A Rollercoaster Ride of Czech Credit Unions Academic research paper on "Economics and business"

CrossMark

Available online at www.sciencedirect.com

ScienceDirect

Procedía Economics and Finance 25 (2015) 239 - 248

16th Annual Conference on Finance and Accounting, ACFA Prague 2015, 29th May 2015

A Rollercoaster Ride of Czech Credit Unions

Matej Kuca* Petr Teplyb

aCharles University in Prague, Institute of Economic Studies, Opletalova 26, Prague 110 00, Czech Republic bUniversity of Economics, Prague, Department of Banking and Insurance, W. Churchill Sq. 4, Prague 130 67, Czech Republic

Abstract

The aim of this paper is to assess the current situation of Czech credit unions in context of their past development, changing environment and legislative framework evolution. We focus on the differences between traditional cornerstones of cooperative banking and operating principles of Czech credit unions. We compare contemporary credit unions' performance with performance of their predecessors together with performance of commercial banks. We conclude that despite the crisis of 1999, Czech credit unions still behave like small and risky commercial banks what contradicts to business models of the credit cooperatives operating in the EU.

©2015TheAuthors.PublishedbyElsevierB.V.This is an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of University of Economics, Prague, Faculty of Finance and Accounting Keywords: Credit union; Cooperative banking; Moral hazard; Risk management

1. Introduction

Credit unions are retail oriented financial institutions with long tradition in the Czech Republic. Their development was disrupted by the Second World War and they were consequently liquidated by the communist regime. Credit unions that were founded under new legislation after the fall of communism experienced massive growth. However, poor legislative framework did not reflect modern trends in European cooperative banking and the boom turned into bust by the beginning of the new millennia. History repeated itself as credit unions regained lost confidence after few years of stagnation and grew rapidly in recent years. However, some of the biggest credit unions got into troubles recently and the Czech National Bank revoked their licenses.

* Corresponding author. E-mail address: matejkuc@seznam.cz

2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of University of Economics, Prague, Faculty of Finance and Accounting doi: 10.1016/S2212-5671 (15)00734-0

Aim of this paper is to try to explain current situation of Czech credit unions in context of their past development, changing environment and legislative framework evolution. Section 2 presents basics of cooperative banking, which is important for understanding of bizarre character of contemporary Czech credit unions. In Section 3, we provide a brief overview of history of cooperative banking in the Czech lands, putting stress mainly on the difference between institutions that were active before the Second World War and current ones. Section 4 discusses importance of the proposed legislation and its impact on credit unions in the Czech Republic. Section 5 summarizes the paper.

2. Cooperative banking in a nutshell

Stakeholder value banks are created to maximize utility of all their stakeholders, i.e. persons influenced by operations of a company (CEPS, 2009). Because stakeholder institutions try to maximize utility of more, often heterogeneous groups, they cannot have only one single concrete objective for example in profit maximization. Bare profit maximizing behavior would decrease utility of another group of stakeholders: their clients who would have to pay more for banks' services. Therefore, cooperative banks as typical example of stakeholder value banks may not try to maximize their profit to the same degree as commercial banks (Fonteyne, 2007). Nevertheless, profit is necessary prerequisite for survival and expansion of cooperative banks. Stakeholder value banks have more objectives than only profit maximization and from that reason, they are sometimes called double bottom line institutions (see e.g. Hillman and Keim, 2001). They are created to offer favorable financial services to their members who often share some common bond (such as place of living, occupation etc.). This is why cooperatives often focus on retail banking (Hesse and Cihák, 2007). Rich chains ofbranches help to create long term relationships between members and their cooperative bank. Close proximity to members help cooperatives to better identify members' profiles and needs and creates information advantage over commercial banks in dealing with asymmetric information (Angelini et al., 1998).

Cooperative banks are owned and democratically controlled by their members. Another difference between commercial and cooperative banks is that the ownership stakes of the latter one are usually not marketable and work on principle "one member one vote". It means that member cannot sell his share and it does not matter how much money he put into company's equity because he has got still only one vote at the general meeting. Fonteyne (2007) states that cooperative banks can enjoy advantage of notably lower cost of capital in comparison with shareholder driven banks. This fact can result in offering financial products by cooperatives at lower prices. Cooperative banks can face substantially more problems than commercial banks when trying to raise funds quickly. There can be significant legal restriction imposed on cooperatives activities on financial markets. For example, Czech credit unions are allowed to operate in financial markets only to secure risks arising from services to their members and hence cannot solve liquidity problems by bonds issuance.

During its life cycle, cooperative bank often draws a conclusion that creating a network with similar institutions can be mutually advantageous because it is hard for small company to compete with large commercial banks. Vast networks with different degree of both vertical and horizontal integration were created in countries with well-developed cooperative banking sector. Institutions atop of such structure can provide centralized services for the whole group if the economies of scale are present. Apex institutions, sometimes can become central banks of the group and manage liquidity between individual cooperatives, provide consultancy, risk management, marketing or product creation services (Guinnane, 1997). This centralization also helps in building strong brand name.

Typical problem of cooperative corporate governance is a dispersed ownership. Governance mechanisms of cooperatives were designed for small scale organizations, not for banks owned by thousands of members. Attendance at general meetings may become fairly low and information provided by managers may not be sufficient for members to ensure effective monitoring of banks' managers. Becht et al. (2002) point out that the problem of collusion between managers and supervisory board elected to monitor them may happen surprisingly often in case of dispersed ownership. Weak monitoring by members (or their delegates) allows managers to pursue empire building rather than following members' interests.

We should also mention the differences between credit unions and cooperative banks. Credit unions offer services only to their members (owners) whereas cooperative banks can serve to clients (non-owners) as well. Credit unions tend to be smaller than cooperative banks. Cooperative banks are sometimes created by a network of individual

credit unions. Credit unions are popular for example in the UK, Ireland, Poland and the Baltic states (Liikanen et al., 2012).

Above mentioned properties are considered to be typical for cooperative banking model in Europe. Nevertheless, there is not only a single model and cooperative banks differ significantly from country to country. For further details see e.g. CEPS (2010).

3. Historical development of(Czech) credit unions

This section serves as a brief overview of history of cooperative banking in Czech territory1. For greater lucidity, it is divided into three parts. The first subchapter explains historical context and ideas of founding fathers of credit unions: H. Schulze-Delitzsch and F. W. Raiffeisen. Subsequently, we will focus on development of cooperative banking in the Czech lands.

3.1. Origins of credit unions

Industrial revolution brought dramatic changes into the socio-economic environment of Europe. Population grew rapidly and its structure was altering. Nevertheless, not all the people utilized the merits of economic boom in the first half of the nineteenth century (CSSDA, 2004). One of the key assumptions for better life is accessibility to financial services (Guinnane, 1997). Even though German states had well developed banking sector at that time, most of the working class could not reach loans at reasonable rates. Guinnane (1993) considers significant information asymmetry and high cost of enforcement as main obstacles in making business with poor people. Operations with poor people were too costly for the banks because it was hard to get relevant information about clients from lower strata of society. Contract condition enforcement was also unprofitable considering small amounts of money poor people operated with. Angelini et al (1998) state that credit unions could overcome these difficulties since members had often very good information about their fellows and thanks to possibility of imposing additional immaterial penalties to members who did not fulfill their obligations. Both these advantages were resulting from the fact that members were living in the same community.

German economist Hermann Shulze-Delitzsch is considered to be the father of cooperative banking because he founded the first credit union in the beginning of 1850s. The goal of such institution in his view was to offer money to its members on the basis of common credit for the needs of their shops (Schulze-Delitzsch, 1855). Volksbanks, how Shulze-Delitzsch's institutions were later called, originated in urban areas and their members recruited mainly from craftsmen and petty traders.

Credit unions of Volksbank type were successful in urban environment but could not satisfy different needs of inhabitants of rural areas who were still excluded from the access to financial services (Goglio and Leonardi, 2010). Friedrich Wilhelm Raiffeisen was inspired by Schulze-Delitsch's ideas but altered some important characteristics so that the credit unions services suited better to the needs of farmers.

With increasing number of institutions, the need for organizations that would foster the development of credit unions appeared (Guinnane, 1993). Apex institutions proved to be essential in process of setting common standards for individual credit unions, educating managers and also auditing the cooperatives which helped as a signaling device towards third parties. They helped to allocate funds to individual cooperatives, smooth seasonal fluctuations, facilitate trade with banks or they worked as lenders oflast resort.

1 To make the picture complete, we refer to Dvorak (2010), Rippel et al. (2012), Revenda (2013), Mandel and Tomsik (2014), Klinger and Teply (2014), Teply (2012) or Sutorova and Teply (2013; 2014a; 2014b) for more details on regulation of the Czech and EU banking sector. Moreover, for related risk management practices see Divis and Teply (2005), Malek et al (2007), Cimburek and Rezabek (2008), Janda et al. (2010; 2015), Stavarek and Vodova (2010), Jakubik and Teply (2011), Buzkova and Teply (2012), Cernohorska et al. (2012), Stadnik (2013; 2014), Schlossberger (2011), Zamrazilova (2014) or Teply and Tripe (2015).

3.2. Credit unions in Czech lands until 1952

Situation in the Czech lands was not that dissimilar from that of their western neighbor. Lack of affordable credit for broad masses of society blocked growth and development. The first Czech credit union (from nationalistic point of view) was settled in 1858, less than ten years from the first European credit union. The credit unions followed the settings of Shulze-Delitzsch (their Czech name was obcanske zalozny) and they spread out rapidly. There were approximately 130 Czech credit unions in 1865 (Vencovsky et al., 1999) and from that time, 20 to 70 new credit unions were founded every year until the crash of Vienna's stock exchange in 1873 (Hajek, 1984). Capital of the ten biggest Czech credit unions multiplied almost ten times between 1863 and 1868 (Vencovsky et al., 1999). The boom was therefore not only in the total number of credit unions but also in their size.

The development of rural credit unions (Raiffeisen type) in Bohemia was not that fast. Propagator of Czech rural credit unions was Frantisek Cyril Kampelik. He described operating principles of these institutions and endorsed their merits in his work from 1861. Nevertheless, ideas of Kampelik were not put into practice sooner than in 1880s when the first rural credit unions of Raiffeisen type were created. Later on, as an honor to the Czech propagator of this scheme and to distinguish them from their German counterparts, they were colloquially called kampelicky. Afterwards, number of rural credit unions rocketed and in 1912 there were almost 3,700 rural credit unions (Vencovsky et al., 1999).

We have much more data on Czech credit unions available from period ofthe first Czechoslovak Republic (19181938). Even though the economy went through challenging times, we can see gradual increase of credit unions on our territory in Table 1.

Table 1. Czechcreditunions, 1919-1937.

Year 1919 1929 1937

Type Schul. Raiff. Schul. Raiff. Schul. Raiff.

Nr. of institutions 1,413 3,735 1,866 4,190 1,983 2,919

Members (ths) 472 382 844 621 1,017 461

Deposits (CSK mil) 2,485 1,355 11,904 3,220 14,693 3,217

Loans (CSK mil) 997 234 9,934 3,221 11,195 2,236

Source: Vencovsky et al. (1999)

Even though there were more rural credit unions than urban credit unions, the overall size of urban ones was bigger in terms members or of total loans granted. Both institution types were roughly equal in terms of deposits with total amount close to CSK 3 billion each in 1937. Just for comparison, total deposits ofthe 23 biggest Czech shareholder banks in 1936 were almost CSK 9 billion (Mervart, 1996). Size of average cooperative financial institution also increased quite significantly in this period as is clear from Table 2 below.

Table 2. Average size of credit union, 1919-1937.

Year 1919 1929 1937

Type_Schul. Raiff Schul. Raiff. Schul. Raiff.

Members 334 102 452 148 513 158

Deposits (CSKths) 1,759 363 6,379 768 7,409 1,102

Loans(CSKths) 706 63 5,324 769 5,645 766

Source: Vencovsky et al. (1999)

All credit unions went under management of a single central governmentally controlled organization throughout the time of German occupation during the Second World War. Nationalization of Czech banking industry started already in 1945. More and more financial institutions were put under state control as power of communists and socialists grew. Finally, decree number 84/1952 from 11th December 1952 put all credit unions under state savings bank. This meant the end ofcooperative banking in the Czech region for more than forty years.

3.3. Credit unions reborn, 1995+

Czech banking sector had to undertake dramatic changes once again after the fall of communist regime. Number of companies rocketed in the beginning of the nineties, causing higher demand on banking administration. Number of employees of banking sector grew accordingly but there were not enough qualified workers available. After a lengthy debate, politicians decided to allow return of credit unions back on the market. One of the arguments was low willingness of shareholder banks to offer credit to small clients in the beginning of the transition from centrally planned economy. Credit unions should have filled this hole on the marketjust as they did a century ago.

Act number 87/1995 provided legislation for credit unions. It was supported by politicians among almost whole political spectrum despite the criticism from the Czech National Bank (CNB). According to the CNB, the decree did reflect neither current tendencies in Czech banking sector nor those in developed Western European markets where cooperative banks were often hardly distinguishable from shareholder banks. The most frequently mentioned pitfalls were very relaxed conditions to enter the market, ineffective supervision and insufficient deposit insurance fund.

Only CZK 100,000 of registered capital was sufficient to start a credit union. There was no licensing procedure for new entrant - it was enough to inform the authority about starting the operations. Moreover, there were no conditions imposed about theoretical education or previous experiences of founders or key managers. This meant that almost any group of people could start operations in the financial sector by creating their own credit union. Number of institutions grew accordingly: 45 new cooperative banks were founded during the first year. Extensive growth of 1996 was transformed into intensive one in three successive years. It had to be hard for credit unions to deal with high increment of members and resulting quick changes of companies' structures. Members were attracted to credit unions by high interest rates on their deposits (Dvorak, 2004). Higher interest expenses had to be financed by riskier operations which could yield higher profit but managers often failed to assess risks correctly.

The difference between growth of deposit and growth of loans is striking. Credit unions attracted significant amount of funds by depositors but they did not use them to provide loans which was assumed to be one of their key functions. Loans to deposit ratio ofthe whole sector remained deeply below 50% until the crisis of 1999.

Table 3. Overview ofcreditunion sector, 1996-2001.

Year 1996 1997 1998 1999 2000 2001

Nr. of institutions 45 66 76 139 73 56

Members 7,092 25,160 63,301 126,000 9,580* 10,915*

Deposits (CZK mil) 176 1,257 4,485 10,451 628* 766*

Loans (CZK mil) 45 196 1,855 1,266* N/A N/A

Assets (CZK mil) 211 1,414 4,687 5,381* 793* 954*

Source: UDDZ (2002)

We should stress the problem of inadequate supervision. Credit unions were not supervised by Czech National Bank but by special bureau created for the purpose: Bureau for Supervision over Credit Unions (UDDZ, Urad pro dohled nad druzstevnimi zaloznami). The bureau was established as late as in 1997 when plenty of credit unions were already in operation. Holes in law allowed credit unions to create subsidiary companies with unlimited lines of business. UDDZ had no competence to control such companies and credit unions used them to hide assets of poor quality or just everything they did not want to be controlled. UDDZ had only 5 employees in the beginning of 1999 (UDDZ, 2000) which was not enough to control industry sufficiently. Furthermore, there were no special demands on auditors of credit unions unlike in case of banks. Traditional control mechanism of credit unions, general meeting, failed as well, mainly because of low competence of members and poor information provision by bank managers (Dvorak, 2004). Poor controlling mechanisms allowed credit unions to continue in bad operations and therefore, they created more and more losses as long as they were having enough funds to remain liquid. This changed when deposit inflow slowed down due to adverse macroeconomic consequences in the end of 1999. Rumors about bad condition of individual credit unions spread out as the first ones got into troubles causing further

pressure on credit unions' liquidity as members massively withdrew their deposits. Total breakup of cooperative banking industry was soon to come.

We are getting here to next point of criticism of Act 87/1995: insufficient deposit insurance fund. It worked separately but according to similar rules as deposits insurance fund of banks. One key difference was a lower payment rate for credit unions into their fund. This originated from an idea that credit unions are less risky than banks but it proved to be absolutely wrong in the Czech setup. There were less than CKZ 20 million in the fund in 1999 (UDDZ, 2000). This number was ridiculous compared to estimated minimal losses at the level of CZK 6 billion (UDDZ, 2001). In the beginning of 2004, the overall payments to depositors were quantified at CZK 8.1 billion (UDDZ, 2005). The loan by the government was given to the deposit insurance fund in order to keep confidence in the financial system even though the state had no such obligation.

Credit union sector was relatively concentrated - 5 biggest credit unions held 73 % of members' deposits of the whole sector in the end of 1999 (UDDZ, 2000). Unfortunately, all of them run into financial distress. Credit unions that shared some link among members, such as occupational or locational, proved to be more resilient to this crisis of the sector. In the end, credit unions that were holding more than 85 % of deposits of the whole sector underwent government receivership in 2000 (UDDZ, 2001). This crisis of Czech cooperative banking scheme did not have vast consequences for the economy since the market share of credit unions was much smaller than in the time of Czechoslovakia. Deposits in credit unions accounted only for 1.3 % of total household deposits in 2000 (UDDZ, 2001).

New legislation was adopted as a reaction on a disappointing development in the sector. Act number 100/2000 altered Act 89/1995, fixing some long time criticized features. It prohibited credit unions from taking ownership share in other companies, increased minimal registered capital to CZK 500,000, newly created credit union had to ask for permission to provide services or it gave more competences to supervising bureau which was later fully incorporated under the Czech National Bank. Situation on the market got stabilized but the problem was to regain lost confidence in cooperative banking in the Czech Republic. Credit unions were small and growing slowly. In fact, quantity of functioning credit unions has been shrinking since 1999. Some of the smallest credit unions were forced to leave the market as the Czech Republic unified legislation with the European Union. Crucial point of this process was rising the minimal registered capital requirement to EUR 1 million. Czech Act No. 280/2004 set the minimal amount of registered capital to CZK 35 million. This step further reduced number of surviving credit unions by 10to only 20 normally functioning ones at the beginning of 2005.

Despite that the number of credit unions has been shrinking, balance sheet of the sector has been increasing. Annual growth rate of the sector in terms of members was 12 % between 2004 and 2012. Members' deposits and loans grew approximately by 40 % per annum during that time period. Annual equity growth of the sector was slower (26 %) than balance sheet growth (38 %) which meant lowering relative safety cushion. Nevertheless, capital ratio of the credit unions sector was 13.3 % in 2012 (CNB, 2013) which was still well above the 8 % regulatory requirement. Matejasak and Teply (2013) see decrease of capital ratio as a serious threat. Their study suggests that current capital may be overvalued due to insufficient creation of asset provisions. Moreover, fast growth of members' loans and increased capital requirements imposed by Basel 3 may build up further pressure on creation of new capital.

Table 4. Overview ofcredit union sector, 2004-2012.

Deposits (CZK mil) 1,525 3,146 5,217 7,031 10,282 15,672 17,668 25,060 33,816

Loans(CZK mil) 1,337 2,756 4,133 5,189 6,718 8,778 12,569 19,327 28,178

Assets (CZK mil) 2,146 4,190 3,809 8,947 12,061 17,649 19,890 28,275 39,279 Source: CNB (2007, 2009, 2012, 2013)

Most of credit unions which left the market after 2005 were forced to do so by the supervisor. CNB arguments for their closure were significant insufficiencies in credit unions activities and preventive reasons. Concretely insufficient loan securitization, poor monitoring, non-fulfilment of capital requirements, surpassing the engagement limits or poor management were drawbacks that appeared in supervisor's announcements. Fio druzstevni zalozna

2004 2005 2006 2007 2008 2009 2010 2011 2012

Nr. of institutions Members

33 20 20 19 17 17 14 14 13 19,077 30,611 36,637 44,789 35,942 47,952 34,003 44,687 54,408

transferred from credit union into bank in 2010 causing noticeable decline of credit unions' members on that year. More credit unions declared interest to transform into a bank but none has been successful yet. One of the main obstacles is probably the need for CZK 500 million of registered capital which is hardly achievable for any of contemporary credit unions.

4. Contemporary structure of credit unions sector and possible pitfalls

In this section, we are going to tackle some problems of contemporary Czech credit unions and we will try to explain them by the structural differences of current institutions from their predecessors and from their European counterparts.

Important is to realize that the Czech Association of Credit Unions (Asociace druzstevnich zalozen) in not a member of the World Council of Credit Unions (WOCCU). This seems suspicious since associations from nine other European countries with developed credit union system are members of the WOCCU. One of the reasons may be that the Czech credit unions are not governed on famous one member one vote principal but members can buy more membership shares and have significant impact on the institution. In this respect, Czech credit unions resemble more commercial than cooperative banks.

Interesting feature of Czech legal framework is that the Czech credit unions are disallowed to grant mortgage loans. This is serious restriction for the credit unions are unable to grant one of the safest loan products. Instead, they are focused on consumer credit and real estate financing which are much more risky segments. This is visible from comparison of loan categorization of Czech commercial bank sector with credit union sector provided in Table

5. Only 60 % of loans provided by credit unions are paid on time and 15 % of loan portfolio was more than 90 days overdue as of the end of 2012. Moreover, there is deteriorating trend in quality of credit union's portfolio as the ratio ofstandard loans has been shrinking since 2008 as a by-effect of economic slowdown.

Table 5. Comparison of client loan categorization, 2012.

Categorization Commercial banks Credit unions

Standard 90% 60%

Watch 4% 25%

Sub-standard 2% 7%

Doubtful 1 % 3 %

Loss 4% 5%

Source: CNB (2013), annual reports ofcredit unions

Higher riskiness of loan portfolio should be compensated by higher capital buffer in order to keep, ceteris paribus, same degree of stability of both commercial banks and credit unions. That this does not hold is clear from Figure 1. Capital adequacy of commercial banks is gradually increasing thanks to their retained earnings but credit unions were unable to keep capital adequacy as their loan portfolios increased. Moreover, capital needs will be increasing as Basel III rules will come to life. This creates a dangerous mix for the stability ofCzech credit unions.

Source: CNB (2008, 2009, 2010, 2011, 2012, 2013)

Fig. 1. Capital adequacy development, 2007-2012.

Lack of capital is further supported by policy of insignificant price of membership shares required to enter credit union. Equity from membership shares cannot form substantial amount of capital, if most of the credit unions charge less than CZK 100. This is common practice of Czech credit unions in order to attract clients. Drawback for the credit union is not only in lack of capital but it also destroys the cooperative spirit of institution as the members have not inserted a lot of own capital into cooperative and therefore, they tend to feel more like clients of the bank than like members of the cooperative. This flaw should be put aside by legislation novel which sets minimal ratio of membership share to insured deposits to 1:10.

To obtain funds for growing loan portfolios, credit unions need to attract clients. To attract them, they have to offer high interest rates on deposits. Typical deposit products in Czech credit unions are term and savings accounts which are rather expensive sources of funding and they are also less stable than current accounts. Although the credit unions are considered more risky, they profit from moral hazard oftheir clients who do not have to distinguish between stability of credit unions and commercial banks since their deposits are equally 100% insured up to EUR 100,000 in both types of banks. This fact, connected with common deposit guarantee scheme of credit unions and commercial banks is often criticized by CNB representatives (see e.g. Tomsik, 2013; 2015) and academics (Matejasak, Teply, 2013).

Talking about growth of credit unions portfolios, let us compare average size of contemporary credit union with average credit unions from 1937 and from 1998, which was the last year before the famous collapse of the sector. We took cumulated inflation (Harmonized Index of Consumer Prices and its predecessors) from Czech Statistical Office (CSU) from 1939 until 2012 and we recalculated size of average credit union in terms of loans and deposits form 1937 and from 1998 into price level of 2012 to make comparison with contemporary credit unions. This simple method has several flaws: lack of inflation figures for some years, monetary reforms etc. but it can still show us how different were Czech credit unions in past and now. From the results provided in Table 6, it is clear that the average size ofcredit union increased significantly in time.

Table 6. Comparisonofaverage creditunionfrom years 1937, 1998 and 2012.

Year 1937 1998 2012

Type_Schul. Raif. N/A_N/A

Members 513 158 833 4,185

Deposits (CZK ths, price level of 2012) 18,144 7,878 96,581 2,585,434

Loans (CZK ths, price level of2012) 13,822 5,475 24,407 2,132,183

Loans to deposits ratio 76 % 69 % 25 % 82 % Source: own computations based on Vencovsky et al. (1999), UDDZ (2002) and CNB (2013)

Despite the growth of average size of an institution, balance sheet of all 13 credit unions that were operating in the end of 2012 put together is comparable to the smallest commercial banks on the Czech market. Therefore, it is striking that there does not exist any apex institution that would incorporate credit unions under one network, just as it is typical in other European countries. Role of apex institution for Czech credit unions in the past was carried out by Zivnobanka which was founded by credit unions but this system was abandoned in the difficult times of the Second World War and was not restored after the fall of communist regime. This lack of coordination makes standalone Czech credit unions much more vulnerable then e.g. Raiffasenbanks' or Volksbanks' networks in Austria.

Another principle of cooperative banking is that members of a bank should be interconnected by some common bond such as place of living, occupation etc. This also does not seem to be true in the current Czech setup. Whereas for example in Poland, we can see credit unions focused on certain regions or communities such as miners or farmers, no such thing can be traced in the Czech Republic. Despite the small size, bigger Czech credit unions try to operate mostly nation-wide with branches spreading across the country. They tend to offer whole range of products for retail, corporate and for real estate investments. With small portfolios consisting only of hundreds of borrowers,

this lack of specialization can cause problems. It is hard to imagine that the Czech credit unions, where the biggest institutions have only around one hundred workers, can have sufficient amount of specialists for each segment.

5. Conclusion

This paper shows that development ofCzech credit unions more or less copied track oftheir German counterparts in the past, but some of the very cornerstones of cooperative principles were abandoned after the rebirth of cooperative banking in the Czech Republic. Poor legislative framework and insufficient supervision lead to massive crisis of the sector in 1999. Some of the problems like poor supervision or low capital standards were consequently corrected. Nevertheless, the rotten core of pseudo-cooperative principles remains. Not-following basic WOCCU principles of cooperative banking such as one member one vote, lack of common bond between members in individual organizations and their low interest in performance of credit union induced by small membership shares makes Czech credit unions resemble rather small and risky commercial banks than proper cooperatives. This all, together with hardly sufficient capital buffers, risky asset portfolios, unstable and expensive funding and with challenging low interest rate macroeconomic environment may point out that a rollercoaster ride of Czech credit unions has not yet ended.

Acknowledgements

Financial support from the Czech Science Foundation (projects No. GA15-00036S and GA14-02108S), the Grant Agency of Charles University in Prague (project No. 105815), and University of Economics in Prague (project No. VSEIP100040) is gratefully acknowledged.

References

Angelini, P., Di Salvo, R., Ferri, G., 1998. Availability and cost of credit for small businesses: customer relationships and credit cooperatives.

Journal ofBanking & Finance 22.6, pp: 925-954. Becht, M., Bolton, P., Roell, A., 2002. Corporate Governance and Control. European Corporate Governance Institute - Finance Working Paper No. 02/2002.

Buzkova, P., Teply, P., 2012. Collateralized Debt Obligation's Valuation Using the One Factor Gaussian Copula Model. Prague Economic Papers, 2012, vol. 21, no. 1, pp. 30-49.

CEPS, 2009. Investigating diversity in the banking sector in Europe: the performance and role ofsavings banks. CEPS. Brussels, 2009. CEPS, 2010. Investigating Diversity in the Banking Sector in Europe - Key Developments, Performance and Role of Cooperative Banks. Brussels, 2010.

Cimburek, J., Rezabek, P. 2008. Currency in circulation: global trends and the situation in the Czech Republic, Politicka ekonomie, 56, 6, 739758

Cernohorska, L., Teply, P., Vrabel, M., 2012. The VT Index as an Indicator of Market Liquidity Risk in Slovakia. Journal of Economics, 2012,

vol. 60, no.3, pp. 223-238. CNB, 2007. Zprava o vykonu a dohledu nad financnim trhem 2006. CNB, Prague, 2007. CNB, 2008. Zprava o vykonu a dohledu nad financnim trhem 2007. CNB, Prague, 2008. CNB, 2009. Zprava o vykonu a dohledu nad financnim trhem 2008. CNB, Prague, 2009. CNB, 2010. Zprava o vykonu a dohledu nad financnim trhem 2009. CNB, Prague, 2010. CNB, 2011. Zprava o vykonu a dohledu nad financnim trhem 2010. CNB, Prague, 2011. CNB, 2012. Zprava o vykonu a dohledu nad financnim trhem 2011. CNB, Prague, 2012. CNB, 2013. Zprava o vykonu a dohledu nad financnim trhem 2012. CNB, Prague, 2013.

CSSDA, 2004. The Co-operative Movement in Cyprus. The Co-operative Societies' Supervision and Development Authority, December 2004 Divis, K., Teply, P., 2005. Information efficiency ofCentral Europe stock exchanges. Czech Journal ofFinance 55, 471-482. Dvorak, P., 2004. Analyza pricin krize ceskeho druzstevniho bankovnictvi. Article. Analyza pricin a dusledku ceske financni krize v 90. letech, pp. 93-100. Praha, VSE.

Dvorak, P., 2010. What to Expect from Basel III? European Financial and Accounting Journal, 2010, vol. 5, no. 3, pp. 4-6. Fonteyne, W., 2007. Cooperative Banks in Europe - Policy Issues. IMF working paper 2007/159. July 2007.

Goglio, S., Leonardi, A., 2010. The roots of cooperative credit from a theoretical and historical perspective. Euricse Working Papers 10011,

Euricse (European Research Institute on Cooperative and Social Enterprises), 2012. Guinnane, T. W., 1993. Cooperatives as Information Machines: the Lending Practices of German Agricultural Credit Cooperatives, 1883-1914. Economic Growth Center Discussion Paper No. 699, Yale University, 1993.

Guinnane, T. W., 1997. Regional organizations in the German cooperative banking system in the late 19th century. Research in Economics, Elsevier, 1997, vol. 51,no.3, pp. 251-274,

Hajek, J., 1984. Pocatky a rozmach ceskeho zalozenskeho hnuti ve treti ctvrtine 19. stoleti. Hospodarske dejiny, Praha: Ustav ceskoslovenskych a svetovych dejin CSAV, vol. 12, pp. 265-320.

Hesse, H., Cihak, M., 2007. Cooperative Banks and Financial Stability. IMF Working Papers, No. WP/07/02, SSRN, International Monetary Fund, Washington, D.C.

Hillman, A. J., Keim, G. D., 2001. Shareholder value, stakeholder management, and social issues: what's the bottom line?. Strategic management journal, 2001, vol. 22, no. 2, pp. 125-139.

Jakubik, P., Teply, P., 2011. The JT index as an indicator of financial stability of corporate sector. Prague Economic Papers, 2011, vol. 20, no. 2, pp.157-176.

Janda, K., Michalikova, E., Potacelova, E., 2010. Gravity and fiscal models of government support of export credit in the Czech Republic. Politicka ekonomie, 2010, vol. 58, no. 3, pp. 305-325.

Janda, K., Zetek, P., 2015. Microfinance Revolution: Controversies and Challenges. (In Czech Mikrofinancni revoluce: kontroverze a vyzvy), Politicka ekonomie, 2015, vol. 63, no. 1, pp. 108-130.

Klinger, T., Teply, P., 2014. Systemic risk of the global banking system - an agent-based network model approach. Prague Economic Papers, 2014, vol. 23, no. l,pp. 24-41.

Liikanen, E.; et al., 2012. High-level Expert Group on reforming the structure ofthe EU banking sector. Brussels: European Commission, 2012.

Malek, J., Radova, J., Sterba, F., 2007. Yield curve construction using government bonds in the Czech Republic. Politicka ekonomie 55, 792-808.

Mandel, M., Tomsik, V., 2011. Regulation ofthe banking sector from the economic theory's point of view. Politicka ekonomie, 2011, vol. 59, no. 1, pp. 58-81.

Mandel, M., Tomsik, V., 2014. Monetary Policy Efficiency in Conditions of Excess Liquidity Withdrawal. Prague Economic Papers, 2014, vol. 23, no. 1, pp. 2-23.

Matejasak, M., Teply, P., 2013. Kampelickyjako dynamit na ceskem trhu?. Cesky financni a ucetni casopis, 2013, no.l, p. 33-47.

Mervart, J., 1996. Ceske bankovnictvi do roku 1936. Prague: Institut ekonomie Ceske narodni banky, 1996.

Revenda, Z., 2013. Theoretical and economic aspects ofdeposit insurance. Politicka ekonomie, 2013, vol. 61, no. 2, pp. 149-170.

Rippel, M. Suchankova, L., Teply, P. 2012. The Role of Insurance in Operational Risk Mitigation - A Case Study, Politicka ekonomie, 60, 4, 523535

Schulze-Delitzsch, H., 1855. Vorschuß- Vereine als Volksbanken. Leipzig: Keil, 1885.

Schlossberger, O., 2011. Cross-border payment system cuts state boundaries, 9th International Conference on Hradec Economic Days 2011 -Economic Development and Management of Regions Location: Univ Hradec Kralove, Fac Informat & Management, Hradec Kralove, Czech Republic

Stadnik, B., 2013. Market Price Forecasting and Profitability - How To Tame Random Walk? Verslas: Teorija ir Praktika/Business: Theory and Practice, 2013, vol. 14, No. 2, pp. 166 - 176.

Stadnik, B., 2014. The Puzzle of Financial Market Distributions. Ekonomicky Casopis (Journal ofEconomics), 2014, vol. 62, no. 7, pp. 709-727.

Stavarek, D., Vodova, P., 2010. Analysis ofLong-run Relationships on the Credit Market. E + M Ekonomie a Management, 2010, vol. 13, no. 30, pp. 83 - 95.

Sutorova, B., Teply, P., 2013. The Impact ofBasel III on Lending Rates ofEU Banks. Czech Journal ofFinance, 63, 3, 226-243.

Sutorova, B., Teply, P., 2014a. The Level ofCapital and the Value ofEU Banks under Basel III. Prague Economic Papers, 23,2, 143 - 161.

Sutorova, B., Teply, P. 2014b. EU Banks' Profitability and Risk Adjustment Decisions under Basel III. Ekonomicky casopis (Journal of Economics), 62, 7, 667-692.

Teply, P. 2012. The Application of Extreme Value Theory in Operational Risk Management. Ekonomicky casopis (Journal ofEconomics). 60, 7, 698-716.

Teply, P., Tripe, D. (2015). The TT Index as an Indicator of Macroeconomic Vulnerability of EU New Member States. Ekonomicky casopis (Journal ofEconomics). 63, 1, 19-33.

Tomsik, V., 2013. Neuhlidany moralni hazard. Article; published 5/24/2013; retrieved 2/5/2014, available online: http://dialog.ihned.cz/cl-59936300-neuhlidatelny-moralni-hazard.

Tomsik, V., 2015. Rozlisujme mezi druzstevnictvim a bankovnictvim. Bankovnictvi 1/2015, available online: http://www.cnb.cz/cs/verejnost/pro_media/clanky_rozhovory/media_2015/cl_15_150127_tomsik_bankovnictvi.html

UDDZ, 2000. Zprava o cinnosti a hospodareni Uradu pro dohled nad druzstenimi zaloznami za rok 1999. USSZ, Prague, 2000.

UDDZ, 2001. Zprava o cinnosti a hospodareni Uradu pro dohled nad druzstenimi zaloznami za rok 2000. USSZ, Prague, 2001.

ÜDDZ, 2002. Druzstevni zalozny. Rocenka HN 2002; Prague: Economia, 2002, pp. 135-136.

UDDZ, 2005. Zprava o cinnosti a hospodareni Uradu pro dohled nad druzstenimi zaloznami za rok 2004. USSZ, Prague, 2005.

Vencovsky, F., Jindra, Z., Novotny, J., Pulpan, K, Dvorak, P., 1999. Dejiny bankovnictvi v ceskych zemich, Prague: Bankovni institut.

Zamrazilova, E. 2014. Monetary policy: short-term stabilization versus long-term risks, Politicka ekonomie, 62, 1, 3-31