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

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  • Francesca Battaglia
  • Vincenzo Farina
  • Franco Fiordelisi
  • Ornella Ricci

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 side.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09603107.2010.491442
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 20 (2010)
Issue (Month): 17 ()
Pages: 1363-1376

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Handle: RePEc:taf:apfiec:v:20:y:2010:i:17:p:1363-1376

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Cited by:
  1. Cristina Bernini & Paola Brighi, 2012. "Modeling the effects of Geographical Expansion Strategies on the Italian Minor Banks’ Efficiency," Working Paper Series 72_12, The Rimini Centre for Economic Analysis.
  2. Bonanno, Graziella, 2012. "L’efficienza del sistema bancario italiano dal 2006 al 2010. Un’applicazione delle frontiere stocastiche
    [The Efficiency of Italian Banking System over 2006-2010. An Application of the Stochast
    ," MPRA Paper 42831, University Library of Munich, Germany.
  3. Francesco Aiello & Graziella Bonanno, 2013. "Profit and cost efficiency in the Italian banking industry (2006-2011)," Economics and Business Letters, Oviedo University Press, vol. 2(4).
  4. Carretta, Alessandro & Farina, Vincenzo & Gon, Abhishek & Parisi, Antonio, 2011. "Politicians “on board”! Do political connections affect banking activities in Italy?," MPRA Paper 33549, University Library of Munich, Germany.
  5. Cristian Barra & Sergio Destefanis & Giuseppe Lubrano Lavadera, 2013. "Regulation and the Crisis: The Efficiency of Italian Cooperative Banks," CSEF Working Papers 338, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  6. Paola Brighi & Valeria Venturelli, 2013. "The Effect Of Revenue And Geographic Diversification On Bank Performance," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 13103, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  7. Fiordelisi, Franco & Mare, Davide Salvatore, 2013. "Probability of default and efficiency in cooperative banking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 30-45.

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