Probability of default and efficiency in cooperative banking

Abstract

Cooperative banks are small credit institutions, and they are more likely than commercial banks to default in periods of financial stability. Focusing on Italy (one of the largest cooperative banking markets), we analyze the contribution of efficiency to the estimation of the probability of default of cooperative banks. We estimate several measures of bank efficiency, and we run a discrete-time survival model to determine whether different managerial abilities play different roles in predicting bank failures. We show that higher efficiency levels (both in cost minimization and revenue and profit maximization) have a positive and statistically significant link with the probability of survival of cooperative banks. We also find that capital adequacy reduces the probability of default, supporting the view that higher capital buffers provide additional loss absorbency and reduce moral hazard problems

Competition and financial stability in European cooperative banks

“…A number of papers have analysed small credit institutions focusing on performance (Goddard et al, 2008a;Kontolaimou and Tsekouras, 2010), diversification (Goddard et al, 2008b;Lepetit et al, 2008;Mercieca et al, 2007, Mckillop andWilson, 2011), risk of failure (Fiordelisi and Mare, 2013) and ownership structure (Gorton and Schmid, 1999 (Hesse and Cihák, 2007;Ayadi et al, 2010) providing empirical evidence that cooperative banks are more stable than commercial banks as they have a great deal of soft information (which is hard to collect) on the creditworthiness of members/customers, and therefore less likely to make lending mistakes. Furthermore, size appears to be positively related to systemic risk (Vallascas and Keasey, 2012;De Jonghe, 2010) and the majority of cooperative banks are small rural credit institutions.…”

“…Furthermore, size appears to be positively related to systemic risk (Vallascas and Keasey, 2012;De Jonghe, 2010) and the majority of cooperative banks are small rural credit institutions. Conversely, there are several studies suggesting that cooperative banks are more fragile than commercial banks (Goodhart, 2004;Brunner et al, 2004;Fonteyne, 2007) and have higher default rates: for instance Fiordelisi and Mare (2013) document that the default rate of Italian cooperative banks was four times higher than default rate of commercial banks in the period before the financial crisis (1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006). To reconcile these two opposite views, it is necessary to take into account the supervisory behaviour.…”

To be bailed out or to be left to fail? A dynamic competing risks hazard analysis

“…Fiordelisi and Mare (2013) examine the relevance of cost, revenue and profit efficiency as well as that of capital adequacy in the estimation of the default probability of Italian cooperative banks. They find that higher levels of efficiency and capital are positively related with the probability of survival, supporting the view that stronger capital buffers provide additional loss absorbency and reduce moral hazard problems.…”

“…Moreover, Poghosyan and Cihak (2011) define distressed mergers as forced mergers with healthier banks, while Mare (2015) treat mergers as a resolution mechanism of troubled banks. In this context, the studies of Lanine and Vennet (2006), Lu and Whidbee (2013), Fiordelisi and Mare (2013), and Berger et al (2016) exclude merged and acquired institutions from their empirical analyses. In line with the aforementioned studies, acquired banks as well as those which have been merged with some other institution during the crisis not at the initiative of the Federal regulatory agencies are considered to be a third group of distressed banks together with the failed and bailed out banks, which comprise the two key distressed banking groups under scrutiny in our study.…”

Efficiency in Spanish banking: A multistakeholder approach analysis

“…In this regard, efficiency comparative analysis literature of different types of financial entities is limited, but there are relevant reference papers (Carbó et al, 2002;Williams, 2004), which results are debatable, though. Some authors consider that the different orientation that banking entities have regarding the achievement of profits might have derived into, on the one hand, a specialization of private banking in order to obtain more profitable customers and, on the other hand, savings banks and credit cooperatives have offered specific products for low income families and small enterprises (Carbó and Rodriguez, 2007;Fiordelisi and Salvatore, 2013;McKillop et al, 1996). This specialization in the orientation means that the use of comparative analysis concerning the classic efficiency indicators, generated from the identification with productivity, is not completely adequate because of the lack of adequacy to the aims that are not exclusively oriented in economic terms.…”