The efficiency of mergers among cooperative credit banks: evidence from Italy. Special Session on Cooperative Finance.

In Italy, cooperative credit banks (CCBs) are small-sized credit institutions organized in a banking network that mainly operate in local areas and whose activity is grounded on mutual principles. They manage about 14% of... [ view full abstract ]

In Italy, cooperative credit banks (CCBs) are small-sized credit institutions organized in a banking network that mainly operate in local areas and whose activity is grounded on mutual principles. They manage about 14% of total branches and 7% of total loans. Their typical customers are SMEs and households, with whom they generally adopt the relationship lending business model (based on long-lasting fiduciary relationships with customers) in order to cope with problems of asymmetric information.
However, in the very last years there have been pressures for a reform of the Italian credit cooperative system, as CCBs are regarded to be “too many and too little”. Particularly, the Italian government is trying to promote mergers and increase efficiency, even if there are concerns that bigger CCBs might undermine network economies and make relationship lending unsustainable, thus lessening (or even offsetting) the efficiency gains from mergers.
In this paper we try to assess whether mergers among Italian CCBs are efficiency-enhancing. For the purpose, we employ a two-step procedure: we first estimate bank-level cost efficiency scores for a large sample of Italian banks in the period 1993-2013 by means of a stochastic frontier approach, then we explain the estimated CCBs cost efficiency with a set of merger status dummy variables (never merged, merged once, merged twice...) as well as a vector of control variables. Our evidence is that mergers are able to increase mutual banks’ cost efficiency only after that a CCB has merged at least three successive times with other CCBs, hence after reaching a remarkably larger size. On the other hand, this could generate a harmful effect especially on marginal borrowers (i.e. those who are likely to be served by smaller banks but neglected by bigger ones), with a strong and adverse impact on development and inequality and in contrast with the CCBs’ ethics and mission.