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

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.