While Ostrom-inspired research has proven an important corrective to the simplistic “markets or government” dichotomy that continues to shape social and administrative sciences, this paper uses a case study to suggest that in some circumstances, our understanding of the commons could be enriched by giving more weight to the role governments can play in helping to constitute a human-made commons. In particular, this paper examines the case of a little-known deposit insurance scheme run by credit unions in the Canadian province of Saskatchewan that has operated without once incurring a deficit for 70 years despite offering the kind of unlimited deposit insurance frowned upon by policymakers. We find that the provincial government played an important role in constituting the scheme and helping it operate, effectively, as a polycentric commons that until recently, satisfied all the design principles that tend to characterize successful collective management. The resulting argument is simple: it would be difficult to understand the stability of Saskatchewan’s credit union deposit insurance scheme without also understanding how government supported its operation as a commons.
Elinor Ostrom’s analysis of the commons, and associated common pool resources (CPRs), has generated a body of research extending into many realms of human activity ranging from the management of natural resources such as watersheds, fisheries and forests to human-constructed resources such as the Internet, transportation networks, financial co-operatives, and more (Hess & Ostrom, 2003; Périlleux & Nyssens, 2017). There is now compelling evidence that collective management of non-excludable and subtractive resources is not doomed to tragedy, contrary to what Hardin (1968) predicted.
While Ostrom-inspired research has proven an important corrective to the simplistic “markets or government” dichotomy that shapes much of social and administrative sciences (Aligica & Tarko, 2013; Toonen, 2010), this paper uses a case study to suggest that our understanding of the commons could sometimes be enriched by giving more weight to the role governments can play in helping constitute human-made commons. We examine the case of a little-known deposit insurance scheme run by credit unions in the Canadian, largely agricultural, province of Saskatchewan. As we show, this scheme has operated continuously, without incurring a deficit, for almost 70 years despite offering the kind of unlimited deposit insurance thought to incent moral hazard behaviour (Demirgüç-Kunt & Detragiache, 2002; Iyer & Puri, 2012).
We argue the provincial government played an important role in constituting the scheme and helping it operate as a commons that, until recently, satisfied all the design principles that tend to characterize successful collective management of commons-type resource systems. Credit unions set membership boundaries, made their own rules, monitored each other, self-policed, enforced graduated sanctions, had conflict-resolution mechanisms, and devised nested polycentric decision-making arrangements but always with active and ongoing government support that manifested itself in later years by a devolution of regulatory power to credit unions.
The resulting argument is straightforward: it would be difficult to make sense of the stability of Saskatchewan’s credit union deposit insurance scheme as a commons operating within a polycentric system of governance without also understanding how government initially incubated and regulated its operation. This point is also crucial for understanding what might happen to the scheme’s nearly C$400 million fund were it no longer needed, a situation that is increasingly likely. In addressing this scenario, we consider a related normative question, namely what should happen with the allocation of an unowned resource, one that conforms to a proprietor relationship but where government has played a key role in its creation, after it is no longer needed?
Our argument sits somewhat uneasily with parts in the commons literature, particularly those drawing inspiration from a Libertarian orientation. Ostrom’s seventh design (DP7) principle opens this door, stressing the importance of a government that recognizes the rights of users to set their own rules and make their own decision; a slightly more expansive interpretation of DP7 might leave room for a supportive institutional environment (e.g., law of contract; impartial courts), as Ostrom (1990) does through discussion of her ‘constitutional level’ analysis and in her classic case study of water management systems in California, among others. Consistent with this ‘non-interventionary’ but ‘supportive’ principle, Ostrom (2000, p. 147) has pointed to experimental research showing how the imposition of external rules can “‘crowd out’ endogenous cooperative behaviour.”
To be sure, some authors working in the Ostrom tradition acknowledge that government can play a more active role in polycentric systems that govern commons but refrain from giving it much explanatory power. Sarker and Itoh (2001, p. 100) for example find that “the non-coercive strategic presence of an external entity (the central, prefectural and local government) … significantly contributed to irrigators’ self-governance of their CPRs in Japan” (emphasis added). They go on to suggest a “moderation” to DP7, arguing that room should be made for “non-interventionary” but strategic investment by governments. They insist however that this is only a “minor” variation to DP7.
Research bridging the study of banking, CPRs and polycentricity tends to engage more directly with government’s potential role, with some suggesting that an Ostrom-inflected understanding opens up space for the kind of government involvement in macroprudential policy that we observe widely today (Selmier, 2014; Selmier & Winecoff, 2017). Others, working from a free-banking tradition, argue that government should limit its role to “protecting property rights, enforcing contracts, and upholding a non-discriminatory rule of law” (Salter & Tarko, 2019, p. 511).
For her part, Ostrom (1990, p. 14) insisted that ‘institutions are rarely either private or public – “the market” or “the state” and noted that CPRs are often governed with “rich mixtures” of “private-like” and “public-like” institutions “defying classification in sterile dichotomy.” Working in the same tradition, McGinnis (2005, 2011a, 2016) emphasizes the role that public entrepreneurs, including those in government, can play in supporting polycentric governance by convening and facilitating citizen engagement of the kind we document later. He also notes however, that government should refrain from actual coordination and that “no single planner would ever design” the kind of “mess” that characterizes many polycentric systems (McGinnis, 2005, p. 168).
The rest of the paper proceeds as follows. Section two reviews the theoretical building blocks for our case study. Section three discusses our case study methodology and use of the institutional analysis and development (IAD) framework. Section four sets out the case, demonstrating how government over time created the conditions that allowed credit unions to take full control over the action situations associated with the deposit insurance scheme. Section five concludes with some reflections for areas of future research and policy implications derived from our analysis.
Based on her field studies on the management of natural resource systems that generate harvestable natural resources, Ostrom (1990, 2000, 2010) characterized situations where there are no clear ownership rights as “proprietor,” meaning agents collectively can manage, access, exclude, and withdraw output from the resource system but they cannot sell (or buy) the resource system itself. No one “owns” the alienation rights and price signals are inoperative inside the commons. Instead, production and allocation decisions are governed by a set of rules that Ostrom described as “design principles,” much like decisions inside corporate entities take place outside of market arrangements governed by price signals (Simon, 1991).
Proprietor relationships are often associated with natural resources that Ostrom describes as “common pool,” meaning it is difficult to exclude access to the resource system or its output and there are limits to the amount of extraction that can take place before resource system depletion. The resources are subtractive and largely non-excludable. Saskatchewan’s credit union deposit insurance scheme embodied both features. There was and is an ever-present risk that difficult-to-prevent (i.e., exclude) claims can deplete the scheme’s nearly $400 million fund (worth about 1.5% of insurable deposits) and/or financial challenges at a credit union could erode its reputational worth (also an asset that can be overdrawn).1 Hardin (1968) predicted that efforts by individuals to exploit natural resource systems with these features would end in a tragedy of over-exploitation unless government imposed order or established alienation rights over the resource. Absent these interventions, agents are incentivized to take as much as they can from the resource system and disincentivized by free-rider problems from making investments that could enhance sustainability. Ostrom (1990, 2000, 2010) found that contrary to Hardin’s prediction, there were in fact numerous instances of sustainable, long-lived commons and that these tended to conform to eight design or governance principles.
In a commons structured around a CPR, agents have decision-making power over a set of rules governing resource system use, allocation and management. These rules set out who has access to what bundle of rights (DP1); how costs and benefits associated with maintaining the resource system and harvesting its output are allocated (DP2); who can make and modify the rules (DP3); how disputes among resource appropriators can be resolved at cost and with minimal defection (DP4); systems for monitoring behaviour related to the use and maintenance of the resource system (DP5); the use of escalating sanctions to punish free riding and other behaviour antithetical to the commons (DP6); and sometimes, in large scale commons, multiple systems of decision-making nested in one another (DP8). The seventh design principle (DP7 – discussed earlier) refers to an ‘exogenous’ feature of a successful commons, namely a willingness by policymakers to respect the capacity of agents to design their own rules.
The commons literature also draws on and is related to the literature on ‘polycentric’ governance, an idea that at once infuses and builds on the design principles, particularly DP8 and which in the commons literature, is traced back to Ostrom, Tiebout and Warren (1961) and their study of municipal governance. Building on this work and others, Stephan, Marshall and McGinnis (2019) tease out eight features of polycentricity and argue that two of these, the presence of multiple and independent decision centres, are minimally required. They characterize two more as important, namely overlapping responsibilities and mutual adjustments, both of which impart dynamism to the polycentric system. The remaining four are optional, and include the presence (or not) of low entry and exit costs, an overarching system of rules, emergent (not dictated) behavioural patterns, and some form of spontaneous order. From a different perspective, Aligica and Tarko (2012, 2013) tend to give more weight to exit and spontaneous order but share an emphasis on multiple independent decision-centres set against a supportive institutional environment of laws and courts.
As McGinnis (2016) notes, there is a normative undercurrent in much of the polycentricity literature that tends to regard polycentricity as “better” than monocentric structures because of an underlying commitment to democratic self-governance. This theme resonates with co-operative and credit union principles of voluntary and open membership, democratic control, member economic participation, education, co-operation amongst co-operatives, and values like self-help, and self-responsibility. Regardless of whether one takes a normative or more descriptive approach, polycentric systems are generally expected to leverage local knowledge and economize on monitoring and enforcement costs because decisions and rules enjoy legitimacy and hence adhesion, existing in fact not just in form (E. Ostrom, 1999). As we show, this describes well the pattern of decision making – and the legitimacy of the resulting rules – around Saskatchewan’s deposit insurance commons.
Ostrom-related concepts have been applied to the study of a number of topics in finance and regulation. Many of these works share a concern with emphasizing the collective and systemic nature of the financial sector, often suggesting a need for some form of macroprudential governance paired with microprudential regulation (Selmier, 2014, 2016, 2017; Selmier & Winecoff, 2017; Ulgen, 2020). Thus, we see applications of Ostrom concepts to understanding money (Selmier, 2017), the nature of financial risk and its susceptibility to transmutation from a purely private good into a CPR or public good (bad) (Selmier, 2014, 2016; Selmier & Winecoff, 2017), and the public goods nature (finance as utility) of government regulation (Ulgen, 2020).
Salter and Tarko (2017, 2019) challenge the notion that macroprudential regulation and government intervention more generally improves financial stability. Working in the “free banking” tradition, they point to polycentric governance systems to show how private sector actors can design resilient clearinghouse systems that obviate the need for the trappings of the modern regulatory state, namely central banks, deposit insurance, and the associated regulatory oversight. Not dissimilarly, Bryce (2012) uses the concept of polycentricity to show how the regulation of U.S. capital markets is shared amongst self-financing non-government organizations (NGOs), government agencies (i.e., the Securities and Exchange Commission), and private firms (the New York Stock Exchange), each operating in their own unique spheres/boundaries set against the institutional backdrop of legislation and courts.
Some scholars have extended Ostrom concepts to financial co-operatives. Tortia (2018) for example shows how the legislated non-divisibility of co-operatives capital, as currently applied in Italy, and use of design features consistent with Ostrom’s design principles, can help co-operatives overcome the free riding/incentive problems that are otherwise theorized to lead to under-investment and capitalization in co-operatives that have heterogeneous membership. For their part, Péreilleux and Nyssens (2017) argue that financial co-operative equity satisfies criteria associated with CPRs, including the design principles. Stressing ethical considerations, they frame this equity as an intergenerational trust and advocate for legislative asset locks to preserve its patrimonial characteristic.
The application of Ostrom-infused ideas to finance and financial co-operatives is not altogether surprising given the proximity of the literature on financial co-operatives to transaction cost economics and the new institutionalist field. Scholars specializing in the study of co-operatives (Cook, 2018; Fulton & Giannakas, 2012; Giannakas et al., 2016; Hansmann, 2000; McKillop et al., 2020; van Rijn, 2022) emphasize their ability to address market gaps by economizing on governance costs. In their formative years, these co-operatives typically are composed of a small number of likeminded members whose shared economic circumstances simplify decision making and monitoring. Financial co-operatives like credit unions have indeed tended to emerge to serve segments of the population – referred to in the co-operative literature as sharing a ‘common bond’ – who because of their shared circumstances, are unable to make use of conventional banks to safely and economically accumulate small-dollar savings (Poulin & Tremblay, 2006; Roby, 1975) or borrow at reasonable cost (McKillop et al., 2020).
While we could not identify any research linking commons management, CPRs, and polycentric structures to deposit insurance schemes, credit union or otherwise, there is some proximate work. Beck (2002) attributes the resilience of three German private bank unlimited deposit insurance schemes to a supportive institutional environment and a club-like nature that featured voluntary membership, clear boundary conditions, self-regulation, monitoring (i.e., by peers and through audits), the application of fees based on risk, and the potential application of sanctions, features consistent with Ostrom’s design principles. Beck (2002) argues that these features, combined with exclusion of interbank deposits from the guarantee, created strong incentives for members to monitor one another. In a similar vein, Kane and Hendershott (1996) attribute the relative resilience of the National Credit Union Share Insurance Fund, operated by an arm of the U.S. federal government, to the closed-bond nature of credit unions that limits ambitious and risky growth, incentivizes monitoring by peers and stakeholders, and results in fewer opportunities for managerial opportunism (because of the illiquidity and one-member, one-vote nature of membership shares).
For the empirical analysis, we employed a case-study methodology. While case studies preclude generalization, Gerring (2004) stresses that this methodology is well suited to exploratory descriptive inquiries likes ours where there is little in the way of existing research and where the focal point is on a relative rare event. A case study also has the advantage of potentially reaching, however imperfectly, for a new theoretical frame or refinement of an existing one. As noted, we argue for a richer understanding of DP7 that allows for the potential of a more activist government role in incubating and supporting the development of polycentric CPR systems.
We gathered data from four sources. Given the absence of scholarly literature on credit union deposit insurance schemes (and Saskatchewan’s in particular) we first drew heavily on four books published by credit union-owned entities (Purden, 1980; Schroeder, 1983; Turner, 1984), including one of the deposit insurers (Youds & McGeachie, 1985). Next, we collected data from content published in two industry trade publications, Saskatchewan’s Credit Union Way (1944–1999), and British Columbia’s Enterprise Magazine (1942–2017). We reviewed all available material from these publications, collecting, scanning,2 archiving and categorizing relevant content into major themes such as “governance” and “government,” with a set of sub-themes such as “nested decision making” (for governance) and “legislation” for government.
We also collected, reviewed, and categorized iterations of Saskatchewan’s credit union legislation from inception in 1937 through to 2021. As we discuss below, this revealed that credit unions had, until 1985, a right to dissolve the scheme and appropriate its fund upon a two-thirds favourable vote, a fact not mentioned in trade publication reporting. Fourth and finally, we enriched our findings by interviewing, in some cases several times, 10 subjects knowledgeable about the history and contemporary nature of Saskatchewan’s credit union system and its deposit insurance scheme. These individuals are the core of a small group of experienced people (minimum 10 years experience; maximum 55 years) knowledgeable about the scheme, its history, and the broader credit union system. Table 1 sets out interview identity codes to ensure anonymity.
|IDENTIFICATION||RELATIONSHIP TO SCHEME||STATUS (ACTIVE, RETIRED OR NO LONGER IN SYSTEM)|
|C2||Central||No Longer in System|
|L1||Outside legal counsel||Semi-retired|
To organize and interpret the data, we make use of the institutional analysis and development or IAD framework (McGinnis, 2011b; E. Ostrom, 1999, 2009b, 2009a, 2011). The IAD draws attention to “action situations,” spaces where decisions get made about the production and distribution of a good or service, provision (which may be separate from production), consumption, financing, coordination, dispute resolution, and rule-making. In each of these action situations, the relevant actors are assigned positions and roles and from this vantage point, process information and assess the costs and benefits of decisions and their potential outcomes. Actors are presumed to be boundedly rational, and their behaviour influenced by external variables, including biophysical conditions, community attributes, and the relevant set of rules and institutions.
Given our claim that the Saskatchewan scheme was and is nested in a polycentric governance structure and given its symbiotic relationship with government, we also consider what McGinnis (2011b) calls “Networks of Adjacent Action Situations” or NAAS. These exist when an external action situation exerts influence over “one or more of the working components” of the action situation under scrutiny (McGinnis, 2011b, p. 53). Finally, while scholars have tended to use the IAD to study action situations at a point in time (E. Ostrom, 2011), we focus on the evolving way these NAAS shaped credit union control over the deposit insurance scheme and the nature of the fund as a CPR.
Saskatchewan is a land-locked sparsely populated province of 1.2 million people, two-thirds fertile prairie, one third boreal forest. The settlers who formed co-operatives and credit unions arrived in mass migrant waves in the early 20th century from European countries/regions (e.g., Great Britain, Germany, Scandinavia) with strong co-operative movements built on an ethos of self-help, voluntary membership, democratic control, and community-provision. While the settlers benefitted in what was initially a prosperous agricultural economy, the Great Depression revealed just how tied the province’s economy fortunes were (are) to commodity cycles for agriculture, and later, oil and gas, potash, and uranium.
The volatility associated with commodity-based economies makes for a difficult operating environment for banks given the risk of elevated loan defaults associated with sharp economic downturns. As the International Association of Deposit Insurers notes (2014), “persistent instability hampers the functioning of markets, and such conditions affect the ability of financial institutions to absorb and manage their risks.” Canada’s large banks, headquartered thousands of kilometers away in Toronto, have a history of expanding and withdrawing services according to the economic cycle, most notably in the 1930s when they closed dozens of branches in response to the Great Depression and thousands of farm failures (Bromberger, 1973).
Against this backdrop and motivated by concern about credit shortages related to the bank exodus, the province devoted scarce resources to organizing meetings of local co-operators to stimulate the development of a local credit union system. It assigned staff to study implementation and drafted and passed legislation in 1937 that followed recommendations from a planning committee of co-operative sector representatives and government officials that itself resulted from a resolution at an earlier government-initiated and funded conference of co-operatives (Purden, 1980).
Government next set up a Registrar for credit unions and tasked the planning committee to advise, coordinate, and monitor the sector as well as create, in 1938, a new entity called the Credit Union League of Saskatchewan (the “League”) that the province provided with free office space, clerical staff, and promotional support. By tasking the League with education and advocacy responsibilities, the government formalized a lobbying mechanism for credit unions to influence their institutional environment. Recognizing the need to address provincial-level liquidity imbalances, the province introduced legislation to create the Saskatchewan’s Co-operative Credit Society Ltd. (CCS). Both of these “second tier” entities were owned and governed by credit unions.
With the arrival in power of the socialist Co-operative Commonwealth Federation (CCF) in 1944, the province moved to create a standalone Department of Co-operation and Co-operative Development (DCCD) dedicated to promoting and supporting co-operatives and credit unions (Argue, 1992). The CCF and its successor, the New Democratic Party (NDP), governed the province for 44 of the next 77 years. The DCCD oversaw credit unions and later the deposit insurance scheme until 1987, when a conservative government shuttered the Department. While the government’s support for the sector was guided by a belief that they “could not risk a single failure” at a credit union (Purden, 1980, p. 52), it also relied on citizen engagement to do the work of creating and developing new credit unions and associated second-tier structures. As Argue (1992, p. 39) notes, the philosophy governing the CCF during the credit union sector’s formative years was “assistance to the movement as a whole,” not control.
With the support of these entities, low start-up costs, and densely networked communities of co-operators,3 the number of credit union grew quickly: by 1965, there were 301 serving many of the province’s farming communities. Credit unions enjoyed legitimacy and loyalty, attributes that helped minimize the information asymmetries and monitoring problems that are an unavoidable challenge in banking and, in so doing, helping compensate for their lack of geographic diversification.
The deposit insurance scheme came into being in 1953, again at the initiative of the government. After observing high delinquency rates on small-dollar credit union loans and persistent liquidity imbalances, it initiated studies of schemes elsewhere. It only took action, however, after credit unions failed to establish a volunteer guarantee fund in the wake of high-profile management fraud at two credit unions that imperilled the system’s reputation.
The provincial premier, also the Minister for the DCCD (Schroeder, 1983), personally intervened, nudging credit unions to support legislation for a mandatory scheme overseen by a new credit union-controlled entity called the Mutual Aid Board (MAB). The MAB would help resolve problem credit unions and, if necessary, reimburse depositors by drawing on a fund built with premiums set initially set as a percentage (up to 5%) of annual net income, and later deposits. Importantly, and consistent with the government’s disposition towards co-operatives, the legislation stipulated that the MAB would only come into being if more than half the province’s credit unions, representing two thirds of total membership, supported the initiative (Savings and Credit Union Act, 1953).4 The subsequent credit union referendum garnered the support of 79 percent of credit unions representing 80 percent of provincial membership.5 The MAB legislation also allowed credit unions to dissolve the entity, and return all funds to credit unions, via a plebiscite garnering at least two-thirds support.
The resulting governance system, which we characterize as polycentric, is depicted in Figure 1. Consistent with that understanding, we observe that each credit union-owned entity had its own areas of responsibility and adjusted behaviour based on the activities of others. The CCS, thought of as a kind of central bank (but lacking money creation powers), helped shore up credit union liquidity as needed, heading-off the need for MAB support. The League lobbied for a favourable policy environment and educated credit unions about proper financial management, again activities that buttressed the MAB. Each entity had its own democratic electoral process, leading to the kind of multiple points of independent decision-making core to the definition of polycentricity. We also observe areas of overlap, with representatives from each organization stitched into each other’s formal governance (e.g., League and CCS representatives sat on the MAB board), a situation that did not preclude concerns about competition and duplication of services that by 1970, led to the merger of the League and Co-operative Credit Society into a new entity called Saskatchewan Central (SaskCentral).6
Figure 1 also shows that Saskatchewan’s increasingly self-regulated credit union system transacted with the Canadian Bankers Association (CBA), controlled by the five large banks that dominate Canada’s banking sector. Consistent with the federal government’s constitutional power over “banks” and “banking” (Nicholls, 2019) and the evolution of the sector in Canada, the CBA operated the country’s clearinghouse, enjoyed unambiguous access to the central bank’s lender of last resort facility (LOLR), and had a “responsive” relationship with their regulator (M. A. Pigeon & Pringle, 2022). As provincial entities, credit unions had no choice but to settle transactions through the CBA.
That said, the federal government was broadly accommodative of credit unions, providing them with access (if needed) to a $200 million line of credit from the federal deposit insurer (not a true LOLR facility), offering favourable tax treatment – no taxation until 1972, and preferential rates until 2013, and providing regulatory services to provincial centrals that facilitated cross-provincial cooperation. Indirectly then, the federal government supported and legitimized the polycentric governance structure that enveloped the MAB and other provincial schemes.
While the DCCD had formal responsibility for regulating credit unions in the 1950s and 1960s (staff conducted audit inspections), it gradually ceded oversight and rule-making power to the MAB (and to a lesser extent, other system entities) in response to credit union advocacy for more self-regulation. In the 1960s, the League for example hired field representatives to act as its eyes and ears on the ground, assuming “some of the duties performed by (DCCD) government inspectors in the early years” (Schroeder, 1983, p. 54). Then, in the 1970s, the government transferred core supervisory and regulatory functions to the MAB, including the power to put credit unions under supervision, wind-up a failing credit union, introduce mandatory insurance programs (e.g., fire and bonding), require special premium assessments to replenish any fund deficiencies, and set up a credit committee to review burgeoning credit union commercial lending (Schroeder, 1983). During this period, the province increased its representation on the five-member board to two from one, reflecting the shift to more strategic rather than hands-on oversight and engagement.
As part of a 1985 legislative overhaul, the province eliminated the right of credit unions to dissolve the deposit insurance scheme, a move linked to the creation of the Canadian Payments Association (CPA), a new federal entity that took over clearinghouse functions from the CBA (L1). As a condition of CPA membership, credit unions had to show evidence of a deposit guarantee fund that could not be unwound by plebiscite (L1). Interestingly, most interviewees active during this period were either unaware of the dissolution right, or only dimly so, feeling like the loss of this right changed very little and, if anything, reinforced the “unowned” nature of the scheme’s fund and professionalization tendencies afoot at the time. The province and credit unions also agreed in 1985 to change the MAB’s name to the Credit Union Deposit Guarantee Corporation (CUDGC), signalling a strategic shift from an organization that stabilized troubled credit unions to one that took action before financial assistance was needed. Finally, in the early 1990s, credit unions negotiated a memorandum of understanding (MOU) with the provincial government, a constitution-level change, that transferred the residual regulatory responsibility from the DCCD to CUDGC, clarified lines of responsibility, and reinforced a culture of independence and proactive behaviour at CUDGC.
The credit union system’s direct control over CUDGC began to erode as market and regulatory trends, plus the 2009-10 financial crisis, led federal policymakers to rethink the wisdom of accommodating credit union self-regulation and their unusual governance system. To address the situation, the federal government introduced new legislation in 2010 – at the urging of a handful of larger credit unions from outside Saskatchewan – that provided a path for credit unions to come under federal jurisdiction, exiting their provinces and associated deposit insurance schemes. Then in 2013, but without consultation, it eliminated preferential tax treatment. In 2014, and again without consultation, it clarified but imposed strict conditions on access by provincial entities to the Bank of Canada’s LOLR facility, cancelled the $250 million line of credit, and ceased to provide regulatory services for centrals. To address the unexpected loss of federal regulatory services, the province worked closely with credit unions to craft new legislation that put SaskCentral under CUDG supervision.
While these federal actions caused an unexpected challenge to their governance system, Saskatchewan credit unions had already initiated changes that put more distance between them and CUDGC as part of an ongoing professionalization trend. As of 2005, CUDGC management were no longer part of the SaskCentral management team. In 2010, employees at SaskCentral became contractually engaged at CUDGC rather than seconded. In 2016, legislative changes motivated by the federal government’s 2014 policy changes made it so that credit unions could only appoint half the seats on CUDGC’s nominating committee, with government appointing the other half. Credit union employees were no longer eligible to sit on the board. Finally, as SaskCentral came formally under the control of CUDGC in 2017, SaskCentral employees previously contracted to work for the deposit insurer officially became CUDGC staff.
Following McGinnis (2011b), we can think of governments, SaskCentral and its predecessors, and credit unions as actors in a network of adjacent action situations. They shaped and had evolving roles in the production, consumption, monitoring and sanctioning of Saskatchewan’s deposit insurance scheme. We briefly describe the resulting NAAS depicted in Figure 2, and related design principles.7 Our analysis is broken into three distinct periods (1953–1970; 1971–2015; 2016 – present), each corresponding to the fact that scheme actors confronted an evolving external environment.
Until the mid-1970s, key scheme actors on the MAB board were credit union and League/CCSC employees/volunteers (one of whom served as chair) and a lone government official. They focused on setting premiums (proportionate to deposits, DP2) and managing the resulting fund (provision and production), which was used to rescue or resolve problem credit unions with capital infusions, or zero/low interest (often forgiven) loans. The scheme “produced” a reputation for stability that was “consumed” by four actors: the people who used credit union services (member-owners); credit unions; the provincial government which valued the sector’s economic contribution and local control; and the federal government, which accommodated provincial systems for political and economic reasons.
The Registrar, and to a lesser extent the League, CCS and the MAB, monitored (DP5) and sanctioned (DP6) behaviour that put the scheme at risk. Registrar inspectors, and later MAB field officers, conducted credit union visits, collected financial data, and developed a good understanding of on the ground reality. We found no evidence however of the application of financial penalties, a situation consistent with relatively prosperous times, the generally secretive nature of administrative fines, but also a reluctance by government to risk damaging political relationships (Purden, 1980, p. 203).
Meanwhile, consistent with their dissolution rights and control over the MAB board, credit unions regarded the scheme’s funds as “theirs,” counting its assets as part of total system assets (as reported in the Credit Union Way). Some credit unions petitioned for the MAB to return what was perceived as “excess capital,” a right enshrined in law. While these calls appear to have gone unheeded, there was statutorily mandated premium holiday if the fund hit 1% of system assets, a situation occurring only over 1970–1973 before this legislative feature was eliminated. Meanwhile, some credit unions held little or no capital, preferring to pay out patronage payments8 or favourable interest rates for depositors and borrowers, on the assumption that the MAB would absorb losses from any bad loans.
While there appears to have been some unease about the resulting moral hazard, there is no evidence of public disputes (DP4) tied to premium setting or the use of the fund. Whatever unease there was would have been expressed, and disputes resolved, in semi-formal fashion by appeals to the Registrar and political actors, through credit union, League, CCSC, MAB regional and province-wide meetings. Credit Union Way coverage – itself a source of internal dialogue and coordination – reveals system meetings were well attended, with hundreds of participants comprised of volunteers, observers, employees, members, and government officials. The meetings, often lasting several hours, were used to voice concerns, make rules (DP3), and effectively coordinate behaviour. It is also important to remember that credit unions monitored one another’s behaviour. As S2 noted, “Word Travels. They know each other. We would get calls from people saying ‘when are you going to do something about so-and-so.” There was also, however, a strong sense of societal responsibility. As C1 noted, “I was continually amazed at the goodwill of people (in the credit union movement) to do the right thing.”
With the maturation of their operations and polycentric governance systems, credit unions increasingly hired professional staff, limiting the role of volunteers to serving on the board of directors and, correspondingly, lobbying for more self-regulation that would ultimately bring monitoring and sanctioning over deposit insurance entirely “in house” to the MAB. We depict this dynamism by the dashed “monitoring and sanctioning” action situations in Figure 2.
With its newfound responsibilities, the MAB deployed a computerized model, one of the first in Canada (Schroeder, 1983), to monitor (DP5) credit unions for early signs of financial distress, and increase its ability to provide early warnings and graduated interventions/sanctions (DP6) based on the severity of the problem. Credit unions did not want to find themselves on their regulator’s watch list. CUDGC made considerable use of its intervention power in the 1980s and early 1990s, helping resolve, dissolve, or merge dozens of credit unions whose members and communities were struggling from a sharp downturn in agricultural commodity prices, and related farm debt. While these activities reversed the fund balance’s otherwise steady march higher (see Figure 3), it was a temporary setback and CUDGC officials routinely underlined the fund’s resilience, and unlimited guarantee, to bolster member confidence and loyalty in struggling credit unions. As S2 noted, credit unions had a growing appreciation that stability was good for business and for members, a fact underscored by the failure of two mid-sized federally-regulated banks in 1985, resulting deficits at the federal deposit insurer, and bailouts of credit union systems in other provinces around the same time (Government of Canada, 1986).
The federal government’s decision to abandon its accommodative disposition towards credit unions, manifested in the 2013 and 2014 policy changes, influenced the decision by credit unions and government to remove credit union representatives from the CUDGC board, eroding direct credit union control and some of the scheme’s status as a commons.
It also created an opportunity for a Saskatchewan credit union to take up federal incorporation and, relatedly, make a claim on the provincial scheme’s nearly $400 million fund on the basis that it no longer benefited from the guarantee. G1 and G2 explained however that credit unions, and policymakers, were concerned that a successful claim could pose an existential threat to the scheme, causing reputational harm and impairing its ability to generate the fund-derived investment income used to pay for supervisory and regulatory services, both of which represent substantial fixed costs. To compensate for this lower revenue, the scheme would need to raise premiums and this, in turn, could have unpredictable effects on the competitiveness and behaviour of the remaining credit unions.
With this scenario in mind, and after receiving the support of all but the one credit union actively pursuing federal incorporation, the province in 2021 amended the credit union legislation to include the following language: “no credit union or person has any claim on the fund (italics and underline added).” This change restricted the ability of any one credit union to claim a share of the deposit insurance fund, preserving the scheme’s integrity. It also, intentionally, did not foreclose the possibility of a claim on the fund in the event of a collective exit into federal jurisdiction.
Our case study shows that government played an important role in brining Saskatchewan’s credit union deposit insurance scheme to life, initiating and funding events and studies in 1930s, providing financial support to adjacent entities in the 1940s, cajoling credit unions to accept the formation of the scheme in the 1950s, and performing tasks (e.g., monitoring, sanctioning) usually left to commons appropriators until the 1970s. At the same time, credit unions enjoyed considerable freedom to develop and operate the deposit insurer and other parts of the polycentric governance structure, realities that imparted a degree of stability that has helped the scheme minimize moral hazard problems and avoid the deficits that have plagued other deposit insurance schemes. Credit union freedom to self-govern increased as the province gradually retreated from monitoring and sanctioning activities. This process culminated with the signing of an MOU in the early 1990s. It created a stable foundation for CUDGC and the system until the federal government’s major constitutional-level changes in the 2010s.
Our case suggests that governments can sometimes do more than act as (constitutional) rule maker and arbiter of disputes: they might also incubate, nurture, and shift power to a polycentric governance system charged with managing a CPR. While an awkward fit with parts of the commons literature, this perspective is not at odds with a more expansive view of DP7 that recognizes the breadth of society’s institutional and government diversity and government’s potential role in facilitating and nudging collective action. It is especially resonant in banking, where private risk can morph into a public problem, and reminds us that governments also need to be vigilant about how their actions can deleteriously affect a commons (DP7), a lesson Canada’s federal government may have forgotten.
This understanding opens the door for more research into how, and under what circumstances, governments might be inclined to support and nudge the creation of a commons, and associated polycentric governance systems, with an understanding that they will eventually retreat from direct involvement. It also suggests that we could enrich our understanding of financial co-operatives and deposit insurance schemes by taking a closer look at government’s role in fact and in potential.
Our study also has implications for how we understand who owns, and what happens, to a CPR if it is no longer needed. Given government’s role in incubating the scheme alongside appropriators, it does not seem unreasonable that it would also play a role, and having a say in how the assets are protected and possibly distributed. The province’s 2021 legislative amendment is consistent with this view. It is also consistent with the idea that the fund could be alienated if some threshold number of credit unions indicated their intention to exit provincial jurisdiction and as a consequence, the fund was no longer needed. There is precedent for this idea. When the 15 Caisses Acadienne in the eastern Canadian province of New Brunswick merged into a single credit union (Uni Financial Cooperation) and continued as Canada’s first federal credit union in 2016, the province allowed Uni to appropriate more than $100 million accumulated in that province’s deposit insurance scheme for French-language caisses (New Brunswick Credit Union Deposit Insurance, 2015; 2016).
Building on this precedent, Saskatchewan could impose a condition that any future recipient(s) of the scheme’s fund balances treat this capital as an indivisible reserve, a concept common in the co-operative literature (Périlleux & Nyssens, 2017; Tortia, 2018). In this scenario, the reserve would represent a collective unowned asset that present-day credit unions steward for future generations. By so doing, the province could impart some “productive and welfare-increasing potential,” reinforce the co-operative, the commons, and associative culture (Tortia, 2018, p. 13), and perhaps most importantly, behave in a fashion consistent with its history of helping to constitute and protect the scheme’ status as a CPR.
1See Bryce (2012) for a similar argument but in capital markets.
2The Credit Union Way was only available in print format, with some physical content missing. The entire Enterprise Magazine collection is available digitally.
3Most credit unions began life in the kitchens of volunteers, many of whom were active in farm co-operatives (Bromberger, 1973). Start up costs included pencils, paper, ledgers, and maybe a safe but little else.
4In her study of groundwater CPRs in California, Ostrom (1990, p. 119) points to a “contingent contract” similar to what is described here whereby an “interim” water use agreement amongst water producers in the West Basin only cam into effect after at least 80% of the total “prescriptive rights” were on board.
5British Columbia and Alberta required similar, but higher thresholds of support, before establishing their schemes (Turner, 1984; Youds & McGeachie, 1985).
7Pigeon (2020) provides a more thorough discussion of the scheme’s alignment with design principles.
8In a co-operative context, patronage refers to profits paid out to member-owners based on the amount of use they make of the co-operative’s (credit union’s) services.
The author would like to thank three anonymous reviewers for their helpful comments on an earlier draft of this paper. We are also grateful to the University of Saskatchewan for funding that supported this research.
The author has no competing interests to declare.
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