Competition and Financial Stability in European Cooperative Banks

F Fiordelisi, Davide Mare

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

Cooperative banks are a driving force for socially committed business at the local level, accounting for around one fifth of the European Union (EU) bank deposits and loans. Despite their importance, little is known about the relationship between bank stability and competition for these small credit institutions. Does competition affect the stability of cooperative banks? Does the financial stability of banks increase/decrease when competition is higher? We assess the dynamic relationship between competition and bank soundness (both in the short and long run) among European cooperative banks between 1998 and 2009. We obtain three main results. First, we provide evidence in line with the competition-stability view proposed by Boyd and De Nicolò (2005). Bank market power negatively “Granger-causes” banks' soundness, meaning that there is a positive relationship between competition and stability. Second, we find that this fundamental relationship does not change during the 2007–2009 financial crisis. Third, we show that increased homogeneity in the cooperative banking sector positively affects bank soundness. Our findings have important policy implications for designing and implementing regulations that enhance the overall stability of the financial system and in particular of the cooperative banking sector.
Original languageEnglish
Pages (from-to)1-16
Number of pages16
JournalJournal of International Money and Finance
Volume45
Early online date11 Mar 2014
DOIs
Publication statusPublished - Jul 2014

Keywords / Materials (for Non-textual outputs)

  • Competition
  • Financial stability
  • Cooperative banks
  • Bank soundness

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