Raiffeisen Austria – a
Meaningful Alternative Structure for a Bank?
Introduction
The intensive
discussions currently going on about issues like the appropriate role of banks,
how to make banks safer, etc. prompts me to describe my experience with the
Austrian Raiffeisen organization. The first 30 of my 40 years in banking, I
spent with capital markets oriented banks, i. e. they were public stock
corporations owned by shareholders. The last 10 years, I spent with a Regional
Bank in the Austrian Raiffeisen organization; a co-op.
To sum it up:
until my early fifties, I was convinced that there was only one way to
structure a bank; i. e. to structure it as a public corporation with
shareholders who, naturally, have an interest in the return which they get on
their investment. In the last 10 years of my career, it dawned on me that there
is a very, very interesting alternative to that structure.
Raiffeisen
has become a brand name in many countries. Their structures may differ from one
country to next. I will explain the structure of Raiffeisen Austria and I will
attempt to do that in layman’s terms.
History
Friedrich
Wilhelm Raiffeisen (1818-88) is described in history books as a ‘social
reformer’ whose primary concern was to eliminate poverty in rural areas of
Germany. Some of his principal convictions were: “help only for self-help”; “no
give-away’s whatsoever”; “one for all and all for one”. He formed co-operatives
in rural towns where the constituents of these co-op’s were those locals who
had money and those who needed it. The constituents made sure that the money
which was given (deposits) was passed on wisely to those who needed it (loans).
Just as simple as that!
Raiffeisen structure in Austria
In Austria,
the first Raiffeisen co-op dates back almost 150 years. Today, the Raiffeisen
organization is probably Austria’s largest financial organization with over
1.000 banking offices in a country of 8 million. It is structured in 3
hierarchical levels:
Primary level
– the independent Local Banks serving
their local communities
Secondary
level –the Regional Banks, owned by Local Banks and serving the Local Banks
Tertiary
level – the Umbrella Bank for all
Austrian Raiffeisen banks, owned by Regional
Banks
The
Raiffeisen organization follows Austria’s political organization: the Local Banks are in virtually every
town/city (‘minimum equipment’ for an Austrian town: the mayor, the priest and
the Raiffeisen banker). The Regional Banks
are headquartered in the respective capitals of every federal state of Austria
(9 of them) and owned by the Local Banks.
And the Umbrella Bank is
headquartered in Vienna and owned by the Regional
Banks. In short: it is a pyramid turned upside down.
Historic evolution of the structure
To explain it
in simple terms: picture the first Raiffeisen Bank (‘Bank A’) being organized
in a small town. It is an autonomous co-op. Instead of tradable shares, the
bank issues ownership certificates. These certificates do not pay any
interest/dividends. The certificates can only be sold back to the co-op at
nominal value, which is very low (say 10 Euro/certificate).
Why would
people buy such certificates? Certainly not as an investment because the
certificates do not generate any return. Instead, people buy them as a show of
solidarity with and commitment to the community. When customers open a new
account, they are offered to buy a certificate and since the amount is so
small, they may agree to buy one out of a sense of solidarity with and
commitment to the community. Many owners of such certificates are probably not
even aware that they are ‘owners’ of a bank. The certificate entitles the
holder to play an official role in the organization (annual meetings, honorary
positions on boards, etc.).
Bank A takes
in deposits and makes loans. If they have more loan demand than deposits, they
initially cannot meet that demand. If they have more deposits than loans, they
have to invest the excess with other banks.
One day
(several other Local Banks existed
already), it was discovered that Bank A had more deposits than loan demand and
that Bank B had more loan demand than deposits. So, Bank A lent its excess to
Bank B. As the number of Local Banks
increased, they discovered that this exchange of liquidity became a rather
cumbersome process. Thus, the Local Banks
got together and decided to open, in the regional capital, a subsidiary whose
initial role was to manage the cash surpluses/shortfalls among the individual Local Banks. As time progressed, the Local Banks discovered that there were
many other activities which could be optimized by pooling them at the Regional Bank. The principal was:
whatever the Regional Bank can do
better for all than the Local Bank only
for itself should be delegated to the Regional
Bank. Over time, the Regional Bank
assumed responsibility for setting regional policy guidelines, etc.
In short: the
Regional Bank became something like a
regional HQ except that when the regional managers ‘gave out orders’ to the Local Banks, they were dealing with
their owners and not with their branch managers. That tends to have an
influence on management cultures.
As time
progressed, the Regional Banks
discovered that there were functions whose performance could be optimized if
they were not handled by every region on its own but, instead, pooled on a
national level for Austria (i. e. the securities business). Thus, the 9 Regional Banks formed a subsidiary in
Vienna which became the Umbrella Bank
for Raiffeisen Austria. Its Supervisory Board is composed of managers of the Regional Banks. When the managers of the
Umbrella Bank gave out orders to the Regional Banks, they were dealing with
their owners. That tends to have an influence on management cultures.
Influence of organizational structure on
management cultures
The
constituents of the Local Banks (i.
e. the ‘owners’) are members of all walks of economic life in the community
(small businessmen, farmers, private individuals, etc.). The Supervisory Board
of the Local Banks is composed of
those constituents. Those constituents are not experts in banking but they do
understand that lending has something to do with risk and that running a bank
successfully has something to do with operational costs. So they watch
particularly these two things: the loans which the Local
Bank makes and the operational costs which it incurs.
The mindset
of the local managers is likely to mesh with the mindset of those constituents
who appoint them (if not, they will not be managers for very long…). The
constituents have a mindset where common sense prevails because that is how
they run their own small businesses. Their view is that bank managers are there
to gather deposits and to make loans and anything which prevents them from
doing that (i. e. from dealing with customers) should be minimized.
The Local Banks are often very small units. The
managers are not challenged to ‘manage’. They are challenged to do business.
The key measurement is not any ROE (because ROE does not matter when no
earnings are paid out) but, instead, the comparison with other Local Banks. And no local constituent is
happy when he sees that other Local Banks
are more successful in their communities.
The Regional Bank is owned by the Local Banks (based on the principle of
‘one bank has one vote’ regardless of size). The Supervisory Board of the Regional Bank is composed of managers of
Local Banks whose mindset has been
described above. Thus, the mindset of the management of the Regional Bank meshes with the mindset of
the local managers which, in turn, meshes with the mindset of the local
constituents.
Initially,
the Regional Bank did nothing other
than service the Local Banks. As time
progressed, the Regional Bank started
doing its own business with its own customers but always in cooperation and
coordination with the Local Banks
(their ‘owners’). For example: a local customer who might be too large to be
handled by the Local Bank would be
transferred to the Regional Bank for
account management but ALWAYS in coordination and cooperation (and with revenue
sharing) with the Local Bank.
My initial reaction to the Raiffeisen Structure
Within about
a month, it became clear to me that Raiffeisen worked differently from the
capital markets oriented banks which I had worked for before. Thus, I made an
appointment with the Controller of the Regional
Bank (my employer) to ask some questions. The dialogue went something like
the following:
Question: If I understand our structure correctly, we
own ourselves. There doesn’t seem to be any natural person who has a financial
benefit (other than salary) if the bank earns more money. Normally, I would
expect to see complete complacency with that kind of a structure. Why do I see
more business aggressiveness than I have seen before in other banks?
Answer: You are right. There are no natural persons
who, as owners, benefit financially from the performance of the bank. In fact,
there is only one hierarchical level where the owners are natural persons and
that is at the Primary Level. There, the ‘owners’ are the local holders of
ownership certificates of the Local Bank.
However, regardless how the Local Bank
performs, they receive neither interest nor dividends. Neither can they make
money on selling their certificates because they can only sell them back to the
organization at nominal value. These constituents get essentially two things
for their ownership certificates. One, at least once a year, they are invited
to a meeting of certificate holders where they can feel as important members of
the business community. Those are typically very special events with lots of
recognition and rewards for individual constituents. And, two, the constituents
can assume important functions, albeit without remuneration, in the supervision
of the Local and Regional Banks. Put
differently, they can assume positions of high standing and responsibility.
Question: But how come that the managers and staff at
all levels are motivated so much to perform successfully instead of being
complacent?
Answer: Because our system does not aim at the financial
motives of people. Instead, our system aims at human motives for being
successful in competition and for assuming important functions in society. The
supervisors of Bank A pain if they see that Bank B is more successful in its
market. The same goes for the managers of Bank A. Thus, the supervisors of the Regional Bank are composed of managers
of Local Banks who thrive on
competition and who make sure that the business practices which work well at
the local level are also pursued at the Regional
Bank.
Question: If the Local
and Regional Banks can’t sell shares to investors, how can they raise
capital for growth?
Answer: Remember, no earnings leave the organization;
they are all retained and they are our source of capital formation. If there
were insufficient retained earnings, our growth would be limited and Raiffeisen
would fall behind its competitors. Since neither the Local Banks nor the Regional
Bank want to fall behind competition, they are all motivated to generate
earnings.
Question: So far, I have not heard anyone mention the
ROE. Does the bank not measure ROE?
Answer: We think that the ROE is important but we
also think that the ROE is the result of
something and cannot be meaningfully managed in and by itself. That’s why
we don’t talk about the ROE, even though we look at it. And we do show ROE in
our Annual Report. We believe that a good ROE is the result of having done the
right things. For us, ‘doing the right
things’ in banking means having your risk and operational expenses under
control. Thus, we focus on managing the quality of our risk and the level of our
operational expenses. The most important ratio for us is the cost/income ratio.
The most important analysis for us is the analysis of our risk portfolio – the
risk rating and the level of risk provisions we make. We at the Regional Bank follow the following
guidelines: of our operating revenues, no more than 40-45% should go into
operating expenses; another 25-30% into risk provisions and the rest into
capital formation and dividend pay-out to Local
Banks.
Question: Why does the Regional Bank pay out dividends to Local Banks?
Answer: It’s a bit of a feel-good mechanism. Our
dividend improves the earnings of the Local
Bank and they look good vis-à-vis their constituents. Our dividend also
increases their equity which enables them, in turn, to put more equity back into
the Regional Bank (which equity, in
turn, generates more dividends…).
Question: I see virtually no focus on structural
optimization. In fact, it seems to me that there is quite a bit of double-effort
inherent in the structure of having Local
Banks and a Regional Bank. Why is
there no focus on optimized organization?
Answer: Yes, there is some double-effort. We monitor
it but we are not unduly concerned about it. Our philosophy is not to maximize short-term. Instead, we optimize longer-term. We have a strong
belief (and everyone in the organization shares it) that every individual and
every unit of the bank has to achieve a satisfactory operating profit. Note, I
said ‘satisfactory’ and not ‘maximum’ operating profit. If two units happen to work with one and the
same customer and both achieve a satisfactory operating profit in the process,
we are better off having two units than only one. Generally, the customer feels
better serviced as well. Put differently, if we eliminated one of the two units,
the customer could feel that, while it is a benefit for us, it is possibly a
disadvantage for him.
Question: How can a system work with so many
stand-alone Local Banks, many of them
of extremely small size?
Answer: They are ‘stand-alone’ mostly on the outside.
That’s what the customer sees. The customer does not see where the internal
administrative functions are performed. The customer of the Local Bank does not see that his account
statement is prepared and distributed by the Regional Bank. He does not see, or at least we hope he doesn’t see
it, that most of the administrative functions of the Local Banks are pooled.
Question: With so many Local Banks being involved in the supervision of the Regional Bank, how can that work in
practice?
Answer: It works because we all share similar values,
the values of Raiffeisen. There is very little room to depart from those
values. Suppose the managers of the Regional
Bank decided to become ‘professional managers’ like in a capital markets
oriented bank. They might invite a consulting firm to advise them how to
optimize structures. They might make a PowerPoint presentation to their
Supervisory Board. And then? Remember, that Supervisory Board consists of local
managers with the mindset of local managers. They wouldn’t understand the
PowerPoint presentation. Instead, they would probably begin to wonder whether
they had the right kind of managers at the Regional
Bank. Also remember, if the management of a centralized bank makes one very
bad decision, the consequences run through their network of branches and
subsidiaries. Our structure does not allow ‘one very bad decision’ to be made
by only one management. The risk that all managers support the same ‘one very
bad decision’ at the same time is very small.
Question: With so many entities, how can one control
risk effectively?
Answer: Every bank in the system is liable for every other
bank. Before one depositor loses money, the entire Raiffeisen organization
would have to disappear. The Local Banks
are liable for each other and for the Regional
Bank, and vice versa. That motivates everyone to watch what everyone else
is doing. The auditing arm of the Raiffeisen organization is completely
separate from the banking arm. It audits the Local Banks as well as the Regional
Bank. Furthermore, the Regional Bank
with its greater professional expertise monitors closely the performance of the
Local Banks. The Regional Bank cannot ‘dictate’ any measures to the independent
management of the Local Bank but the Regional Bank can make conditions for
‘continued support’ of the Local Bank.
One condition might be the replacement of local management.
What is the role of the Umbrella Bank?
(Raiffeisen Bank International)
With so many Local Banks and 9 Regional Banks, what can an additional Umbrella Bank possibly do?
Traditionally,
the principal role of RBI was to make sure that the full spectrum of
international services could be offered by every single Raiffeisen Bank, even
in the smallest town of Austria. Then followed other services which were deemed
to work better when pooled at the national level (Leasing, Fund Management,
Investment Banking, etc.). Also, the larger Austrian corporations preferred to
do business with a bank headquartered in Vienna and with direct international
competencies.
During the
1980s, RBI ventured into Eastern Europe with a small subsidiary in Budapest.
After the fall of the Iron Curtain, Eastern Europe exploded for RBI. Today, RBI
is the largest banking group in Eastern Europe with subsidiaries and national
banking networks in all countries. In many countries among the top-3 banks; in
some countries even the No. 1.
To finance
that expansion, RBI could no longer get by with only the equity provided by the
Regional Banks. Today, RBI is a
publicly traded bank with about 25% of its shares traded publicly. While still
under control of the Raiffeisen culture, it is quite noticeable that RBI now
has public shareholders who want a (short-term) return on their investment: RBI
focuses on ROE and it works with management consultants from time to time…
In terms of
structure, RBI is the ‘grand-daughter’ of Local
Banks (via the Regional Banks). The
East European subsidiaries of RBI are ‘great-grand-daughters’ of local Raiffeisen Banks. The significant
benefit of that is that, ultimately, RBI can fall back on the deposit base of
over 1.000 Local Banks (which act
like a vacuum sucker of deposits).
Example:
after Lehman, some of the East European subsidiaries of RBI faced liquidity
squeezes. They needed funding from RBI. Since RBI acts like a wholesale bank,
it did not have much of a deposit base on its own and the interbank market had
dried out. Nevertheless, RBI could draw on the resources of its owners, the Regional Banks. Since the Regional Banks did not have much of a
deposit base on their own, either, they had to draw on the Local Banks, their owners. And the Local Banks had the largest share of deposits of any Austrian
banking group. No better way to show the advantages of a bottom-up organization
than that!
Business philosophy of Raiffeisen
As explained
in great detail, one will never hear a Raiffeisen banker say something like
“our primary responsibility is to earn an adequate return for our
shareholders”. Instead, a Raiffeisen banker will say something like the
following: (I have heard it on innumerable occasions)
“Our
principal purpose is to provide our customers with the financial resources so
that they can take advantage of their market opportunities and grow. Our growth
and success depends on the growth and success of our customers. Our business is
not simply the lending of money. Instead, it is the providing of financial
resources. In most cases, the making of loans will serve that purpose well. In
some cases, our customers may be better served if we offer them other forms of
financing. Where we offer Private Equity, we don’t do that with an exit to
third parties in mind. Instead, we do it with a view that the customer will
benefit from that equity so much that he can eventually repurchase it out of
his own means. In other cases Leasing may be the best way to provide financial
resources to our customers. Or Factoring. Or whatever. It is the providing of
financial resources which is what we are here for.
Our customers
may not really ‘need’ us in good times but in bad times they must be able to
rely on us as a provider of financial resources. In order to be a reliable
financial partner, we must adequately provide for risks long before they occur.
When we attend the first bankers’ meeting after a company has announced
problems, we see a lot of bankers who are nervous. They are nervous because
they have not made any loan loss provisions yet. Their mindset is that,
whatever is decided, it should not harm their P+L. Thus, their focus is on
getting their money back as soon as possible, even if that means damaging the
company. Our view is that the greatest damage for all occurs in the case of
bankruptcy. Thus, wherever and whenever there is a reasonable hope that the
company can survive with our help, we have to provide that help. In the end, we
will most frequently be better off financially and we will certainly be better
off in terms of market reputation.
We are not an
end it and by itself. Instead, we can only exist because some people have money
and others need it. Thus, if we occupy ourselves with ourselves, we are
defeating the purpose. We cannot secure our well-being on our own. We need the
market and customers for that. What counts, above all, is customer satisfaction
and we are monitoring that carefully and continually.
Finally,
successful banking is not only about risk but, equally importantly, about
costs. Operating costs, that is. The more we spend on operating costs, the less
we have available for risk provisions and equity formation. As long as we keep
our operating costs in the range of 40-45% of revenues, we are in good shape.
That cost/income ratio is the most important yardstick which we are tracking
through the entire organization all the time”.
Conclusion
The first
Annual Report came out after I had been with the bank for about 9 months. The
first number I looked for was the ROE. I wanted to see how low it was when a
bank was not managed with a view towards maximizing ROE. Interestingly, the ROE
was about 12% and it had been in the range of 10-12% in the years before. Not
quite the 25% which Josef Ackermann promised his shareholders but, then, very
close to the 12% which Deutsche Bank had actually averaged during Ackermann’s
tenure.
There can be
no question that in a globalized world with globalized corporations, banks have
to be more than local, regional or national co-op’s if they are to service
their customers well. A publicly traded stock corporation seems to be the only
way to structure such a bank.
The question
is one of mindset and culture of a bank. A capital markets oriented bank will
communicate well with a capital markets oriented customer. They are both driven
by the same mindsets and culture (they ‘speak the same language’). A capital
markets driven bank and a middle-market entrepreneur may become a poisonous
combination because they are driven be different mindsets and cultures (they
hardly ever ‘speak the same language’).
My conclusion
is that for that segment of the economy which is not driven by a capital
markets mindset and culture, the organizational structure described above is a
most interesting alternative to that of a public stock corporation. And, if it
is works well, it can work extremely well for all sides. Much better than a public
stock corporation ever could in that market segment.
