Are Cooperative Banks a Lever for Promoting Bank Stability? Evidence from the Recent Financial Crisis in OECD Countries

• Author: Federica Poli,Laura Chiaramonte,Marco Ercole Oriani
• Date: 01 June 2015
• Published date: 01 June 2015
• DOI: http://doi.org/10.1111/j.1468-036X.2013.12026.x

Are Cooperative Banks a Lever for

Promoting Bank Stability? Evidence

from the Recent Financial Crisis in

OECD Countries

Laura Chiaramonte, Federica Poli and Marco Ercole

Oriani

Department of Economics and Business Administration, Faculty of Economics, Catholic University of

Milan, via Necchi 7, 20123, Milan, Italy

E-mails: laura.chiaramonte@unicatt.it; federica.poli@unicatt.it; marco.oriani@unicatt.it

Abstract

Based on a sample of cooperative, savings, and commercial banks from OECD

countries, this paper examines whether and to what extent cooperative banks

affected average bank soundness during 2001–2010. To account for the impact of

the recent financial crisis, we analyse separately the pre‐crisis period (2001–2006)

and crisis years (2007–2010). Unlike published claims that blame the fragility of

banking systems on the presence of non–profit‐maximising entities, our main

finding is that cooperative banks have explanatory power for stabilisation during

the crisis years, but only above a certain market share threshold.

Keywords: financial stability, z‐score, cooperative bank, financial crisis

JEL classification: G01, G21

1. Introduction

Cooperative banks (CBs) represent an important part of the banking systems of many

European economies (Groeneveld and Sjauw‐Koen‐Fa, 2009), with Austria, Finland,

France, Germany, Italy and the Netherlands possessing the largest segments (see

Figure 1). By comparison, the share of CBs in non‐European economies is generally low,

with the sole exceptions of Canada and Japan (Fonteyne, 2007; Hesse and C

ˇihák, 2007),

We express our gratitude to John Wilson (University of St. Andrews), Frank Hong Liu

(University of Glasgow) and Ettore Croci (Catholic University of Milan) and an anonymous

referee for their helpful comments and suggestions, which greatly improved this article. We

thank Nicola Tommasi (University of Verona) and Mariacristina Piva (Catholic University

of Piacenza) for their support and assistance in the empirical analysis, Luigi Gallitto (Bureau

van Dijk) for his assistance in gathering balance sheet data from the BankScope database.

We also wish to thank the editor, John Doukas. Correspondence: Federica Poli.

European Financial Management, Vol. 21, No. 3, 2015, 491–523

doi: 10.1111/j.1468-036X.2013.12026.x

© 2013 John Wiley & Sons Ltd

where CBs play a non‐negligible role.

1

During the global financial crisis, CBs faired

comparatively well (Ayadi et al., 2010; Boonstra, 2010; European Association of Co‐

operative Banks (hereafter EACB), 2010; Groeneveld, 2011; Mottura, 2011). This was

due in large part to their distinctive business model and governance mechanisms, which

pursue limited exposure to toxic assets, target domestic retail banking, follow a longer‐

term perspective, and pay much stronger attention to stakeholders. As a result, CBs are

less affected by stock market cycles and market discipline (Mottura, 2011). One might

therefore expect CBs comprising a substantial proportion of a banking system to reduce

instability during periods of financial turbulence.

However, the contribution of CBs to the soundness of financial systems in which they

operate is a controversial issue in the literature that stimulates further investigation.

Groeneveld and Sjauw‐Koen‐Fa (2009), Llewellyn (2009), Ayadi et al. (2010), the EACB

(2010), Stefancic (2010), Groeneveld (2011), and Stefancic and Kathitziotis (2011) show

that the CB presence enhances financial stability. Hesse and C

ˇihák (2007) find that a

higher share of CBs improves the stability of the average bank in the same banking

system. However, they also argue that an ample CB presence can weaken commercial

banks, particularly those that are already weak. On the contrary, Barth et al. (1999),

Fig. 1. European countries with a relatively large cooperative banking sector: 2001–2010.

This figure shows the cooperative banks’market share (CBMS) in European countries with an extremely

important cooperative sector during 2001–2010. The BankScope database defines cooperative banks as

those banks that have a cooperative ownership structure and are mainly active in retail banking (i.e.,

lending to individuals and SMEs). Here CBMS is calculated as the ratio of the sum of the total assets of all

cooperative banks in the country to the sum of total assets of all banks (cooperative, savings, and

commercial) in the same country.

Source: BankScope database, authors’calculations.

1

In 2010, the CB share in Canada and Japan was equal to 3.49% and to 15.72%, respectively.

The market share is calculated as the ratio of the sum of total assets of all cooperative banks in

the country to the total assets of all banks –cooperatives, savings and commercial –in the

same country. The values of CB total assets were collected by the European Association of

Cooperative Banks (EACB), while the values on the total assets of all banks were collected by

the Organisation for Economic Co‐operation and Development (OECD).

© 2013 John Wiley & Sons Ltd

492 Laura Chiaramonte, Federica Poli and Marco Ercole Oriani

Brunner et al. (2004), Goodhart (2004), and Fonteyne (2007) maintain that CBs tend to

increase the fragility of their respective financial system. To our knowledge, no empirical

work published so far has explored the role of CBs in financial stability while taking into

account the recent financial crisis. Moreover, only a limited number of studies focus on an

international sample of banks.

Given the mixed empirical results in the related literature and consequent stimulus to

further investigate the contribution of CBs to bank stability, especially after the onset of

the financial crisis, this paper aims to shed some light on the role of CBs, based on a

sample of OECD banks over a period that includes the recent financial crisis (2001–2010).

Building upon the work of Hesse and C

ˇihák (2007), we first examine the idiosyncratic

stability of the business and governance models adopted by banks, distinguishing

between commercial banks, savings banks, and CBs. We successively analyse whether

and to what extent CBs impact on average bank soundness, and especially on large banks.

Bank stability is proxied by the z‐score, a widespread accounting measure (Boyd and

Graham, 1986, 1988; Boyd and Runkle, 1993; Maechler et al., 2005; Beck and

Laeven, 2006, Demirgüç‐Kunt and Huizinga, 2010; Beck et al., 2012). To evaluate

whether the impact of CBs on banking system resilience changes with varying

macroeconomic and financial conditions, the empirical analysis was carried out in both

the pre‐crisis and crisis periods. The empirical analysis uses a generalised method of

moments (GMM) estimator and focuses on bank‐specific factors, including a set of

dummy variables accounting for the business models adopted by banks, and on a number

of country‐specific variables.

This paper contributes to the literature in several ways. First, to the best of our

knowledge, it is the first study to examine whether the contribution of CBs to bank

stability varies across different market share levels. For this reason, following Martinez‐

Miera and Repullo (2010), who find evidence of a U‐shaped relations between

competition and bank risk, we hypothesise and test for the existence of a non‐linear

relationship between CB market share and the proxy for bank stability. Hence, our

empirical analysis includes not only the CB market share but also its square as explanatory

variables, the two variables of interest. Second, this paper investigates the relationship

between CBs and bank stability over a period that takes into account the recent financial

crisis (2001–2010), thus allowing any differences between pre‐crisis and crisis period to

be highlighted. Finally, this study is one of very few covering a large sample of

commercial, savings, and mutual banks operating in 26 countries (Barth et al., 1999;

Hesse and C

ˇihák, 2007). Most analogue studies have only a national focus (Hansmann,

1996; Chaddad and Cook, 2004; Garcia‐Marco and Robles‐Fernandez, 2008; Beck

et al., 2009; Llewellyn, 2009; Stefancic, 2010; Stefancic and Kathitziotis, 2011) or

concern a specific geographic area (Fonteyne, 2007; Ayadi et al., 2009; Groeneveld and

Sjauw‐Koen‐Fa, 2009; Groeneveld and de Vries, 2009; EACB, 2010; Liu et al., 2010;

Groeneveld, 2011).

Our findings show that the role of CBs varies strongly over time, since economic and

financial conditions change. The coefficients of the CB market share and its quadratic

term indicate divergent impacts on stability before and after the onset of the financial

crisis. In particular, CBs have explanatory power for stabilisation during the crisis years,

conditional on surpassing a certain market share threshold. Moreover, our results indicate

that a greater CB presence exerts a positive and increasing influence on the stability of

large banks in the same banking system, but only during the financial crisis. A possible

explanation for these results is that banking instability phenomena may be smoother and

© 2013 John Wiley & Sons Ltd

Are Cooperative Banks a Lever for Promoting Bank Stability? 493