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

Italy has experienced a restructuring and consolidation process in the banking industry since the 1990s’ that is expected to foster efficiency and competition. Despite the reforms, a peculiarity of the industry is the persistence of small mutual-cooperative banks (BCCs) active in narrowed markets. The scope of this paper is to evaluate the level and the dynamics of BCC efficiency compared with other bank-types and to analyze its main determinants over the period 2006-2011. Efficiency is firstly estimated with stochastic frontiers and then used as dependent variable in fixed and random effects models that have been run to regress BCC efficiency against individual and environmental factors. The latter are meant to gauge the structure of the provincial banking market, that is to say the reference market of BCCs. Results show that BCCs perform better than other banks, even though efficiency has decreased over time, owing to the effect of the current crisis. Furthermore, BCC efficiency increases with market concentration and demand density and decreases as bank branches increase in local markets. This holds whatever the frontier (cost or profit). Finally, local development negatively affects (only) cost efficiency, while BCCs gain in generating profits when systemic credit risk increases.