Diversification, Liquidity, and Supervision for Small Financial Institutions: Nineteenth-Century German Credit Cooperatives
The paper suggests that Germany's successful nineteenth century credit cooperatives were by design small, limited their operations to specific geographical areas and employed few paid staff, most of whom had little business experience. It suggest that cooperatives would be vulnerable to liquidity problems caused by correlated shocks to their member's fortunes. The historical record shows, however, that the cooperatives overcame these problems, growing steadily in numbers and assets. The solution had little to do with government regulation. Rather, the cooperatives devised a series of regional banks and auditing associations to which most cooperatives eventually belonged. To obtain the benefits of membership in these organisations a cooperative had to submit to discipline imposed by the auditing association, an effective alternative to government regulation of the credit cooperatives.
The paper concludes that this Central / auditing combination provided two related services to cooperatives:
- The Central freed the credit cooperative from trying to match supply and demand for local credit on a short term or long term basis;
- This reduced the dangers of illiquidity;
- This gave cooperatives with excess deposits safe outlets for investment;
- Centrals and auditing societies collected and verified information about each cooperative's behavior and condition and helped the cooperative to attract both members and depositors.
