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Cooperative Banks and Financial Stability

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  • Martin Cihak
  • Heiko Hesse

Abstract

Cooperative banks are an important, and growing, part of many financial systems. This paper empirically analyzes the role of cooperative banks in financial stability. Contrary to some suggestions in the literature, we find that cooperative banks are more stable than commercial banks. This finding is due to the lower volatility of the cooperative banks' returns, which more than offsets their lower profitability and capitalization. This is most likely due to cooperative banks' ability to use customer surplus as a cushion in weaker periods. We also find that in systems with a high presence of cooperative banks, weak commercial banks are less stable than they would be otherwise. The overall impact of a higher cooperative presence on bank stability is positive on average but insignificant in some specifications.

Suggested Citation

  • Martin Cihak & Heiko Hesse, 2007. "Cooperative Banks and Financial Stability," IMF Working Papers 07/2, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/2
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    References listed on IDEAS

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    1. Valnek, Tomas, 1999. "The comparative performance of mutual building societies and stock retail banks," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 925-938, June.
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    3. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-480, June.
    4. Beck, Thorsten & Cull, Robert & Jerome, Afeikhena, 2005. "Bank privatization and performance: Empirical evidence from Nigeria," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2355-2379, August.
    5. Altunbas, Yener & Evans, Lynne & Molyneux, Philip, 2001. "Bank Ownership and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 926-954, November.
    6. Carlos E. Cuevas & Klaus P. Fischer, 2006. "Cooperative Financial Institutions : Issues in Governance, Regulation, and Supervision," World Bank Publications, The World Bank, number 7107, August.
    7. International Monetary Fund, 2004. "Germany's Three-Pillar Banking System; Cross-Country Perspectives in Europe," IMF Occasional Papers 233, International Monetary Fund.
    8. Martin Cihak & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
    9. Martin Desrochers & Klaus P. Fischer, 2005. "The Power of Networks: Integration and Financial Cooperative Performance," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 76(3), pages 307-354, September.
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