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Conflict of interest between borrowers and lenders in credit co- operatives: the case of German co-operative banks

  • William R. Emmons
  • Willi Mueller

Over the last few decades, the co-operative banking sector in Germany has steadily increased its market share at the expense of other types of banks. This outcome is surprising from the standpoint of traditional economic thinking about co-operatives, which suggests that they are most appropriate for "backward" economies. We develop a model of co-operative banks that highlights the dual role ofmembers as borrowers and lenders. We show that a shift in the median (hence pivotal) member of the co-operative from predominantly a borrower orientation toward a lender orientation causes the co-operative bank to shift its policy from underpricing credit toward the provision ofcompetitively priced credit and deposit services. Together with a nationwide supporting infrastructure to capture scale and scope economies (the Verbund), the market-oriented policy of German co-operative banks today allows them to compete successfully with other banking groups.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1997-009.

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Date of creation: 1997
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Handle: RePEc:fip:fedlwp:1997-009
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  1. Besley, T. & Coate, S. & Loury, G., 1992. "The economics of Rotating Savings and Credit Associations," Papers 157, Princeton, Woodrow Wilson School - Development Studies.
  2. repec:cep:stitep:/1996/292 is not listed on IDEAS
  3. Oliver Hart & John Moore, 1996. "The Governance of Exchanges: Members' Co-operatives Versus Outside Ownership," STICERD - Theoretical Economics Paper Series 292, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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