Cooperative Banks

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WP/07/2

Cooperative Banks and Financial Stability
Heiko Hesse and Martin Čihák

© 2007 International Monetary Fund

WP/07/2

IMF Working Paper Monetary and Capital Markets Department Cooperative Banks and Financial Stability Prepared by Heiko Hesse and Martin Čihák1 Authorized for distribution by Mark W. Swinburne January 2007 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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. JEL Classification Numbers: G21, P13 Keywords: financial sector stability, cooperative banks, commercial banks, savings banks Author’s E-Mail Address: hhesse@worldbank.org; mcihak@imf.org

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We are indebted to Klaus Schaeck for useful discussions during the early stages of the project. We also thank the following for their comments: Edward Al-Hussainy, Thorsten Beck, Ralf Elsas, Wim Fonteyne, Francois Haas, Patrick Honohan, Plamen Iossifov, Alain Ize, Barry Johnston, Luc Laeven, Eduardo Ley, Andrea Maechler, Paul Mills, John Muellbauer, Miguel Segoviano, Mark Swinburne, Alexander Tieman, and participants in an IMF seminar and a conference entitled “Public versus Private Ownership of Financial Institutions” in Frankfurt in November 2006.

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Contents

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I. Motivation and Literature Overview ......................................................................................3 II. Data and Methodology ..........................................................................................................6 A. Data ...........................................................................................................................6 B. Measuring Bank Stability..........................................................................................7 C. Methodology .............................................................................................................8 III. Results................................................................................................................................11 A. Decomposition of Z-Scores and Correlation Analysis ...........................................11 B. Regression Analysis ................................................................................................14 IV. Conclusions and Topics for Further Research...................................................................18 References................................................................................................................................35 Tables 1. Summary Statistics of Bank-Specific Variables in the Sample, 1994–2004 .....................20 2. Decomposition of Z-Scores for the Full Sample, 1994–2004 ...........................................21 3. Decomposition of Z-Scores for Selected Countries, 1994–2004.......................................22 4. Sensitivity of the Z-score Decomposition..........................................................................23 5. Fitch:...
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