simona caselli: italian legacoop's financial network

ICA GENERAL ASSEMBLY -‐ Cape Town Workshop D2 "Tackling the economic crisis. Coops at the forefront of a

beGer world” -‐ Sunday 3 November

Italian Legacoop’s financial network:

a story of “useful finance” for a be2er world

Simona Caselli Director of Financial Services and Development at CCFS Consorzio CooperaSvo Finanziario per lo Sviluppo soc. coop President of Legacoop Reggio Emilia

Summary

ü Global finance: the need to constantly advocate a “real economy oriented” finance

ü The case of Italian Legacoop financial instruments network

ü Future challenges: Ø Basel 3 rules and expected increase of credit crunch Ø Fair raSng system for co-‐ops Ø Expected process of disintermediaSon

2 3/11/2013 ICA GENERAL ASSEMBLY CAPE TOWN

1. Global Financial Markets


Global Finance

ü A[er more than 5 years from the beginning of the crisis, global financial system is sSll dominated by speculaSve acSviSes

ü The recently introduced regulaSons seems to mainly affect ordinary banks, while huge amount of liquidity are sSll invested in derivaSves or speculaSve acSviSes, o[en realized through “dark pools” or “over the counter” pla`orms


Global Finance DerivaSves are sSll there…

ü DerivaSves are esSmated at 700 trillion $, including those on food commodiSes, which are highly dangerous in terms of consequences on people’s access to food

§ Only about 10% of transacSons pass trough Stock Exchanges; the rest is “Over the Counter”…


Global Finance Dark pools grow fast…

ü  Dark pool transacSons are increasing at very high rate so bringing up the quesSon whether we can really trust Stock Exchange quotes Ø The total value of shares traded through dark pools in Europe in the second and third quarter rose from €143bn to €207bn.

Ø The total value of shares traded in Europe across all pla`orms in the same period stayed flat at about €4.8tn. It’s also esSmated that the average value of trade size rose from €6,639 to €9,150 bn.

Ø 4/5 of dark pools transacSons are short term and speculaSve Ø The use of high frequency trading (HFT) can make the scenario even worse


Dark Pools

ü  Dark pools are essenSally private stock exchanges reserved for the largest traders, including hedge funds, major insStuSonal funds, pension funds, and big banks.

ü  While all exchanges have a degree of anonymity, dark pools have an increased level of secrecy because neither the size of the trade nor the idenSty of the parScipants are disclosed unSl the trade is fulfilled.

ü  Financial regulators remain years away from being able to peer into "dark pools," the high-‐tech mechanism that insiders use to conduct secret, advantageous transacSons.

ü  European policy makers and exchanges have raised concerns that dark pools may damage transparency and investors’ ability to find the best prices.


Trade Size for European Dark Pools


Source: Thomson Reuters, Deutsce bank AG London

The Growth of Dark Trading in Europe and U.S.


Source: The TABB Group

The need to keep campaining for Good and Useful Finance

ü DerivaSves and Dark Pools are only two examples of how financial markets sSll work

ü This is surely not the way of building a beGer world!

ü We must conSnue campaigning for a Good a Useful Finance aimed at supporSng people’s work, life and sustainable development


2. Italian Legacoop Financial Network tackling the crisis


What happened to credit market in Italy?


ü A[er a period of “easy loans” credit crunch arrived

What happened to credit market in Italy?


ü And money costs increased…

Legacoop system ü Associates over 11.000 co-‐ops and consorSa (coop of coops), including SME and large firms, acSve in all economic sectors (agriculture, consumer, social services, manufacturing, retail, building etc)

ü More than 8 millions members

ü Approx 55 billion € consolidated turnover

ü More than 500.000 employees


How Legacoop reacted ü At the beginnig of the crisis Legacoop decided to promote a network among exisSng Financial coop insStuSons (CCFS, Coopfond, CFI) and to add new specialized instruments (for factoring, leasing, merchant banking to support merging and aquisiSons)

ü  These internal financial instruments, directly and through partnership with banks, should work to garantee support to co-‐ops investments and ordinary acSvity


Legacoop financial instrument network


CCFS The company and his mission

ü CCFS is the only "Purpose Company" of the Italian Legacoop that operates in the field of the financial intermediaSon and other related services, in order to provide its Member Co-‐ops with financial resources they need to support their acSvity and investments.

ü CCFS’s aim (in accordance with its By Laws) is Ø to promote the development of the members Companies (Co-‐ops and their controlled LLCs);

Ø to parScipate in the development and consolidaSon of the CooperaSve Movement, Legacoop and other Bodies that are appointed to represent it, in Italy and abroad;

ICA GENERAL ASSEMBLY CAPE TOWN 3/11/2013 17

CCFS The company and his mission

ü Actual acSvity is, thus, instrumental to that aim and is to Ø help the sesng up of new Co-‐ops in many and diversified economic sectors;

Ø Facilitate member’s access to credit and to other financial resources;

Ø intermediate financial resources received by member co-‐ops, providing other meber co-‐ops with loans, under different technical forms

Ø financial advisoring Ø other services


CCFS Loans to members 2008-‐2013


0

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012 2013 (sept)

medium indirect member loans stock (mln €) medium member loans stock (mln €)

CCFS Some key figures (updated september 2013)

ü More than 1.150 member co-‐ops ü € 1.150 million Deposits from Members ü € 828 million Loans to Members ü € 6,5 billion compensaSng transacSons among member co-‐ops

ü OperaSng with more than 40 banks, for a total yearly amount of financial movements of € 46 billion


Coopfond ü Italian law 59/1992 regulates the insStuSon of MutualisSc Fund for cooperaSve start-‐up and development (according to the principle of external mutuality)

ü Every Italian cooperaSve must pay 3% of its net annual profit to MutualisSc Fund (this principle adds on others cooperaSve principles such as indivisible reserves, one head-‐one vote, open membership, limited yeld on capital…)

ü Coopfond is the Company that manages the Fund insStuted by Legacoop


Coopfond

ü The Fund is generated by: Ø the collecSon of 3% of annual profits of all exisSng cooperaSves;

Ø the collecSon of the residual assets of dissolved and transformed cooperaSves

Ø Fund’s own increases achieved by retained profits


Coopfond The Mission

ü To produce an opSmal environment for the development of the Italian co-‐operaSve system

ü To manage efficiently the Fund and to guarantee its holdings, reducing losses

ü To favour, in the Company’s acSvity, innovaSng and socially qualified enterprises

ü To aid in territorial re-‐balancing, parScularly between northern and southern Italy

ü To improve partnerships within the Co-‐operaSve Movement and relaSonships with local communiSes


Coopfond Basic guidelines

ü Coopfond’s acSvity usually foresees temporary intervenSons with medium-‐long term horizon (5-‐10 years), in accordance with refundable rules of acSvity: Ø loans have a natural duraSon according to scheduled payment plans

Ø capital share pay back is planned by: § withdrawal at nominal value § buy-‐back from co-‐op (especially if Coopfond is a member of new enterprise under co-‐op control)


Coopfond The Fund’s Stock

ü  The Fund’s stock managed by Coopfond now amounts to about


€ 430 million (Sept. 2013)

BalanceYear

The time series shows how economic crisis has hit net profitability of cooperatives (this show social committments of coops: reduction of margin with stable or even growing employment) (*) the 2012 data are not still final

Coopfond Accumulated IntervenSons (equity and loans)


0

100000

200000

300000

400000

500000

600000

700000

800000

Loans

Equity

Coopfond In-‐payments and desSnaSons


0

5000

10000

15000

20000

25000

30000

35000

40000

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

In-‐payments per year

0

20000

40000

60000

80000

100000

120000

93

94

95

96

97/98

98/99

99/00

00/01

01/02

02/03

03/04

04/05

05/06

06/07

07/08

08/09

09/10

10/11

11/12

12/13

Equity Loans

Coopfond Some key figures (updated september 2013)

Total amount in 21 years ü More than 750 projects coming from more than 550 cooperaSves

ü 270 projects realized and 480 in por`olio ü More than 1,5 billion € of investments enabled by cooperaSves and 25.000 increase in employees

ü € 620 million disbursed by Coopfond (sum of collecSon of 3% and refund), of which Ø € 420 ml directly refundable projects Ø € 200 ml indirectly invested in refundable projects in instrumental companies

Ø  € 320 ml by share capital Ø  € 300 ml by loans


Coopfond Concluding remarks

ü  The Fund was created in order to generate a virtuous circle designed to develop the cooperative enterprise form using self-generated resources coming from other cooperatives (principle of solidarity)

ü  The financial means provided in equity shares have allowed many cooperative to strenghten their equity and improve their creditworthiness (by providing “patient capital”)

ü  Coopfond acting as a sort of merchant bank without being a classic merchant bank (no capital gain, no surplus value, eased interest rate, valued added created left in the cooperative) has raised the entrepreunerial vision of cooperative system as a whole

ü  The refundable principle has allowed to disburse more financial resources than those collected just from the funds raised with the 3%

ü  The number of unsuccesses (bankruptcy, write-off and insolvency proceedings) is below the average of the credit system (even if increasing due to economic crisis), also thanks to the support given by other cooperatives and consortia involved and careful monitoring


3. Future Challenges Ø Basel 3 and credit crunch Ø Fair raSng for co-‐ops Ø DisintermediaSon and access to capital markets


Basel 3: what changes

ü Basel III new requirements: Ø Increase of Common Equity percentage held by the bank from 2%to 4,5% of Risk Weighted Assets (RWA)

Ø Capital Tier 1 capital raIo from 4% to 6% of RWA Ø Total regulatory capital confirmed at 8% of RWA Ø IntroducSon of a Capital ConservaIon buffer equal to 2,5% made by Common Equity Tier 1 to be retained in non-‐stress periods

Ø IntroducSon of a variable Countercyclical Capital Buffer made by Common Equity Tier 1 under naSonal legislators decision, during expanding credit period, unSl a max. 2,5%

Cred

its: Fed

erico Parm

eggiani -‐ Università

di

Mod

ena e Re

ggio Emilia – De

partmen

t of

Econ

omics"

Capital requirements Basel 2/ Basel 2.5 to Basel 3


Cred

its: Fed

erico Parm


di

Mod

ena e Re

ggio Emilia – De

partmen

t of

Econ

omics"

Phase-‐in arrangements Basel 3 capital requirements


Cred

its: Fed

erico Parm


di M

oden

a e

Reggio Emilia – Dipartmen

t of Econo

mics"

Consequences of Basel 3 rules ü More capital stability in banks, but… ü It has been esSmated (Slovik – Cournède, OECD, 2011) that Basel III rules can cause a reducSon in GNP among -‐0,05% and -‐0,15% under non-‐stress condiSons

ü Some studies (Slovik, OECD, 2012) suggests big banks with high systemic relevance could more easily bypass rules in tricky way, so small and medium sized banks are expected to be more affected and penalized

ü An esSmated worldwide credit crunch equalling 5,000 billion euros (Boston ConsulSng Group, Facing New Reali:es in Global Banking, 2012)


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Italian Companies Funding An InternaSonal comparison

Source: Il Sole 24 Ore


InternaSonal comparison shows big differences in use of “private debt” or alternaSves to bank loans

Cred

its: Luca Pe

nna – Partne

r Bain&

Co.

CriScal issues for a fair co-‐op raSng

ü  If predicSons on disintermediaSon process are true the need for a fair raSng system, really able to understand co-‐operaSves, becomes more urgent.

ü What’s important to consider in order to have a fair raSng

for co-‐ops? Ø Members’ rebates:

§  addiSonal remuneraSon for workers, recognized on year basis if co-‐op efficiency produces profits, aren’t considered by raSng system, because they are buried into work costs. So efficiency is always underesSmated.

Ø  Indivisible reserves (retained profits) Ø Special rewards for the goods conferred by members in agro-‐industrial sector.

Ø Member’s loans


The urgent need of fair raSng system for co-‐ops

ü Current raSng systems, used by banks and other financial operators, are build for ordinary for-‐profit companies. No specific raSng system for non-‐profit and co-‐ops companies has been officially validated yet

ü A fair raSng for co-‐ops will be crucial and so it should be part of “CooperaSve Decade” acSons (with regard, in parScular, to “legal framework” and “capital” secSons of the document)


ü THANK YOU FOR YOUR ATTENTION!!!

Simona Caselli [email protected]


simona caselli: italian legacoop's financial network

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