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

AuthorFederica Poli,Laura Chiaramonte,Marco Ercole Oriani
Date01 June 2015
Published date01 June 2015
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
Department of Economics and Business Administration, Faculty of Economics, Catholic University of
Milan, via Necchi 7, 20123, Milan, Italy
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 20012010. To account for the impact of
the recent nancial crisis, we analyse separately the precrisis period (20012006)
and crisis years (20072010). Unlike published claims that blame the fragility of
banking systems on the presence of nonprotmaximising entities, our main
nding is that cooperative banks have explanatory power for stabilisation during
the crisis years, but only above a certain market share threshold.
Keywords: financial stability, zscore, 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 SjauwKoenFa, 2009), with Austria, Finland,
France, Germany, Italy and the Netherlands possessing the largest segments (see
Figure 1). By comparison, the share of CBs in nonEuropean 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, 491523
doi: 10.1111/j.1468-036X.2013.12026.x
© 2013 John Wiley & Sons Ltd
where CBs play a nonnegligible role.
During the global nancial 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 nancial turbulence.
However, the contribution of CBs to the soundness of nancial systems in which they
operate is a controversial issue in the literature that stimulates further investigation.
Groeneveld and SjauwKoenFa (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 nancial stability. Hesse and C
ˇihák (2007) nd 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: 20012010.
This gure shows the cooperative banksmarket share (CBMS) in European countries with an extremely
important cooperative sector during 20012010. The BankScope database denes 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, authorscalculations.
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 Cooperation 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 nancial system. To our knowledge, no empirical
work published so far has explored the role of CBs in nancial stability while taking into
account the recent nancial 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 nancial 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 nancial crisis (20012010).
Building upon the work of Hesse and C
ˇihák (2007), we rst 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 zscore, a widespread accounting measure (Boyd and
Graham, 1986, 1988; Boyd and Runkle, 1993; Maechler et al., 2005; Beck and
Laeven, 2006, DemirgüçKunt and Huizinga, 2010; Beck et al., 2012). To evaluate
whether the impact of CBs on banking system resilience changes with varying
macroeconomic and nancial conditions, the empirical analysis was carried out in both
the precrisis and crisis periods. The empirical analysis uses a generalised method of
moments (GMM) estimator and focuses on bankspecic factors, including a set of
dummy variables accounting for the business models adopted by banks, and on a number
of countryspecic variables.
This paper contributes to the literature in several ways. First, to the best of our
knowledge, it is the rst 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 nd evidence of a Ushaped relations between
competition and bank risk, we hypothesise and test for the existence of a nonlinear
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 nancial
crisis (20012010), thus allowing any differences between precrisis 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; GarciaMarco and RoblesFernandez, 2008; Beck
et al., 2009; Llewellyn, 2009; Stefancic, 2010; Stefancic and Kathitziotis, 2011) or
concern a specic geographic area (Fonteyne, 2007; Ayadi et al., 2009; Groeneveld and
SjauwKoenFa, 2009; Groeneveld and de Vries, 2009; EACB, 2010; Liu et al., 2010;
Groeneveld, 2011).
Our ndings show that the role of CBs varies strongly over time, since economic and
nancial conditions change. The coefcients of the CB market share and its quadratic
term indicate divergent impacts on stability before and after the onset of the nancial
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 inuence on the stability of
large banks in the same banking system, but only during the nancial 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

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