"Small is beautiful?”: Essays on the cooperative banking sector: The case of credit cooperative banks in Italy from 2004 to 2011

Small Italian banks have experienced a substantial growth since the mid-1990s and have not disappeared in the wave of the liberalization process that started in 1992. Two main reasons have emerged to explain their growth: (i) the consolidation process of larger banks that disregards smaller customers and (ii) their lending strategy based on localism, proximity, small dimensions, and peer monitoring. Small banks could exploit their ability in collecting soft information and they often use them along with hard information to reduce the asymmetries of information and moral hazard issues in transactions. Among the small banks, cooperative banks have an additional advantage due their member-based ownership structure. They use this to increase the quantity and quality of the soft information compared to other small banks. Italian Credit Cooperative Banks (Banche di Credito Cooperativo, hereafter CCBs) have performed particularly well in expanding their business and in increasing both members and branches, largely due to the weakening of their legal constraints in 1992. However, this growth has not been homogenous and there are differences in growth patterns at the dimensional and the geographical levels. This dissertation focuses on three research questions concerning CCBs: 1. The role of size in the recent growth of CCBs: the literature on bankâ s growth has shown mixed results on the relationship between growth and size. In particular, two main features have been studied: (i) the role of size in the growth of loans, assets and members by testing the Law of Proportionate Effect (LPE); (ii) the role played by other covariates in the growth of loans, assets and members by testing a multivariate regression model. Applying these models to CCBs, the results show that LPE is rejected in favour of a negative relation between size and growthâ i.e., smaller CCBs have grown faster. Their faster growth is related to the financial variablesâ the cost-income level and average earnings (or costs) from interest rates. Moreover, environmental variables play a significant role in explaining the growth. 2. The impact of social capital on the performance of CCBs: given their cooperative form, lending technology, and control mechanisms, the presence of CCBs are expected to be higher in areas where people are more connected and the level of trust is higher. This assumption is related to a small but growing literature on the effects of trust and social capital on the viability and growth of cooperatives at the macro-level. The impact of social capital variables (number of people joining associations and the trust level) on the market share of CCBs at province level turn out to be positive and significant. The results for the market share hold for both the overall credit market and the specific SME credit market. Moreover, the higher presence universalistic associations (associations pursuing general goals â e.g. environmental protection) as compared to particularistic association (those with a particularistic goal, e.g. sports club) have a positive impact on the market share. Finally, only CCBs seem to gain from the presence of larger social capital in comparison to other local banks 3. The relation between the governance structure and interest rate pricing as a way to reward members: CCB members do not usually receive dividends, instead benefit from better financial conditionsâ i.e., better interest rates. However, while the borrowers are interested in reduced interest rate on loans, the depositors prefer an increase in the interest rate on their deposits. The reward choices of CCBs are described using a model based on the bankâ s rewarding priorities and the median voter framework is suitably adapted for the CCBs governance structure. An empirical investigation on the impact of the majority composition in the general assembly on the interest rates pricing is attempted. The tests show that the interest rates policies of CCBs match with the median voter prediction in the case of a borrower majority, while a depositor majority kept the interest rates on deposits lower. This could be seen as a way to control the costs. CCBs follow a strategy to benefit both types of members and to be consistent with their balance sheet constraints.