Mutual Banks: An Old Model for a New Economy?


This guest post by Alice Maggio, UEP alumna (M.A. ’19), was first published on Professor Penn Loh’s official blog. The content is adapted from Alice’s thesis research. Read the original article, posted on Apr. 14, 2020, here, and download the full thesis here.

Not all banks are created equal. Most are owned by Wall Street investors, while some are owned by their own customers (such as credit unions). The mutual bank, governed like a trust by a small group of “corporators,” occupies a position somewhere in between. Not beholden to stockholders, these mutuals are more free to act in ways that contribute to their communities, employees, and environmental sustainability. They can be critical catalysts for building community wealth and solidarity economies. To explore these possibilities, I conducted a case study of Lee Bank, a mutual bank in the Berkshire region of western Massachusetts where I am a corporator.

While many other banks across the country have, since the 1970s, converted to shareholder ownership, Lee Bank has remained a mutual. The bankers I interviewed argued that the bank’s mutuality allows it to retain local decision-making power, employ long-term thinking, and keep its focus on the Berkshire Region. My research indicates that the bank’s mutual structure has also made it more possible for the bank to build community wealth in the following ways.

Lee Bank prioritizes the financial stability and well-being of its employees, offering

  • Student debt paydown assistance
  • College savings contributions
  • 100% employer-paid secondary education and continuing education
  • Extensive health insurance with wellness add-ons
  • Profit sharing
  • Special programs such as holiday farmer’s market shopping sprees with local currency
  • Transparent and in-person management and leadership

Lee Bank’s lenders continue a long tradition of “relationship lending,”

  • Using local deposits to lend locally, retaining profits (thereby anchoring money in the region, rather than letting it leak out to money centers like New York City)
  • Making lending decisions based on local knowledge of the region
  • Serving as advisors to borrowers, helping them in rough times

Lee Bank takes its commitment to the broader Berkshire community seriously,

  • Pledging to give away 5% of its profits to local non-profits each year as a “community impact dividend”
  • Participating in county-wide collaborations between nonprofits, foundations, and businesses to address pressing issues such as the lack of affordable housing
  • Serving as a key partner in BerkShares local currency, a solidarity economy experiment

At the same time, I found that there was a lot of room for growth in the way that the bank and its representatives understood and communicated the concept of mutual governance. Chiefly, the bank could build on its quasi-democratic nature and ramp up its investment in solidarity economy initiatives in the Berkshire Region.

As networks of mutual aid blossom around the country in the face of the coronavirus crisis, the concept of mutuality may be more accessible than at any other time in recent history. If we want to build an economy based on solidarity that can advance human and environmental well-being, we will need financial institutions to mobilize their substantial resources to help us do so. Now is the perfect time for mutual banks to boldly embrace their heritage and evolve to meet the present need.

Economic diversity is all around us

With all its talk of “winners and losers,” the political and economic discourse of our time often kowtows to a mindset of scarcity. In this dog-eat-dog worldview, the idea is that there is not enough for everyone, and that we must therefore compete to survive. When you start from this point of view, injustice and inequality begin to seem, in some way, excusable. After all, the story goes, some people are just better at “pulling themselves up by the bootstraps.”

However much our economic and civic institutions seem to operate on these assumptions, what I have learned in the past eight years (since taking an internship at the Schumacher Center for a New Economics in 2012) is that, in fact, we are also surrounded by other ways of organizing our economy—models for community ownership of land, worker-owned businesses, and democratized control of capital. Some of these you may not have ever heard of, but others—like your local food co-op—you might find just down the road.

For my master’s thesis at Tufts’ Urban and Environmental Policy and Planning program I decided to investigate one model that has been around for a long time, but that has not garnered much attention from scholars or organizers of late, the mutual bank.

My own interest in mutual banks was spurred by my experience working on the BerkShares local currency program in the Berkshire region of Massachusetts, where we partnered with a number of regional banks. Through this work, I was eventually asked to become a “corporator” of Lee Bank, one of the banks that exchanges BerkShares at its branches.

What’s a corporator? you may ask. That’s what I asked, too.

As it turns out, Lee Bank is a mutual bank, and as such, it has neither shareholders (as a publicly traded company would) nor members (as a credit union or cooperative bank would). Instead, it is owned by its depositors but governed by a small subset of those depositors, known as corporators. This corporate form strongly resembles a trust, where a few people control an entity on behalf of a defined beneficiary or group of beneficiaries.

Besides its governance, one of the other defining features of the mutual bank is that it must rely on retained earnings (a.k.a. profits) for its lending capital, whereas a shareholder-owned bank can issue stocks or shares to raise capital. As I learned from a dive into the history of banking, this was one of the reasons that the mutual form has been increasingly abandoned since the late 1960s; as banking regulations relaxed and banks sought to grow bigger and bigger, they wanted fast access to more capital to fuel their expansion.

Mutual banks, like credit unions or cooperatives, are supposed to deliver value back to their own users, whereas shareholder-owned banks are designed to deliver value back to their shareholders. Image credit: Alice Maggio

The more I spoke to the Lee Bank’s top management the more I heard them talk about how they were focused on serving Berkshire County. This place-based commitment was in stark contrast to another homegrown bank with which I was familiar, which had converted to shareholder-ownership and grown rapidly outside of the Berkshire region in the past two decades. I began to wonder how important Lee Bank’s status as a mutual bank was to its direction.

Relic of times gone by or resource for a better future?

I became interested in the idea that mutual banks might be a latent economic tool waiting to be fully activated to help build an economy that prioritized the well-being of people and the planet over the generation of profit. In my graduate thesis at Tufts UEP, I framed my question this way: “How can Lee Bank, a rural community bank structured as a mutual, be a part of the burgeoning solidarity economy movement to build ‘community wealth?’”

I used Penn Loh and Boone Shear’s 2015 article “Solidarity economy and community development: emerging cases in three Massachusetts cities” to ground my conception of the solidarity economy movement. Loh and Shear argue that solidarity economy initiatives do the following:

  1. Demonstrate that an economic system in which solidarity is a core value is possible
  2. Further people’s agency by enacting participatory economic practices that meet felt needs
  3. Build political power between and among places at different scales (local, regional, national, international)

I looked to Steve Dubb’s article “Community Wealth Building Forms: What they are and how to use them at the local level” to define community wealth building. According to Dubb, community wealth building is a community development strategy that focuses on the following:

  1. Leveraging existing flows of dollars in a place (especially significant flows from large “anchor” institutions) and
  2. Anchoring those flows using democratically governed institutions that can “broadly share the wealth generated among community members”

These were the central frameworks that I used to analyze the findings of my primary research, which consisted of interviews with employees, senior managers, board members, and corporators at Lee Bank. First, I wanted to find out how much Lee Bank currently operated in a way that aligned with community wealth building and the solidarity economy. Second, I was hoping to find ways that Lee Bank might more actively embrace or step into a solidarity economy role.

Getting clearer about the meaning of mutuality

What I found was that Lee Bank’s mutuality was indeed a very important part of its history, its identity, and its direction. The most overwhelming reason that the people I interviewed valued Lee Bank’s mutual structure was because it allowed the institution to remain accountable to the people of Berkshire County, as opposed to having to answer to (anonymous, far-away) shareholders.

My interviewees argued that Lee Bank’s mutual structure allows it to maintain consistency and stability, engage in long-term thinking, and preserve and promote local decision-making. They explained that because the bank does not have to deliver value to shareholders, it can deliver more value to its customers, its employees, and its region. Some described a positive cycle of alignment between organizational purpose and customer satisfaction. In short, mutuality enables Lee Bank to center solidarity values in meaningful ways.

Despite this universal enthusiasm for the results of mutuality, my interviews revealed that it is not easy to communicate the concept or value of mutuality–either internally or externally to the public.

One of the challenges, I think, is that mutual banks have a quasi-democratic governance that is not developed robustly enough. As the CEO of Lee Bank Chuck Leach reflected: “The corporators are very powerful, but we just don’t see them very often.” Corporators have the legal authority to elect the bank’s board of directors, and thereby can serve as a check on the direction of the bank. However, there is no process laid out by law or in Lee Bank’s own bylaws to specify how corporators should be chosen. In practice, they are chosen by the top management and board of directors of the bank. And because the only concrete role of the corporators is to show up at the annual meeting, their participation would hover around the “informing” or “consultation” level, if placed on Arnstein’s ladder of citizen participation.

The circular logic of Lee Bank’s governance model means that the mutual bank is missing out on an opportunity to do what Loh and Shear called “furthering people’s agency by enacting participatory economic practices that meet felt needs.” Through its role as a lender, Lee Bank already plays a key role in helping people meet their felt needs (for shelter or economic productivity, for example), but its participatory practices could be further developed.

CEO Chuck Leach has already expressed interest in fostering more points of connection with the corporators, so that they can be more informed about the bank’s direction but also so that they can offer more insight. It might also be beneficial for mutual banks to create clear guidelines for how corporators should be chosen, and by whom. I found no legal reason that mutuals could not add more elements of democracy beyond the simple rule that corporators elect the bank’s board.

The mutual bank could examine other democratic economic institutions such as credit unions and Community Land Trusts to see what practices might be incorporated. For example, the Community Land Trust seeks to balance various perspectives, interests, and skills on its board by setting aside three board seats each for three different types of board members: leaseholders, non-leaseholding community members, and professionals who might lend their expertise to the organization. The mutual bank might consider apportioning its corporator seats according to the different interests or purposes it seeks to serve.

How to leverage an anchor?

One of the main elements of Steve Dubb’s definition of community wealth building is “anchoring” existing flows of money in a place, rather than pulling capital out of a community to a corporate headquarters somewhere far away. Lee Bank, as a locally headquartered bank that lends almost exclusively to locally owned businesses, clearly fits this description. Lee Bank’s impact in this realm could be increased if more money were shifted to its stewardship by municipalities, foundations, institutions, and individuals.

The second part of Steve Dubb’s definition involves “leveraging” that money and sharing the wealth generated broadly among community members. I found that one way Lee Bank is doing this is in its role as an employer. CEO Chuck Leach expects that offering an excellent benefits package to Lee Bank employees will not only boost performance, but also contribute to broader community well-being, including: 1) a multiplier effect for local businesses when Lee Bank employees have money in their pocket to spend, and 2) increased community stability because Lee Bank employees and their families have the kind of security and safety nets that help them avoid–or better weather–crises.

Although Leach said he was relying “on his gut and common sense” when predicting these results, scholars such as Jessica Gordon Nembhard and Johnston Birchall have posited similar positive “spillover effects” for cooperative and member-owned businesses because of their ability to deliver value back to their members. In the case of mutual banks, it might make sense to expand the understanding of members to expressly include employees. One way that mutual banks could make such an inclusion concrete would be to designate space on the board of corporators for representation from non-management level employees.

Screenshot of Lee Bank’s homepage. Image credit: Lee Bank

Another way that Lee Bank could enhance its contribution to transformative community development and community wealth building is to more thoroughly explore and make explicit what kinds of results–other than retained earnings–it seeks to generate through its business practices. Already, the ethos of mutual banks like Lee Bank allow for more than just profit as a motivating factor. But most of Lee Bank’s contributions to social and environmental issues happen in the realm of philanthropy and volunteerism. When it comes to evaluating business opportunities, there are no criteria for what the bank actively wants to invest in.

If banks like Lee Bank want to increase their contribution to solidarity economies, they could emulate the Mondragon cooperatives’ bank, Caja Laboral, by helping to develop businesses that fill gaps in the local economy, and lending to companies with broad-based ownership, like worker-owned cooperatives. To guide such an endeavor, they could learn from the members of Global Alliance for Values Based Banking how to develop performance management tools to track and incentivize impact along social, environmental, and financial vectors.

Time for mutuals to show their mettle

Although to some they may seem to be relics from “paths not taken” (Schneiberg 2007), there are still almost 500 mutual banks throughout the United States. Because they have weathered the assaults of deregulation and successive financial crises, I suspect that these 500 mutual banks are survivors, with a particular kind of inner strength. Without the pressure of shareholders, they can be more nuanced and creative than many other financial institutions in how they meet the needs of their customers, employees, and broader community.

Now, when it is abundantly clear every day that the existing profit-driven political, economic, and social services systems are incapable of caring for everyone, it is time to unearth, hold up, and burnish models that revolve around a different logic: mutuality.

Cover photo by Gavin Preuss