The efficiency of cooperative banks: the impact of environmental economic conditions

Abstract

This article analyses the cost and profit efficiencies of cooperative banks. Cooperative banks are small financial institutions providing financial services in several local geographical areas, and they play a fundamental role in various European banking systems. Even though these small financial institutions present a homogeneous business model, their performance is strongly influenced by the economic conditions of their local markets. The efficiency measurement has to account for the heterogeneity of the environmental conditions. By using a large sample of Italian cooperative banks (2683 year observations) collected between 2000 and 2005, we estimated the cost and profit efficiency using Stochastic Frontier Analysis (SFA) and including various environmental variables accounting for disparities among Italian regions. We show that environmental conditions substantially influence efficiency estimates: banks in the Northeast of Italy are shown to be the more cost efficient, benefiting from a favourable environment, while banks in the South of Italy display a higher profit efficiency, probably due to lower competitive pressures. We show that the coefficients for branches and the concentration of cooperative banks with respect to other banks are important both on the cost side and the profit sid

Profit and cost efficiency in the Italian banking industry (2006-2011)

“…It must be also said that profit efficiency requires not only technical efficiency and both input and output allocative efficiency (as does the cost efficiency), but also an appropriate scale. Thus, banks cannot be profit efficient if they are scale inefficient (Berger and Mester, 1997) 3 Giannola et al (1997), Giannola and Scarfiglieri (1998), Girardone et al (2004), Giordano and Lopes (2006), Giordano and Lopes (2012), Fontani and Vitali (2007), Dongili et al (2008), Battaglia et al (2010). 4 As shown by Lensink and Meesters (2012) and Wang and Schmidt (2002), the two-step approach suffers from the fact that the inefficiency is assumed to be identically and independently distributed in the main frontier equation, while it depends on other variables in the inefficiency equation.…”

“…Table 4 reports some descriptive statistics of the variables included in the cost and profit frontiers. 6 As in many other recent papers -see, i.e., Battaglia et al (2010) in the banking efficiency literature -the assumptions on v it and u it are those originally proposed by Battese and Coelli (1995), also because modeling other "possible correlated structures of the technical inefficiency effects and the random errors in the frontier" (Battese and Coelli, 1995, 327) goes beyond the scope of this work. 7 The Popolari banks are a specific category of cooperative that, during the restructuring process occurred in Italy over the last two decades, have maintained their nature of cooperatives for what concerns some features (the one vote per capita, irrespective of the number of shares held by the shareholder) but were trasformed in profit-seeking companies.…”

“…Despite the huge literature on bank efficiency -there are exhaustive surveys by Berger and Humphrey (1997) and Fethi and Pasourias, (2010) -few papers have focused on Italy (Battaglia et al, 2010;Dongili et al, 2008;Fontani and Vitali, 2007;Giannola et al, 1997;Giannola and Scarfiglieri, 1998;Girardone et al, 2004). In this regards the evidence is mixed, but three conclusions may be drawn.…”

Looking at the determinants of efficiency in banking: evidence from Italian mutual-cooperatives

“…11 As in many other recent papers in the banking efficiency literature (see, i.e., Battaglia et al 2010;Giordano and Lopes 2008;Lensink and Mester 2012) the assumptions on v it and u it are those originally proposed by Battese and Coelli (1995), also because modeling other "possible correlated structures of the technical inefficiency effects and the random errors in the frontier" (Battese and Coelli 1995:327) goes beyond the scope of this work.…”

“…This process surely reinforces BCCs territorial vocation, which tends to expand their relative role and participation in small markets. In other words, data Differently from Battaglia et al (2010), our estimations of BCC individual performances control for what happens in the national banking system. In other words, BCCs are analyzed within the overall industry, with the result of preserving the comparability of efficiency across different groups of banks.…”