The Limits to Local Embeddedness - Lending Activity of the Hungarian Cooperative Banking Sector

21 Pages Posted: 10 Sep 2014

See all articles by Zoltan Gal

Zoltan Gal

Hungarian Academy of Sciences (HAS) - Centre for Regional Studies

Dr. Csaba Burger

University of Oxford - Saint Peter's College Oxford

Date Written: September 6, 2014

Abstract

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

Gal, Zoltan and Burger, Csaba, The Limits to Local Embeddedness - Lending Activity of the Hungarian Cooperative Banking Sector (September 6, 2014). Available at SSRN: https://ssrn.com/abstract=2493040 or http://dx.doi.org/10.2139/ssrn.2493040

Zoltan Gal

Hungarian Academy of Sciences (HAS) - Centre for Regional Studies ( email )

Papnovelde u. 22
Pecs, 7621
Hungary

HOME PAGE: http://www.dti.rkk.hu

Csaba Burger (Contact Author)

University of Oxford - Saint Peter's College Oxford ( email )

New Inn Hall Street
Oxford, Oxfordshire OX1 2DL
United Kingdom

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