Cooperative Banks and Financial Stability

IMF Working Papers, January 1, 2007

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Cooperative banks are an important, and growing, part of many financial systems.
The paper empirically analyzes the role of cooperative banks in financial stability.
Primary finding: cooperative banks are more stable than commercial banks.
Stability advantage driven by lower volatility of cooperative banks' returns, which more than offsets their lower profitability and capitalization.
Likely mechanism: cooperative banks' ability to use customer surplus as a cushion in weaker periods.
System-level nuance: in systems with a high presence of cooperative banks, weak commercial banks are less stable than they would be otherwise.
Overall impact of a higher cooperative presence on bank stability is positive on average but insignificant in some specifications.

Lower return volatility at cooperative banks is the central quantitative mechanism explaining higher stability versus commercial banks.
Lower profitability and lower capitalization at cooperative banks do not outweigh the stabilizing effect of lower return volatility.
Customer surplus functions as an internal buffer for cooperative banks during weak periods.

Presence of cooperative banks affects commercial banks: weak commercial banks become less stable in systems with a high cooperative presence.
Aggregate effect of cooperative-bank presence on overall bank stability: generally positive but can be statistically insignificant depending on specification.

IMF Working Paper — Cooperative Banks and Financial Stability by Martin Cihak and Heiko Hesse (January 1, 2007).