Cooperative Banks and Financial Stability

Cooperative banks are an important, and growing, part of many financial systems. The paper analyzes empirically the role of cooperative banks in financial stability. Contrary to some suggestions in the literature, we find that cooperative banks are more stable than commercial banks. This finding is due to much lower volatility of the cooperative banks’ returns, which more than offsets their lower profitability and capitalization. We argue that this lower variability of returns is most likely due to cooperative banks’ ability to use customer surplus as a cushion in weaker periods. We also find that in systems with a high presence of cooperative banks, commercial banks are less stable than they would be otherwise. JEL Classification Numbers: G21, P13