Conventional and cooperative banks in the euro area: A DSGE approach to banking sector heterogeneity

This paper develops a DSGE model centered on a heterogeneous banking sector in which conventional and cooperative banks coexist, as observed in the euro area. Building on the framework of Gerali et al. (2010), the model incorporates four key features of cooperative banks: (i) a higher loan-to-asset ratio, (ii) specialization in lending to households and SMEs, (iii) greater rigidity in interest rate pass-through, and (iv) a significantly higher profit retention rate. These differences are primarily introduced through differentiated adjustment costs and institutionally grounded differences in profit retention rates, while both types of banks share a common intertemporal profit-maximizing objective. Model simulations show that banking system duality weakens the counter-cyclical effects of monetary policy, although the lower responsiveness of cooperative banks to macroeconomic shocks acts as a stabilizing force. Increased rigidity in interest rate setting emerges as the most significant differentiating mechanism.