Deloitte strategies in cooperative financing and capitalisation
Giovanni ferri and giovanni pesce
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Regulation and the Viability of Cooperative Banks
Giovanni FERRI1 and Giovanni PESCE2
Introduction3
The aim of this paper is to analyze the impact that banking regulation has had upon the
business model of coop banks. Banks exist because of information asymmetries between
borrowers and lenders (Stiglitz and Weiss, 1981). Banks are there to tackle the problem
as delegated monitors of the borrowers (Diamond, 1984). The importance of banks stems
from the fact that they provide a monitoring service to investors at a considerably low
cost, which decreases the cost of financing for borrowers. In the run up to the Great
Crisis of 2007-2009, there had been a general relaxation of the monitoring activity from
a large part of the global banking system, mainly though not exclusively by Anglo-
American institutions. Many institutions moved from the OTH model–‘originate-
to-hold’–to the OTD model–‘originate-to-distribute.’ Furthermore, the OTD model was
generally interpreted in the strict sense that originating banks would give away the
underlying risk along with the securitized loan portfolio and this had the disastrous
consequences we all learnt. The collapse in some credit markets highlighted that the
presence of generalized OTD banks had dramatic results for the whole system.
While securitization has its merits in terms of risk-diversification, only the model of the
OTH bank is consistent with the informational advantage that banks have over the
market. The cost of monitoring is reduced through the use of soft and private information
(Scott, 2006). We can therefore recognize that only the OTH model is sustainable in the
long run without fostering systemic risk through excessive securitization and the
assumption of excessive risk by banks and financial institutions.
Banking regulation exists to remedy market failures that can be traced to two main
features: (1) the risk of systemic crises in the banking sector; and (2) the inability of
depositors to monitor banks (Santos, 2001). Both of these types of market failures
emerged in all their seriousness in the Great Crisis, boosting a new wave of regulation
after the deregulation of the banking sector in previous decades. The failures of existing
regulation can explain the need for more sophisticated forms of regulation than those
used for normal liquidity risks. These new forms should be sophisticated enough to allow
banks to ‘survive’ in the way banks manage their risk (Dionne, 2003).
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Since the Great Crisis, the international banking system–and beyond–has been at the
center of the debate for reform. This is the same debate that led to the definition of new
rules to which banks are already adapting. The reform process follows a long and
tortuous course, but the current phase of re-regulation has already given birth to some
important results, such as the new Basel Accord in the end of 2010–called Basel III–
which is perhaps the pinnacle of the iceberg regarding the new round of bank regulation
(D'Apice and Ferri, 2010).
The agreement, following the framework of the three pillars established in the Basel II
Accord, aims to correct critical points that arose during the crisis. Banks will hold more
capital and capital of better quality than in the past. The focus is moved to Tier I Capital–
minimum 6%–and Common Equity Tier I–minimum 4.5%–for a minimum Total Capital of
8% of risk-weighted assets. The causes and the development of the Great Crisis have
greatly influenced the Agreement. Among the main features with respect to Basel II, are
the introduction of (a) a ‘conservation buffer’ equal to 2.5% of total risk-weighted assets
and comprised of Common Equity Tier I to ensure adequate capital in periods of stress and
losses; (b) a ‘leverage ratio’ to curb excessive borrowing by bank institutions–a minimum
Tier I leverage ratio of 3% is under test; (c) a ‘countercyclical buffer’ to limit the pro-
cyclicality of Basel II; and (d) two liquidity requirements—the first ‘Liquidity Coverage Ratio’
(LCR) to absorb shocks in the short term (i.e. 30 days), and the second ‘Net Stable Funding
Ratio’ (NSFR) to absorb shocks in the long term–over a period of one year.
However, it should be stressed that current banking regulations and the new policies are
designed around shareholder value banks–established mainly as PLCs, which maximize
profit–without taking into account the diversity that exists within banking systems with
a strong presence of stakeholder value banks–that maximize the welfare of a set of
subjects broader than just shareholders. Coop banks are a key component of this latter
group of banks.
The effects of regulation differ depending on the risk profile of banks. Supervisors of
regulation should recognize that the approach ‘one size fits all’ is inappropriate (Klomp
and De Haan, 2010). For example, the third pillar of the Basel Accord, which is based on
the disclosure of information to subject banks to market discipline, has reduced power
for coop banks while it is best suited for commercial banks, especially if listed. In
addition, we must not forget that the current approach of regulation and supervision
focuses on some parameters such as profitability–suited for shareholder value banks but
not for stakeholder value banks–may distort the behavior of the latter banks, pushing
them toward the goals of shareholder value banks.
Empirical studies have shown that the regulation, if it focuses on ‘changes’ of the balance
sheet for banks or on the structure of the banking system, is generally ineffective or even
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harmful in increasing the fragility of the system. Two recent examples are the use of the
mark-to-market approach of International Accounting Standards–later suspended during
the Great Crisis–and the excessive use and confidence of credit ratings and credit scoring
in Basel II (Ferri, 2001). On the contrary, effective regulation should focus on the behavior
of bank managers and shareholders (Tchana, 2009).
Ownership structure and deregulation have an impact on a banks’ risk-taking: there is
an agency problem between managers who hold bank capital–the insiders–and outside
investors holding capital but with no management powers. The banks’ portfolio, of which
the insiders hold a certain amount of capital typical for coop banks, is less risky than
that of banks controlled by outsiders, typically commercial banks (Saunders et al., 1990).
The Great Crisis has highlighted the advantages and importance of diversity in the
banking system (Ayadi et al., 2010). The change of sentiment toward coop banks, which
were considered before the crisis as outdated and inefficient, is a clear example.
However, banking regulation almost invariably fails to recognize the positive role of
diversification and instead increases regulatory requirements indistinctly such as capital
ratios, and creates new rules such as liquidity ratios for all banks. As De Larosière (2011)
has noted, Basel III “…may create new risks by favouring the development of the
insufficiently regulated shadow banking system and by penalizing a diversified universal
banking model [the continental European universal bank] that proved resilient through
the crisis.”
Higher capitalization proved neither capable of reducing the likelihood of national
banking systems experiencing the Great Crisis of 2008 (Caprio et al., 2010), nor capable
of mitigating the fall in banks’ stock prices when the market re-priced risk in the
aftermath of the Lehman Brothers' bankruptcy (Bongini et al., 2009)–where the share
price collapse was lower for intermediaries anchored to the traditional banking model.
This paper is organized as follows: section 2 presents possible effects of the new banking
regulations on banking diversity, with particular attention to those of Basel III on coop
banks. Section 3 describes the data and the empirical strategy to test our hypothesis, as
well as the presentation of empirical results. Section 4 provides final conclusions.
Banking regulation and effects on banks diversity
The Great Crisis of 2007-2009 highlighted the virtues of coop banks. After many years
of negative prejudices towards coop banks–driven by the presumed benefits associated
with financial liberalization–the authorities, which includes financial and academic
communities, have recognized the importance of coop banks. The Great Crisis
underscored the major value of diversity in the banking system with respect to a situation
where all banks adopt a single type of business model.
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Although Basel III is designed to make the banking system more resilient, some shadows
still gloom on the horizon. It was stressed (De Larosière, 2011) that the Accord penalizes
banks that proved to be more resilient during the crisis: the diversified universal banking
model based on the traditional system where OTH and coop banks are an important part,
especially in Europe. Universal banks, particularly coop banks,4 were the least involved
in the Great Crisis, showing more resilience due to the fact that they rarely used
securitization and because they had strong balance sheets and a large deposit base,
which reinforced their liquidity. An example of this is represented by the Italian Banche
di Credito Cooperativo (BCC), which, continued to finance the economy and in particular
small and medium-sized enterprises (SMEs) during the credit crunch. For instance,
between 2007 and 2009, loans granted by BCC grew faster than at PLC banks (8.7%
against 3.3%).5 The data confirm a recent advertisement of Italian coop banks stating:
“My bank is different.”
The coop banks are different with respect to other banks–primarily those banks
established as PLC–given the opposing objectives that they pursue. Coop banks should
not maximize shareholder value (SHV), which is the primary objective for banks
established as PLC, often pursued through the OTD model that best fits that purpose.
Rather, by their nature, coop banks pursue other objectives maximizing benefits for their
members and the communities they serve. Coop banks are therefore the prototype of
stakeholder value (STV) banks. The clear difference between SHV and STV banks emerges
when one looks at the governance of banks. For shareholder value (SHV) banks, the key
element is the share–‘one share one vote’–while for coop banks the key element is the
member, ‘one member one vote.’ Although the principle of ‘one member one vote’ has
disadvantages in terms of governance (i.e. less flexibility and timeliness in taking
decisions), it has the obvious advantage of leading to decisions that represent the will
of a larger group of bank stakeholders.
As a consequence of this system of governance, coop banks show a lower volatility in
returns (Hesse and Cihák, 2007; Bongini and Ferri, 2008), granting them the possibility
to pursue long-term goals through a business model that not only hinges on the OTH
model but also features limited exposure to financial market-related activities and deep
roots in relationship banking.
These deep roots in relationship banking are also a natural consequence of the structure
of coop banks. Often, their regulations/statutes prescribe that the majority of loans
should go (with better conditions with respect to other borrowers) to coop bank
members with whom the coops entertain relationships that go well beyond the normal
lending bond, resulting in commercial and professional relationships (not to mention
family or friendship ties). These relationships have a positive effect on facilitating lending
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and lowering the costs of screening and monitoring members and borrowers. In addition,
the ‘stigma’ effect in the community reduces the likelihood of opportunistic behavior by
the borrowers. It follows that the STV banking model is better placed to reduce
borrowers’ information asymmetries, thus overcoming market failures that prevail with
other banking systems.
The new requirements of Basel III–capital requirements but also other measures such as
liquidity requirements–may penalize universal banks by pushing them into fierce
competition to attract new deposits (e.g., increasing interest rates paid on deposits) for
compliance purposes, thereby increasing the cost of lending. Loans will probably be cut
to reach the increased capital requirements deemed necessary under the new regulation,
and banks will tend to keep only the most profitable assets within the same risk assets'
class on their balance sheet.
Practically, not much has changed in the field of supervision by authorities. The so-called
‘light touch’ approach was one of the causes of the Great Crisis. Had controls been more
effective, such as countries like Canada or Italy, much of the disaster that occurred could
have been avoided. In addition, the setting of banking regulation and supervision based
on parameters, such as profitability–appropriate for SHV banks but less so for STV banks–
can somehow encourage the latter to behave like the former, distorting their original
nature. The concept behind the Basel Accords that numbers, ratios and more generally
mathematics alone is needed to control and reduce risk has led to a false sense of
security over the years, with the only result being to save the credibility and reputation
of regulators (Pomerleano, 2010).
Increased coordination between the supervisory authorities worldwide, not only in the
midst of the Great Crisis, is essential to create a level playing field and to prevent the
banking and financial institutions from exploiting gaps between different regulations.
Given the highly interconnected global financial system, regional reform is inadequate
to solve the problem of systemic risk. The regulatory authorities of different regions need
to improve coordination to prevent a future systemic banking and financial crisis,
wherever it has its roots.
The possibility of regulatory arbitrage penalizes coop banks once again, along with banks
generally focused on relationship lending, in favor of global banks that can somehow
circumvent the banking regulation and enjoy a competitive advantage. This may lead to
an outflow of capital from more regulated banking systems to countries with less
stringent banking regulations or, even worse, toward the shadow banking system. Given
the high interconnection of banking and financial systems around the world, regulatory
arbitrage may increase global systemic risks irrespective of the new and larger capital
requirements of Basel III.
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The high concentration of the banking system and the problem of ‘too-big-to-fail’ banks,
are two issues closely linked and only partially addressed by the new banking regulation.
The ‘ordered failure’ of large institutions introduced in the U.S. banking regulation by
the Dodd-Frank Act is acceptable in theory, but will probably result in increased
concentration in the banking and financial system; most likely, large institutions will
acquire the assets of failed institutions, consequently increasing overall systemic risk.
On the other hand, banking institutions of small size and closely linked to their territory,
with a relationship-lending business model, will be allowed to fail while important
institutions for the system, in periods of monetary restraint, will not be allowed to fail
in a natural way, effectively reducing competition in the loan market. In the U.S. from
2008 to 2010, 313 banks with average total assets of less than $10 billion–for a total of
about $200 billion–have failed. That is about one tenth of the value of total assets of
JPMorgan Chase in 2010. The failure of a cooperative bank in a small town in Northern
Italy would certainly not ‘earn’ the front page of the Financial Times, as would a giant
bank of Wall Street.
The increasing complexity and growing volume of regulations that banks must follow
leads to increased regulatory compliance costs that are–at least in relative terms–larger
for the small banks, like the majority of coop banks. For example, if compliance to new
regulation standards, which today can be represented by the move from Basel II to Basel
III, involves the use of one additional unit of personnel, the impact on costs for a
cooperative bank with 10 employees–a value not far from the reality of many of the
Italian coop banks–is approximately equal to 10%. In the case of a large banking
institution, with 10,000 employees, the increase in compliance costs will be
approximately equal to just 0.001%. In other words, the increase of compliance costs
that are fixed costs for each bank creates an artificial scale benefit of a regulatory nature,
thus pushing banks to grow, for example, through mergers and acquisitions (M&A) with
other smaller banks. Coop banks, given their typically small size, particularly feel this
unintended regulatory push.
Growth is not a negative factor per se, but it raises some issues for coop banks such as
governance problems, especially related to the difficulties inherent in the operation and
participation of members in bank meetings. A further distortion may emerge, effectively
placing the strategy of the cooperative bank exclusively at the service of members rather
than including the interests of other groups in the community that the bank operates
within, as it should be for stakeholder banks. Revisions to regulation are needed so that
compliance costs do not lead to an artificial increase in the size of coop banks–possibly
weakening their ethical roots–and to greater concentration of the banking system, which
would increase systemic risk. Thus, it seems appropriate to advocate some type of
“proportionality” in the enforcement of regulation that, even though applied
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horizontally, should be drastically simplified for small banks in a way to avoid building
artificial regulatory-induced economies of scale.
Additionally, the size of the banking business poses at least two additional problems for
supervisors: the ‘scrutiny problem’ and the ‘skill problem.’ The scrutiny problem is related
to the volume of banking transactions and related documents that authorities should
consider during their surveillance operations. The skill problem is connected with skills
that the supervisory staff must have to analyze complex operations and tools that banks
undertake on a daily basis.
Using the example above, let us assume that a cooperative bank with 10 employees
needs only one examiner–a number not far from reality. If we apply the same proportion
to the bank with 10,000 employees, 1,000 examiners would be needed, a number of
course not observed in reality.6 This difference is also reflected in the number of
transactions and documents that authorities may consider in the surveillance. In the case
of coop banks, you will have a very high percentage of documents being examined, while
in the other case, you will see an examination of documents only on a sample basis. The
test on a sample basis will inevitably lead to less attention to certain aspects of bank
operations increasing the probability of not having a reliable view of the whole situation
of the bank, increasing the systemic risk due to any irresponsible behavior by the
institution that went unidentified during the onsite examination.
The scrutiny problem a competitive advantage gives to larger banks compared to banks
of more modest size, as in the case of a cooperative bank, does not help “level the
(regulatory) playing field.” The problem obviously increases with the introduction of new
and more complex rules such as Basel III and by the type of supervision–the ‘light touch’
versus the ‘rigorous touch.’
In turn, the large size of banking institutions may push them to undertake more complex
operations and to use complex financial instruments in contrast to small size banks, such
as the coops. The complexity of operations and tools leads directly to the skill problem
for surveillance authorities. During the Great Crisis, we heard many times of ‘toxic
assets’–complex financial instruments that even those who had created those
instruments were not fully aware of the risks involved. The opacity that characterized
and distinguished complex financial instruments such as CDOs and ABS requires very
high skills that supervisors in most cases do not have (sometimes supervisors resorted
to pools of external experts to evaluate those financial instruments). Can an examiner
understand the risks contained in hundreds and hundreds of pages describing these
instruments before they have infected the whole system? The story of the subprime
securitization pyramid said ‘no.’ In addition, the differences in the speed with which
financial innovation and supervisors and regulation move makes the task extremely
difficult or even impossible.
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Once again, OTH banks relying on relationship banking and rooted in their respective
territory are penalized by the regulatory and surveillance framework. These institutions
had little or nothing to do with securitization–the root of the OTD model–and instead
they engaged in traditional operations and instruments such as lending to enterprises
and households.
The approach that still shapes banking regulation is based on ‘one-size-fits-all.’ Terms
like ‘diversity,’ ‘biodiversity,’ ‘relationship banking’ or ‘coop banks’7 are completely absent
in the text of the Basel III Accord, revealing that there is little regulatory attention to the
different roles and characteristics that distinguish market participants in the banking
system. Indeed, some studies (Ayadi et al., 2010) show that biodiversity is a value in the
banking system to preserve the stability with coop banks, contributing significantly and
positively to the maintenance of broader economic stability. Alas, regulators do not seem
to pay enough attention to this point.
The new bank regulation: a survey among Italian coop banks
During 2011–after the release of the final text of the Basel III Accord–we conducted a
survey questionnaire among Italian coop banks (BCC) to learn their views on various
aspects of the new banking regulation that will apply to banks in the coming years.
At the end of our survey, we collected answers from 141 BCC–about the 33% of the
total number of BCC in Italy at end 2011. Among other points,8 we requested information
on internal staff dedicated to regulatory compliance and possible impacts of the new
Basel Accord on several aspects of bank governance. Balance sheet and other structural
data on Italian BCC come from the 2011 edition of the “Yearbook of Coop banks,”9 an
annual collection of data on Italian BCC. This information also came directly from
balance sheet documents when data were not available from the Yearbook.
As a first step of our hypothesis, we test the existence and relevance of scale effects in
compliance regulation staff costs at coop banks. To do so, we implement an econometric
model where the dependent variable is the ratio in each BCC between the internal staff
devoted to regulatory compliance in 2010 and the total staff in the same year. In
particular, we estimate the following specification:
SRCi,2010 = β0 + β1Xi,t + β3log(DIPi,2010) + β4log(Qi) + Dnet,i + Dpro,i + εi (1)
Where SRCi,2010 is the ratio between the internal staff devoted to regulatory compliance
and the total staff in 2010 for the cooperative banki. We introduce a set of structural
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factors of coop banks, Xi,t and our main covariate of interest, DIPi,2010, which represents
the number of total staff in cooperative banki in 2010. We also test qualitative coop
banks specific factors, Qi, resulting from the survey. In order to control for geographic
fixed effects that could impact staff regulatory compliance costs, local coop banks
associations fixed effects, Dnet,i, are introduced in the empirical specification. The
specification include also Italian provinces fixed effects, Dpro,i, to control for other
geographic characteristics. This set of dummies will hence absorb any effects specific to
the coop banks. We report the results of estimates of (1) in Table 1.
The estimation results confirm our hypothesis that the share (to total staff) of staff
dedicated to regulatory compliance represents fixed costs for coop banks. Estimates also
show that SRC depends positively and significantly on the amount of traded volume by
branches of coop banks. On the other hand, the BCC size–expressed in terms of total
employees–has a negative effect. The coefficient is indeed negative and largely
significant, confirming that for BCC, a positive scale effects on staff dedicated to
regulatory compliance exists. In other words, we can say that smaller coop banks bear
a disproportionate cost of regulatory compliance, in terms of dedicated staff, vis-à-vis
larger coop banks.
Another important point is represented by the fact that the share of staff for regulatory
compliance increases when coop banks, in their history, have been part of mergers and
acquisitions (M&A). The coefficient of the dummy variable M&A is positive and
significant, highlighting the presence of administrative costs arising from these
operations, possibly due to the duplication of staff regulatory compliance costs and to
some transitional adjustment costs.
Estimation results (not reported here but available upon request) are robust, including
the amount of capital per member showing that when the capital of the BCC is
concentrated in a small number of members, the share of staff dedicated to regulatory
compliance decreases. The few major members in terms of coop banks’ capital could
perform an additional control function over the bank’s operations, pushing them toward
more traditional operations resulting in reduced costs of regulatory compliance in terms
of staff. The number of directors present in the BCC also shows a significant and positive
sign. This could be due to increased work needed to inform more directors on the part
of the staff devoted to regulatory compliance, leading to a sort of duplication.
As a second step of the empirical analysis, we fit a probit model to check whether staff
regulatory compliance costs could be an artificial driver for future M&As among,
specifically Italian coop banks as a consequence of the new banking regulatory
framework.
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The model has the following specification:
M&Ai = β0 + β1Zi,t + β3SCRi,2010 + Darea,i + εi (2)
Where M&Ai is a dummy variable that accounts for future possible M&As among Italian
coop banks. The variable comes from our questionnaire survey, in which we asked Italian
BCC: “Will the requirements of Basel III increase the probability of mergers and
integrations among coop banks? If yes, will your bank consider that option?” M&Ai in
particular takes value 0 if coop banks answered “No” to the second part of the question
and value 1 if the answer was “Yes.” Our main aim with (2) is to verify if the ratio
between the internal staff devoted to regulatory compliance and the total staff in 2010
for the coop banki, SCRi,2010, is predictive of expected future M&A operations among
BCC. In other words, we test if a possible increase in regulatory compliance staff costs
of the new banking regulation could push the BCC to grow in size through a sort of
“artificial” economies of scale. Zi,t is a matrix of coop banks structural variables and
Darea,i are fixed effects for coop banks geographical area.
We should stress that it is plausible that coop banks with the same characteristics have
a similar way to act. In this case, it is highly probable that coop banks of almost equal
size could have a similar pattern with respect to the possibility of future M&A operations.
Thus, we clustered observations to account for correlation across coop banks of similar
dimension and independence across coop banks of different dimension. We used the
number of coop banks’ branches to cluster coop banks in the following four groups:
(1) coop banks with a maximum number of 5 branches; (2) coop banks with more than
5 and fewer than 11 branches; (3) coop banks with more than 10 and fewer than
21 branches; and (4) coop banks with more than 20 branches. We report the estimated
results in Table 2.
The probability that the BCC expect to be involved in future M&A operations increases as
the number of M&A occurred in the past increases. In other words, the experience gained
in these operations and perhaps even more, the success of past M&A operations, have a
significant positive impact in considering future M&A operations to mitigate the effects
of Basel III. The significant and positive coefficient of the share of staff dedicated to
regulatory compliance confirms the fact that acquisitions and mergers find a driving force
in the new banking regulation through the existence of artificial economies of scale as
we discussed above. As expected, the likelihood of future M&A operations increases with
the size of the average capital per member of the coop banks. Obviously, the smaller the
number of members or the higher the share of equity per member, the greater the chance
to easily reach an agreement for the M&A operations across two or more coop banks.
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Concluding remarks
The Great Crisis highlighted the strengths of the OTH model along with the weaknesses
of the OTD model. The banking institutions based on the latter model proved to be weak
during the crisis while the banks based on the OTH model showed their strength and the
huge contribution they provided to the stability of the whole banking system.
The crisis has triggered a new wave of regulation, primarily but not exclusively, in the
banking system. Basel III is one cornerstone of the new banking regulation that will
apply to the entire banking system in the coming years. We have seen how it introduces
measures to correct and prevent the causes that triggered the Great Crisis. However,
some question marks remain on the stability of the banking system, such as the
problems arising from the unregulated shadow banking system, the possibility of
regulatory arbitrage, the type of (‘light touch’ vs. ‘rigorous touch’), the extent of
surveillance (‘scrutiny problem’) and the skills of supervisory authorities (‘skills
problem’). Last but not least, the current regulatory approach ignores the benefits from
the presence of banking and financial institutions with different objectives and
governance methods. Coop banks, for example, were considered outdated and
inefficient institutions until a few years ago, but the Great Crisis had highlighted to the
public throughout Europe and beyond of the positive contribution coop banks give to
the stability of the whole banking system. However, the regulation in its current
framework does not recognize such a role. Instead, it creates distortions that may push
these banks into business and governance models outside their nature, characterizing
mainly big banks, primarily PLC banks.
We argued that coop banks are urged to comply via the channel of regulatory
compliance costs. From an ad hoc survey of Italian coop banks, we found that
compliance costs–in terms of dedicated employees–had increased on average of 175%
between 2000 and 2010–even before the enforcement of Basel III–with peaks of 500%
for some coop banks. In addition, in 2010, an average of 1.9% of these banks’ staff was
committed to regulatory compliance, with peaks above 4%. The costs of staff dedicated
to regulatory compliance–as a proportion of the total staff–represents fixed costs for
coop banks. After taking into account differences among coop banks in terms of volume
of business, geographic location, workforce size and local networks, coop banks play a
key role in explaining the costs of staff devoted to regulatory compliance. “Increasing”
the total number of employees of coop banks significantly reduces their regulatory
compliance staff costs. In other words, this means that coop banks with a smaller total
staff bear a cost of regulatory compliance–in terms of dedicated staff–relatively higher
than at larger coop banks.
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All of this compels coop banks to find solutions to reduce the costs of regulatory
compliance. One way is through mergers and acquisitions (M&As) among coop banks; in
fact, 85% of the responding coop banks said that Basel III increases the probability of
M&As, with 43% of respondents saying their own bank will be affected directly by this
event. We find also that the experience (and success) gained in past M&A operations has
a significant and positive impact on the probability that coop banks expect to be involved
in future M&A operations for which the share of staff dedicated to regulatory compliance
is a driving force, through the existence of artificial economies of scale, pushing coop
banks to such measures in order to mitigate the effects of Basel III.
We thus need to reassess bank regulation in a perspective that takes into account the
differences in the nature and governance of different types of bank institutions to make
the whole banking system resilient and to prevent the recurrence of new crises in the
future. Possibly, enlightened legislators and regulators will engage in applying some
proportionality criterion to the enforcement of these new rules. This is needed to
preserve diversity within the banking system, whose virtues were (re-)discovered with
the Great Crisis of 2007-2009. Now, banking diversity demands practical measures of
safeguarding rather than simply lip service.
Table 1 – Scale effects in compliance regulation staff costs
Dependent variable: staff regulatory compliance costs
Note: ***, **, * denote statistical significance at 1%, 5% and 10% respectively (robust standard error
in parenthesis). Estimates include local coop banks associations and provinces fixed effects.
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Table 2 – Future M&A operation among Italian coop banks
Dependent variable: probability of future M&A
Note: ***, **, * denote statistical significance at 1%, 5% and 10% respectively (robust standard error
in parenthesis). Estimates include area fixed effects and intragroup (branches) correlation (independent
across groups, clusters).
Notes
1
Chairman of the Department of Economics at the University of Bari “Aldo Moro”, (giovanni.ferri@uniba.it)
2
European Research Institute on Cooperative and Social Enterprises (Euricse), (g.pesce@dse.uniba.it)
3
Though we bear the exclusive responsibility of any errors or omissions and the views put forward
do not involve any institution we may be affiliated with, we wish to thank various experts. First of
all, we are indebted to Carlo Borzaga for his vision, without which this paper would have not been
conceived. Then, we acknowledge enlightening suggestions from Yiorgos Alexopoulos, Roberto Di
Salvo, Silvio Goglio, Panu Kalmi, David Llewellyn, Juan Lopez and Salvatore Maccarone. We thank
Stefano Di Colli for valuable help in collecting the data. Last but not least, we owe special gratitude
to Riccardo Bodini and the whole of Euricse staff for their unfailing support.
4
With rare exceptions in countries such as France, Switzerland, Germany, the Netherlands and the UK.
5
Our calculations on data from Banca d’Italia, 2011.
6
A fitting example is also that of the asymmetric burden imposed on banks of different size by on-
site examiners. As spelled out by Lange Ranzini (2011), the President and Chief Executive of University
Bank in Ann Arbor (Missouri, USA): “…the chief executive of Goldman Sachs, in an interview after
his investment bank became a ‘bank holding company’ during the market panic in late 2008, that
[because of] the ‘extra’ regulatory scrutiny … they now had 40 bank examiners who drop in from
time to time and look over some documents … Our bank, which has 200 employees, gets 20 bank
examiners each year – that is one examiner for every 10 employees. Goldman Sachs has 34,100
employees, so if the same ratios applied, it would be visited by 3,410 bank examiners for a month, or
it would have 284 examiners permanently stationed on site. Our examiners look at 50 per cent of all
loan files–that means they read every piece of paper in every one of those files. Then they review all
reports that can be output by our computer systems. Can the examiners even look at a 0.01 per cent
sample of a mega bank’s files?”
7
Only quoted in note number 12 of the Basel III Accord.
8
The questionnaire – available from upon request – consisted of 12 multiple choice questions and 5
open questions.
9
Data are updated to October 2011.
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Summary
After a long oblivion–if not negative prejudice–on the part of the financial community and of the
authorities, the Great Crisis of 2007-2009 has highlighted the virtues of cooperative banking. First,
coop banks suffered less during the crisis than commercial banks. Thus, the image of these banks
improved as public opinion shifted when governments spent taxpayers’ money to salvage commercial
banks and only rarely for coop banks. Furthermore, banking coops kept supplying loans while other
banks were restricting credit. For example, loans granted by coop banks in Italy between 2007 and
2009–to small and medium-sized enterprises (SMEs) in particular–grew faster than at public limited
company (PLC) banks: 8.7% against 3.3%. Not only were coop banks less impaired by the crisis but
also their relationship-oriented business model served best in granting credit at a time of increased
borrowers asymmetries of information vis-à-vis other banks. There also seems to be a new favorable
attitude toward coop banks in the scientific economic community, which stopped praising benefits
of financial liberalization to advocate the importance of diversity in banking. With this background
and using an ad hoc survey on Italian coop banks, we ask whether the regulatory set-up and its
ongoing revisions–specifically Basel III–are consistent with safeguarding coop banks’ viability.
Resumen
Después de un largo olvido, sino de prejuicios, por parte de la comunidad financiera y de las
autoridades, la gran crisis de 2007-2009 ha destacado las virtudes de la banca cooperativa. En primer
lugar, los bancos cooperativos sufrieron menos durante la crisis que los bancos comerciales. Por lo
tanto, la imagen de estos bancos mejoró a medida que la opinión pública se modificó cuando los
gobiernos utilizaron el dinero de los contribuyentes para salvar los bancos comerciales, y raramente
algún banco cooperativo. Además, los bancos cooperativos siguieron dando préstamos cuando otros
bancos restringieron los créditos. Por ejemplo, los préstamos otorgados por los bancos cooperativos
entre 2007 y 2009 en Italia (a pequeñas y medianas empresas en particular), crecieron más rápido
que en los bancos S.A.: 8,7% contra 3,3%. No solo la crisis no perjudicó tanto a los bancos
cooperativos sino que su modelo empresarial fue más eficaz en la otorgación de créditos en un
momento en el cual las asimetrías de información de los prestatarios se hicieron más palpables en
relación con otros bancos. También parece haber una nueva actitud favorable hacia los bancos
cooperativos en la comunidad científica que dejó de elogiar los beneficios de la liberalización
financiera para propugnar por la importancia de la diversidad bancaria. Con este panorama y usando
un estudio ad hoc de los bancos cooperativos italianos, nos preguntamos si el sistema regulatorio y
sus revisiones continuas, específicamente Basel III, pretenden proteger la viabilidad de los bancos
cooperativos.
Résumé
Après un long oubli – si ce n'est les préjugés négatifs – de la part de la communauté financière et des
autorités, la grande crise de 2007-2009 a mis en évidence les vertus des coopératives bancaires. Tout
d'abord, les banques coopératives ont moins souffert de la crise que les banques commerciales. Ainsi,
des images améliorées de ces banques ont émergé dans l'opinion publique qui a vu les gouvernements
dépenser l'argent des contribuables pour sauver les banques commerciales et seulement très rarement
les banques coopératives. En outre, les banques coopératives ont continué d’octroyer des prêts tandis
que les autres banques ont restreint leur crédit. Par exemple en Italie, entre 2007 et 2009, les prêts –
en particulier aux petites et moyennes entreprises (PME) –accordés par les banques coopératives ont
augmenté plus vite que les prêts accordés aux sociétés publiques à responsabilité limitée (8,7 %
contre 3,3 %). Cela a non seulement fait en sorte que les banques coopératives ont été moins
affaiblies par la crise, mais aussi que leur modèle d'affaires était le meilleur pour octroyer des crédits
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pendant l’augmentation des asymétries d’information des emprunteurs vis-à-vis d'autres banques. Il
semble aussi qu’une nouvelle attitude favorable aux banques coopératives émerge globalement dans
la communauté scientifique qui a cessé de vanter les avantages de la libéralisation financière pour
promouvoir l'importance de la diversité dans le secteur bancaire. Dans ce contexte et à l'aide d'un
sondage ad hoc sur les banques italiennes coopératives, nous nous demandons si la réglementation
mise en place et les révisions en cours – spécifiquement Bâle III – sont compatibles avec la sauvegarde
de la viabilité des banques coopératives.
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