INVESTIGATING DIVERSITY IN THE BANKING SECTOR IN EUROPE INVESTIGATING DIVERSITY IN THE BANKING SECTOR IN EUROPE KEY DEVELOPMENTS, PERFORMANCE AND ROLE OF COOPERATIVE BANKS Rym Ayadi David T. Llewellyn Reinhard H. Schmidt Emrah Arbak Willem Pieter De Groen CENTRE FOR EUROPEAN POLICY STUDIES BRUSSELS The Centre for European Policy Studies (CEPS) is an independent policy research institute in Brussels. Its mission is to produce sound policy research leading to constructive solutions to the challenges facing Europe. The views expressed are entirely those of the authors. This book is the result of a two-year research project designed by the Financial Institutions and Prudential Policy (FIPP) unit of CEPS and led by Rym Ayadi. The project’s Scientific Committee includes Rym Ayadi, Senior Research Fellow and Head of FIPP at CEPS, David T. Llewellyn, Loughborough University, CASS Business School and the Vienna University of Economics and Business Administration, and Reinhard H. Schmidt, Professor at the University of Frankfurt. The research team is composed of the members of the Scientific Committee and researchers from CEPS, Emrah Arbak, Researcher, and Willem Pieter De Groen, Research Assistant. This study completes earlier research that was published in 2009 on the same topic with a focus on savings banks in Europe. Support was received from the European Association of Cooperative Banks (EACB). Cover photo: Acropora coral garden with giant clam, taken by Richard Ling at Raging Horn, Osprey Reef, Coral Sea, August 2005. ISBN 978-94-6138-042-5 © Copyright 2010, Centre for European Policy Studies. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the Centre for European Policy Studies. Centre for European Policy Studies Place du Congrès 1, B-1000 Brussels Tel: (32.2) 229.39.11 Fax: (32.2) 219.41.51 E-mail: [email protected] TABLE OF CONTENTS Foreword ..................................................................................................................i by Giovanni Ferri Executive Summary .............................................................................................. v 1. Introduction ......................................................................................................1 1.1 Motivations .............................................................................................1 1.2 Objectives, main propositions and structure......................................3 2. The Economics and Nature of Cooperative Banks......................................6 2.1 The nature of a company.......................................................................6 2.2 Stakeholder v. Shareholder banks .......................................................7 2.3 The nature of value creation in banks .................................................8 2.4 The cooperative banking model in Europe ......................................11 3. Key Developments of Cooperative Banks in Europe................................27 3.1 Germany ................................................................................................27 3.2 Austria ...................................................................................................42 3.3 Italy.........................................................................................................57 3.4 France.....................................................................................................66 3.5 The Netherlands ...................................................................................76 3.6 Spain.......................................................................................................86 3.7 Finland ...................................................................................................94 3.8 Overall assessment.............................................................................101 4. Economic Performance and Role of Cooperative Banks ........................104 4.1 The main theoretical arguments for cooperative banks ...............105 4.2 Review of the empirical literature ...................................................110 4.3 Investigating economic performance and role of cooperative banks ....................................................................................................118 4.4 Main results.........................................................................................126 4.5 Conclusions.........................................................................................145 5. Final Conclusions.........................................................................................148 References ............................................................................................................150 Annex 1. Summary of the European Cooperative Society Directive ..........159 Annex 2. Demutualisation of UK Building Societies.....................................161 Annex 3. Estimating the cost function .............................................................167 List of Tables Table 2.4.1 Extent of mutual support in European cooperative banks ......................20 Table 3.1.1 Overview of the German banking system; numbers of banks in the three main ‘pillars’ .................................................................................................29 Table 3.1.2 Tier 1 capital ratios in the German banking sector ...................................40 Table 3.2.1 The Austrian banking system ......................................................................44 Table 3.3.1 Market shares of Italian cooperative banks ...............................................60 Table 3.3.2 Distribution of branches by municipal population in Italy, 2008 ...........60 Table 3.3.3 Lending to Italian firms by loan size, 2008.................................................61 Table 3.3.4 Key capital ratios of Italian banks, as of June 2008 ...................................65 Table 3.4.1 Market shares of French cooperative banks...............................................69 Table 3.4.2 Tier 1 capital ratios in French banking sector............................................71 Table 3.4.3 Distribution of branches by population density in France, 2008 ............72 Table 3.4.4 Distribution of loans of French credit institutions, by sector ..................72 Table 3.5.1 Evolution of the structure of cooperative banks in the Netherlands......77 Table 3.5.2 Evolution of Rabobank’s selected profile...................................................78 Table 3.5.3 Tier 1 capital ratios in Dutch banking sector .............................................85 Table 3.6.1 Market shares of Spanish banks in the credit market...............................88 Table 3.6.2 Market shares of Spanish banks for customer deposits ...........................88 Table 3.6.3 Market shares of Spanish banks in regional credit markets ....................89 Table 3.6.4 Market shares of Spanish banks in regional customer deposits .............90 Table 3.7.1 Market shares of OP-Pohjola Group...........................................................98 Table 3.7.2 Finnish banking sector in 2008.....................................................................99 Table 4.3.1 Number of observations by type of bank.................................................119 Table 4.4.1 Return on assets (RoA) in percentage points, unweighted averages ...129 Table 4.4.2 Return on equity (RoE) in percentage points, unweighted averages...130 Table 4.4.3 Cost-to-income ratio† in percentage points, unweighted averages .....131 Table 4.4.4 Market power indicators (Lerner Index) in percentage points, unweighted averages..................................................................................................... 132 Table 4.4.5 Earnings stability (z-scores), unweighted averages............................... 133 Table 4.4.6 Determinants of market power in the EU banking industry, 2000-2008, random-effects panel regressions ............................................................. 136 Table 4.4.7 Regional growth and cooperative bank presence: Granger-causality tests................................................................................................................................... 139 Table 4.4.8 Determinants of stability (z-scores).......................................................... 143 Table 4.5.1 Comparison of cooperative banks with other banks ............................. 146 Table 4.5.2 Determinants of market power................................................................. 146 Table 4.5.3 Causal relation between cooperative presence and regional growth.. 147 Table 4.5.4 Banking sector determinants of earning stability................................... 147 List of Figures Figure 2.3.1 Simple representation of banking activities ............................................ 10 Figure 2.4.1 Circular authority in integrated cooperative banks ............................... 23 Figure 3.1.1 Composition of the cooperative banking group over time ................... 30 Figure 3.1.2 Market shares of the three banking groups, deposits and loans to non-banks .......................................................................................................................... 36 Figure 3.1.3 Development of cooperative banks’ balance sheet structure over time...........................................................................................................................