The cooperative bank difference before and after the global financial crisis

https://doi.org/10.1016/j.jimonfin.2016.06.016Get rights and content

Abstract

We compare characteristics of the banks' specialization (cooperative versus non-cooperative) at the world level in a time spell including the global financial crisis. Cooperative banks display higher net loans/total assets ratios, lower shares of derivatives over total assets and lower earning volatility than commercial banks. With a diff-in-diff approach we test whether the global financial crisis produced convergence/divergence in these indicators. We finally document that, in a conditional convergence specification, the net loans/total assets ratio is positively and significantly correlated with value added growth in some manufacturing sectors but not in others.

Introduction

As is well known, financial intermediaries, and among them specifically banks, perform a pivotal role in the financial system by pooling resources, transferring economic value intertemporally and cross-sectionally, providing ways of clearing and settling payments, allocating financial resources to the most productive destinations, managing risk and implementing price information (Bhattacharya, Thakor, 1993, Merton, Bodie, 2005). Financial instruments such as derivatives can play an important role by broadening the set of these traditional functions. Derivatives may in fact be conceived as “adapters” among different financial systems that are not fully integrated (Haiss, Sammer, 2010, Merton, Bodie, 2005), thereby helping to foster, among others, foreign direct investment financing. Given the above, it is no wonder that what has been observed in recent years is a positive nexus between finance and growth. In this longstanding literature tradition – probably one of the oldest and most established research fields in economics – well known benchmark references are those from King and Levine (1993) and Rousseau and Wachtel (1998).

However, the most recent empirical studies document a weakening of such favorable relationship in the last decades. Looking over the 1960–2003 period, Wachtel and Rousseau (2007 and Rousseau and Wachtel 2011) find that the positive link between finance and growth is no more robust and disappears after 1989. Arcand et al. (2012) find that the nexus between finance and real economy is non monotonic and conclude that too much finance can have non positive effects on the real economy. On the other hand, Easterly et al. (2000) show that output volatility grows when the share of the financial system is too high.

Our paper starts from the theoretical and empirical background described above, and compares the performances and characteristics of cooperative banks versus commercial (and investment) banks, their behavior during the global financial crisis and their nexus with value added growth. We start from the phenomenon of disintermediation where commercial banks have extensively moved from their lending activity toward proprietary trading, and derivative trading. This circumstance is highly likely to be a rational response of profit maximizing entities to the increasing competition in the traditional intermediation activity, which led to a tightening of intermediation margins, thereby making alternative sources of income, such as service fees and gains from proprietary trading, relatively more attractive.1 We wonder whether this circumstance has applied to a lower extent to cooperative banks due to their characteristics (i.e. one share–one vote, more dispersed local ownership that sees in them a way to finance local economy, constraints on the distribution of profits that have to be accumulated into reserves), which make them more oriented toward traditional lending activities, and imply an implicit departure from straight profit maximization strategies (CEPS, 2010). In that sense, our empirical analysis can also assess whether profit maximization affects engagement in traditional intermediation activities in the current globalized financial scenario.

We test our hypothesis on a worldwide sample of banks during the global financial crisis. We analyze whether cooperative banks are different in terms of net loans/total assets ratios, earning volatility and derivatives over total assets, and we look for the presence of convergence/divergence effects over the long run and across time during the global financial crisis. We additionally investigate whether higher net loans/total assets ratios affect the growth of value added of different industrial sectors classified ex-ante on the basis of their technological intensity and dependence from external finance.

The paper is divided into five sections (including introduction and conclusions). Section 2 describes the characteristics of cooperative banks and their diffusion at the European and global level. In Section 3 we introduce our dataset and examine descriptive results. The empirical strategy and econometric findings are presented and discussed in Section 4.

Section snippets

The cooperative banks difference debate

According to the International Cooperative Alliance (ICA) a cooperative bank is “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty,

Data and descriptive statistics

Our analysis focuses on a sample of 32 countries over the period 1998–2010 for a total of 140,660 bank-year observations.3 The data used

Empirical strategy

In order to check whether the difference in intensity of traditional intermediation activity is robust when controlling for concurring factors, we estimate the following panel specification: NetLoan/TotAssijt=α0+α1Dcoopijt+α2ln(Size)ijt+α3ShareTradijt+α4ShareNonTradijt+α5Deriv/TotAssijt+jβjDCountryj+jγjCountryVarjt+jδDBankTypej+tθDYeart+εijtwhere the dependent variable is the net loans to total assets ratio (NetLoan/TotAss) for the i-th bank in the j-th country measured at year t.8

Conclusions

The nexus between finance and growth is one of the oldest and most explored in the economic literature. However, the recent transformations of the global economy and the occurrence of the global financial crisis seem to have caused an important discontinuity in the empirical evidence on this relationship. Many authors have recently questioned the traditional robust and well-established positive link between the two variables. We argue that one of the explanatory factors is that the growing

Acknowledgments

The authors are grateful to Panicos Demetriades, Giovanni Ferri, Giorgio Gobbi, Iftekhar Hasan, Marco Pagano, Greg Udell, and Alberto Zazzaro for useful comments during the preliminary draft of the paper and to the participants of the XXIII International Rome Conference on Money Banking and Finance, 2014 RCEA Conference, and 55ma RSA Invited Session on Cooperative Banking at the Annual Meeting of the Italian Economic Society where earlier versions have been presented. The usual disclaimer

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