Acknowledgements

Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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existing firms both outside and inside the Basque Country. While some of these later acquisitions soon 

became co-operatives as in the early years, often the acquired companies, initially at least, continued to 

be structured as conventional firms. One example was the acquisition of FABrELEC, a local domestic 

appliance manufacturer in 1989.After a five-year period, an overwhelming majority of employees at that 

firm voted to became members. More or less similar processes have been undertaken in other conventional 

firms acquired by Mondragon co-ops. Another new organizational form that has been created is the so-

called “mixed cooperative”. These emerged because of rising capital requirements in start-up situations, 

especially in capital intensive manufacturing sectors, and the inability to obtain sufficient capital either 

from the traditional core source, namely worker-members’ initial investments, or, given the high debt-

to-equity ratios involved, through standard debt from the Caja Laboral or other banks. These mixed 

cooperatives allow for “investor” members, generally other cooperative firms in the Mondragon group, and 

are structured to provide modest, but explicitly limited control rights for new capital suppliers. An example 

is MULTiFOOD. Thus, the evidence for Mondragon does suggest that it is possible to adapt institutions 

in order to sustain meaningful democracy within individual co-ops as well as groups of co-operatives, and 

that changes can be made that accommodate competing needs. 

Case 2: Finnish co-operative banks

Co-operative banks are very important in Finland. There are two groups of co-operative banks, of 

which the larger, OP-Pohjola Group, commanded a market share of 33.0% of retail lending and 32.4% in 

deposits in 2010. By both indicators, it was the largest retail bank in Finland. in addition, OP-Pohjola has 

been heavily involved in insurance after acquiring the insurance company Pohjola in 2005, and its market 

share in non-life insurance was 27.6% in 2010.

21

The other group, POP Bank, had a 2.0% market share in 

retail lending and 3.1% in deposits in 2010.

22

 Thus, the combined markets shares of co-operative banks 

are over one-third. Finland is one of the European countries with the highest market shares of co-operative 

banking. Similar or somewhat higher market shares exist in France, Austria and the Netherlands (Fonteyne 

2007).

Many European co-operative banks have elaborate group structures, but the Finnish OP-Pohjola 

Group is one of the most integrated groups, alongside with the Dutch rabobank group (Ayadi et al. 2010). 

One of the significant features of the Finnish co-operative banks during the past two decades has been the 

tightening of the group structure. in the following we examine how this has influenced the sustainability 

of member democracy within the group. 

21  

Prior to the acquisition it was called just OP Group.

22  

The information on bank market shares is from FFFS (2011). The information from the insurance market share is from OP-

Pohjola (2011).

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Economies of Scale Versus Participation: a Co-operative Dilemma?

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5.2 Democratic Challenges for individual co-operatives and co-operative groups.

in Finland centralization of co-operative banks was in large part an outcome of regulatory preference.

23

 

The deregulation of banking markets in the 1980s generated a huge boom in bank lending and other 

investment activities. When the economic cycle took a sharp turn for the worse in the early 1990s,

24

 bank 

loan delinquencies increased to an unprecedented level. The economic and banking crises were mutually 

enforcing. While all banking groups were affected, co-operative banks as a group survived the crisis relatively 

well, whereas most savings banks, the main competitors of the co-operative banks, failed during the crisis 

and were acquired by other banks. However, there was significant heterogeneity among co-operative banks; 

some larger co-operative banks made significant losses and had to be bailed out by the group.

Throughout the crisis the central management of the co-operative banking group was rather cautious 

and warned the fastest-growing banks about risks in an overheating economy. However, the group center 

had no means to discipline banks that did not follow their advice. Traditionally the local banks had been 

dependent on the group’s central bank (the OKO-Bank) because the central bank took care of their liquidity 

management; however, during the economic boom of late 1980s that followed banking deregulation, large 

local banks could easily obtain short-term funding directly from the market. 

Since the 1930s co-operative banks have had a mutual guarantee fund that was designated to bail out 

failing co-operative banks. However, in the first half of the 1990s this fund was exhausted and sound co-

operative banks had to make additional contributions to cover losses made by the problem banks within 

the group. 

A new group structure was designed to overcome the problems in the structure that became apparent 

during the crisis. From the perspective of the managers at the group level, the key problem was that the 

center had no means to intervene in the operations of local banks, even in cases where the actions of some 

local banks were creating negative externalities for the group. The new group structure gave the group 

center some (although limited) rights to intervene in the management of local banks. Also all banks became 

fully liable for each other’s debts, whereas in the past the liability, in principle, was limited by the size of 

guarantee fund

25

.

Ever since financial co-operatives started in Finland, the central unit has audited the local banks. in 

turn, the national supervisory authorities audited the central unit. This system remained a part of the new 

group structure. in the aftermath of the crisis in the mid-1990s, the national supervisory authorities voiced 

strongly the opinion that the position of the center should be strengthened, even to the point where they 

advocated the amalgamation of all local banks into a single nationwide co-operative bank. However, this 

was not acceptable to local co-operative banks. The group structure was a compromise solution where the 

center gained more rights and all banks became jointly liable for each other’s debts. 

However, a minority of banks opposed both centralization and joint liability and, in 1997, they seceded 

from the OP-Group to form their own competing co-operative banking group, now known as POP Bank. 

This group is a much looser affiliation of co-operative banks than the OP-group and, as noted above, it is 

also much smaller than the OP-Pohjola Group. The local banks in the POP group have more autonomy 

than do their peers in the OP-Pohjola group. The emergence of such a split within a co-operative banking 

23  

The following description is adapted from Kalmi (2012).

24

  These problems were a combination of outside shocks (dissolution of Soviet Union, recession in Western Europe) and domestic 

policy failures (overvalued currency, mistakes in financial deregulation).

25  

Although, as noted, in practice banks had to make additional contributions once the fund was used.

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