The Limits to Local Embeddedness - Lending Activity of the Hungarian Cooperative Banking Sector
21 Pages Posted: 10 Sep 2014
Date Written: September 6, 2014
Both the literature and public opinion consider cooperative banks as local banks, that is, socially embedded financial service providers. Their primary objective is to fund the local economy from locally collected deposits. To offset any possible disadvantage stemming from their lack of adequate risk management and size, they exploit their information advantage provided by their social ties to the local community. At the same time, growth-oriented cooperatives often enter new regions where they do not have this information advantage.
The present study explores where the limits of social embeddedess of cooperative banks are. By doing so, we look at the financial and geographical data of the Hungarian cooperative sector, 137 institutions from 2010, before the recent radical structural change in the sector.
The study demonstrates that cooperatives with geographical expansion exhibit higher lending activity in pursuing of profits, but also have higher proportions of non-performing loans. We originate this phenomenon from that they lose their ability to exploit their information advantage in new regions. At the same time, geographically expansive demutualized ex-cooperatives have ceteris paribus better quality loan portfolios. The limits of cooperative corporate governance are when a cooperative bank loses its local ties.
Keywords: cooperative banks, takarékszövetkezet, Hungary, finance, embeddedness, relational banking, economic geography, demutualization
JEL Classification: G21, G28, P13, R12
Suggested Citation: Suggested Citation