Is arm's length control more problematic for cooperative banking groups? Evidence from foreign bank ownership in Central-Eastern Europe.Special Session on Cooperative Finance.

TOPIC 15-STAGE 3-MICRO Economic transition of Central and Eastern European countries (CEEC) and opportunities to internationalize their business lured many Western European banks to invest there in in last twenty years. Some... [ view full abstract ]

TOPIC 15-STAGE 3-MICRO
Economic transition of Central and Eastern European countries (CEEC) and opportunities to internationalize their business lured many Western European banks to invest there in in last twenty years. Some of these foreign investors were cooperative banking groups (CBGs).
On a sample of some 500 CEEC banks controlled by Western European banks, we study the comparative efficiency of those controlled by CBGs, representing circa one tenth of the total.
We entertain two alternative hypotheses. On one hand, CBGs controlled local banks might outperform the others by adopting their mother groups’ business model. Given the underdevelopment of the CEEC financial systems and the importance of SMEs for those economies, the relationship banking business model typical – though not exclusive – of CBGs could, in fact, be an advantage for their controlled local banks. On the other hand, however, arm’s length control might prove more difficult for CBGs than at other banks, analogously to what suggested by the literature on the hybridization of CBGs. In that case, CEEC banks controlled by CBGs might underperform vis-à-vis other foreign controlled local banks.
Our empirical analysis favors the latter hypothesis over the former. Specifically, we show that CBG controlled CEEC banks proved generally less efficient than their peers controlled by non-cooperative Western European banks.
The policy implication we draw is that regulators and supervisors should be particularly wary and intensify their oversight when CBGs venture into distant acquisitions.