Efficiency in Cooperative Banks and Savings Banks: A Stochastic Frontier Approach

Introduction

In recent years, the global crisis significantly affected the activity of financial systems and of banking institutions, emphasizing their fragility. In such a context, dominated by intense competition between banks and by significant structural changes in the way they operate, their capacity to increase their efficiency and to reduce costs became essential. Increasing the efficiency in a tumultuous competitive environment ensures stability and can offer a strategic advantage over competitors. Moreover, an efficient banking system is one of the conditions for a wealthy economic environment. Also, given the fact that most of the commercial banks were confronted with higher risks as a consequence of the global financial crisis, the importance of the banks that adopted a traditional model of activity - cooperative banks and savings banks - grew.

Generally, within the banking systems, the institutions embrace different business models, organizational forms and ownership structures. Along with the commercial banks that embrace the universal banking model, a significant number of credit institutions with different organizational forms and ownership structures - cooperative banks and savings banks - play an important role in the banking sector. In addition, Ayadi et al. (2010, p. 6) divided banks into two broad categories: Stakeholder Value banks and Shareholder Value banks. The distinction is made according to the banks’ bottom line objectives and the extent to which profit maximization is the central focus of their business models. The authors consider that cooperative banks and savings banks represent “dual-bottom line” institutions.

Cooperative banks are not-for-profit organizations, established to sustain the activity of their members. Today, the main clients of the credit cooperatives are individuals and small- and medium-sized enterprises, and their business model approaches the universal bank model. Despite this, there are certain characteristics that cooperative banks retain and that differentiate them from commercial banks. Cooperative banks operate under the regional principle, conferring an important role on them in financing local communities (European Association of Cooperative Banks, Annual Report, 2012). Regardless of the countries in which they operate, most of the cooperative banks have mutual support mechanisms, so that the local cooperatives are supported the moment that difficulties are encountered. Being organizations that do not follow profit maximization, their main aim is to improve the economic welfare of the members, while the members’ objective is to use financial services and not to obtain dividends.

Along with cooperative banks, savings banks have an important role in the banking sector, particularly in Europe. Although savings banks were initially created to promote social inclusion, they have evolved into specific, universal banks that are in competition with commercial banks for households and small- and medium-sized enterprises. The main feature that differentiates savings banks from commercial banks is their organizational structure. In Germany, savings banks are public entities and have no owners in the commercial sense, the public authorities being responsible for the activity of these institutions (Clarke, 2010). In Norway, Denmark and Sweden, savings banks are organized as independent foundations. In other words, they do not have stockholders or traditional owners. Their capital consists of profits from previous years (Nordic Banking Structures, 2006; Organisation for Economic Co-operation and Development). On the other hand, the pressure to meet the capital requirements imposed by financial regulations has led to the reorganization of the saving bank sector in some countries. Thus, in Italy, savings banks have been transformed into joint stock companies (Carletti et al., 2005). In Spain, the authorities have decided to change the legal status of savings banks in order to facilitate access to capital markets (Report on Banking Supervision in Spain, 2010). Even so, savings banks remain close to the clients, as they are locally based and are oriented towards long-term lending strategies.