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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.

Suggested Citation

  • Francesca Battaglia & Vincenzo Farina & Franco Fiordelisi & Ornella Ricci, 2010. "The efficiency of cooperative banks: the impact of environmental economic conditions," Applied Financial Economics, Taylor & Francis Journals, vol. 20(17), pages 1363-1376.
  • Handle: RePEc:taf:apfiec:v:20:y:2010:i:17:p:1363-1376
    DOI: 10.1080/09603107.2010.491442
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Francesco Aiello & Graziella Bonanno, 2018. "On The Sources Of Heterogeneity In Banking Efficiency Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 194-225, February.
    3. 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.
    4. Francesco Aiello & Graziella Bonanno, 2016. "Efficiency in banking: a meta-regression analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 112-149, January.
    5. 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 Stochastic F
      ," MPRA Paper 42831, University Library of Munich, Germany.
    6. repec:bla:presci:v:97:y:2018:i:4:p:1017-1037 is not listed on IDEAS
    7. Francesco Aiello & Graziella Bonanno, 2016. "Looking at the determinants of efficiency in banking: evidence from Italian mutual-cooperatives," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(4), pages 507-526, July.
    8. Francesco Aiello & Graziella Bonanno, 2018. "Multilevel empirics for small banks in local markets," Papers in Regional Science, Wiley Blackwell, vol. 97(4), pages 1017-1037, November.
    9. Cristi SPULBAR & Mihai NITOI & Lucian ANGHEL, 2015. "Efficiency In Cooperative Banks And Savings Banks : A Stochastic Frontier Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-21, March.
    10. 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), pages 190-205.
    11. 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) 0043, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    12. Bonanno, Graziella, 2014. "ICT and R&D as inputs or efficiency determinants? Analysing the manufacturing Italian firms over the 2007-2009," MPRA Paper 57640, University Library of Munich, Germany.
    13. repec:eee:intfor:v:34:y:2018:i:4:p:678-695 is not listed on IDEAS
    14. repec:taf:applec:v:48:y:2016:i:41:p:3912-3934 is not listed on IDEAS
    15. Graziella Bonanno, 2016. "ICT and R&D as inputs or efficiency determinants? Analysing Italian manufacturing firms (2007–2009)," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 383-404, December.
    16. Aiello, Francesco & Bonanno, Graziella, 2016. "Bank efficiency and local market conditions. Evidence from Italy," Journal of Economics and Business, Elsevier, vol. 83(C), pages 70-90.
    17. Graziella Bonanno, 2014. "The Efficiency of the Italian Banking System over 2006-2011. An Application of the Stochastic Frontier Approach," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 277-306.
    18. Stefano Azzali & Luca Fornaciari & Tatiana Mazza, 2016. "Income Smoothing via Loan Loss Provision in Credit Cooperative Banks," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2016(2), pages 33-54.
    19. 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, Dipartimento di Economia "Marco Biagi".
    20. C. Barra, 2014. "Local financial development and economic growth: an outlook on italian territorial data," Rivista economica del Mezzogiorno, Società editrice il Mulino, issue 1-2, pages 187-216.
    21. 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.
    22. Cristina Bernini & Paola Brighi, 2012. "Modeling the effects of Geographical Expansion Strategies on the Italian Minor Banks' Efficiency," Working Paper series 72_12, Rimini Centre for Economic Analysis.

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