Abstract
Cooperative banking entails a typical trade-off. The small size, specialization and high correlation of customers’ credit risks are often considered typical weaknesses of local mutual banks. Nonetheless, these banks appear to be largely non-substitutable providers of loans to local economies, given their comparative advantages in screening, monitoring and enforcement with respect to other banks. We explore the idea that the solution of this trade-off is affected by the interplay between banks’ ownership structures and the competitive conditions of the markets in which they operate. Focusing on the banking market of the Italian province of Trento, characterized by a significant presence of cooperative banks and a variety of different competitive environments at the local level, we find that a heightened competition among mutual banks is not socially beneficial with respect to market conditions in which a mutual bank only competes with non-mutual banks. We find that mutual banks competing with each other show a lower ability to transform local savings into local loans, as well as a worse risk allocation.
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Notes
We refer to these institutions interchangeably as mutual banks, cooperative banks and Banche di Credito Cooperativo (BCC), as they are named by the Italian legislator. The Banche di Credito Cooperativo are not the only banks established as cooperatives; in fact, this characteristic is also common to the so-called Banche Popolari. Nonetheless, the latter can make credit to any firms or individuals and open branches in any location in the country. On the contrary, a Banca di Credito Cooperativo can only operate with its own members and in the municipalities where they live; moreover, in order to become a member, an individual (or a firm) must reside (or have its registered office) in the municipality where the bank is established.
Moreover, although it would be interesting to know the average size of the relevant market on which each bank operates, it is not possible to extract this information from our data set that only contains data at the bank level and solely for cooperative banks.
This subgroup is composed of six banks operating in the area of Garda Lake and Idro Lake.
However, as the smallest banks belonging to group 2 do not behave differently from those of group 1, one need to check carefully whether different group performances are the result of size differences rather than of different competitive environments.
Note that although the intercept of the model is not statistically significant, the 95 % confidence interval for the intercept ranges from −255,041 to 12,220,000.
Observe that the figure is drawn by taking into account the 95 % confidence interval for the intercept of group 2, whose point estimate is not statistically significant at the conventional levels.
We are well aware that our empirical analysis is potentially affected by issues of endogeneity, in that both our dependent variables (i.e. the mission efficiency and local effectiveness indicators, as well as the bad loans over total loans) and some of our main covariates can be a function of unobserved factors. In particular, one such variable could be related to the degree of competition of the relevant banking markets. It is reassuring to observe that, although over the considered period M&As and branch openings and closures have been common, in no cases these phenomena have determined a shift of a bank from one of our groups to another. Hence, the correlations we identify cannot be imputed to changes in the competitive environment. Needless to say, this does not imply that other unobservables related to local economic conditions do not play a role. This notwithstanding, our empirical analysis—although possibly only a part of the story—cannot confute the theoretical arguments we put forward in this paper.
Those considerations obviously hold also for cooperation among ‘self-producers’ in the credit market. It is therefore important for credit co-operators to be all connected in a unique and common network of long-term credit relationships, as a necessary condition for the sharing of losses and gains to act as an appropriate incentive for peer monitoring and the control of moral hazard (Grillo 2013).
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Acknowledgments
We are very grateful to: Carlo Borzaga, Giovanni Ferri and Gilberto Turati for useful discussions and comments; two anonymous referees for their suggestions the helped improving the paper; the Editor Pier Luigi Porta for his support. We also wish to thank Euricse for funding the research and Federazione Trentina della cooperazione, Federazione Lombarda della Banche di credito cooperative and Federcasse for providing data and information.
Funding
This study was funded by EURICSE (European Research Institute on Cooperative and Social Enterprises) (RR: 005/12).
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The authors declare that they have no conflict of interest. Nonetheless, authors Gian Paolo Barbetta and Michele Grillo are members of the Committee of the Centro di Ricerche sulla Cooperazione e il Nonprofit of the Catholic University of Milano. The Centre receives grants from Federcasse (the Italian Association of cooperative and mutual banks).
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Barbetta, G.P., Colombo, L., Colombo, S. et al. Intra-competitiveness and inter-competitiveness among mutual banks: the case of Trento. Int Rev Econ 63, 195–214 (2016). https://doi.org/10.1007/s12232-016-0249-0
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DOI: https://doi.org/10.1007/s12232-016-0249-0