e.g. selling greek bank Emporiki for €1 to Alpha Bank, having lost around €10 billion on its investment over six years.

Each of these issues is not unique to the co-operative sector – OK, an ex-chairman buying drugs is Toronto-esque – but the plight of these firms highlights why they should be gripped just as tightly by regulation as any publicly-listed or privately-owned bank. They may be well meaning, but the road to bankruptcy is paved with good intentions.