Theoretical basis

Unlike commercial banks, cooperative banks and savings banks are stakeholder banks. Typically, stakeholder value (STV) is analyzed in contrast with shareholder value (SHV). Furthermore, the debate between these two paradigms is often referred to as the Friedman vs. Freeman debate (Ferri & Leogrande, 2015). The main difference between STV and SHV is that shareholders make the only deserving stake in SHV. In contrast, STV is about how different groups with a stake in the activities that make up the business interact jointly to create value.

These are groups such as customers, employees, financiers, stockholders, suppliers, etc. (Parmar, Freeman, Harrison, Wicks, Purnell and De Colle, 2010).

Parmar et al. (2010) suggest that there are three interconnected problems that are related in business: the problem of value creation and trade, the problem of ethics of capitalism, and the problem of managerial mindset. The stakeholder theory argues that these problems can be addressed more effectively if the relationships between a business and the groups and individuals who can affect it, or who can be affected by it, are adopted as a unit of analysis. Therefore, from the perspective of the stakeholder theory, business can be seen as a set of relationships among groups that have a stake in the activities that make up a business.

The STV and the SHV theories usually apply to non-financial firms. However, banks can also be managed in the STV or SHV model (Ferri & Leogrande, 2015).

When banks maximize STV, such as cooperative banks, they do not create value only for shareholders. Instead, they can aim to reduce borrowers’ exclusion based on mutuality concepts and at the same time preserve stability and savings. In so doing, they also serve the general interests of their communities. In contrast, the objective in the SHV maximization model is not the relationship, but rather profit evaluated by the share value.

Coco and Ferri (2010) argue that a shareholder bank has several levels of asymmetric information problems. According to these authors, the most studied agency problem is the one between borrowers and lenders. Both pre- and post-contractual asymmetric information leads to both adverse selection and moral hazard in this relationship. Freixas and Rochet (2008) argue that this is because, for instance, banks have no control over the actions that borrowers take in their investment decisions. Freixas and Rochet (2008) suggest that this is typically a moral hazard setup. Moreover, Stiglitz and Weiss (1980) assume that borrowers differ in their likelihood of repaying their loans. To distinguish between good borrowers and bad borrowers, banks are required to use a variety of screening

methods. Consequently, Coco and Ferri (2010) argue that ex ante-screening and ex-post monitoring are the main reasons for the existence of banks because a bank is the most logical cost-sharing arrangement of these activities.

Second, shareholder banks have an agency conflict between depositors and bank owners (Coco & Ferri, 2010). Because the owners operate mainly with depositors’

funds, they do not bear most of the risk of loss. Therefore, they have incentives to increase risk taking. Third, shareholder banks have an agency conflict between owners and managers; managers may be driven by other objectives, such as bank size and perks, while owners are interested in profit maximization. However, Coco and Ferri (2010) note that this conflict can be managed by relatively effective tools. These authors conclude that this is an advantage for profit-oriented banks.

The banking business model that is based on relationships is called relationship banking. Boot (2000) argues that relationship banking is most directly aimed at resolving asymmetric information problems. Moreover, Coco and Ferri (2010) suggest that cooperative banks are more devoted to relationship banking than shareholder banks. Therefore, these authors argue that cooperative banks are better able to reduce the information asymmetries on borrowers, and thereby to curtail the effects of moral hazard and adverse selection. Consequently, agency conflict between lenders and borrowers has less importance in cooperative banks because they are more oriented toward relationship banking. Thus, they are better able to overcome market failures. Similarly, Boot (2008) argues that the proximity between the bank and the borrower facilitates screening and monitoring and can overcome the problems of asymmetric information.

According to Boot (2000), these asymmetric information problems may well be the very reason for banks’ existence. Moreover, Coco and Ferri (2010) propose that banks have the appropriate incentives to screen and monitor its borrowers within a single relationship. When customers fragment their businesses among various counterparts, the private (soft) information will be lost.

Furthermore, Coco and Ferri (2010) argue that the perils for financial stability stem mostly from bank owners’ incentives and thereby from the agency conflict between owners and depositors. These authors suggest that this problem is less severe in cooperative banks where the owner-members are also depositors in the bank. Furthermore, because cooperative banks are not strictly profit oriented, they have fewer incentives to increase risk. As a result, there is less need for prudential regulation of these banks.

Cuevas and Fischer (2006) suggest that there exists a conflict between net borrowers and net savers in a mutual bank. This implies that members who are net borrowers have different interests than members who are net savers.

However, Coco and Ferri (2010) argue that some conflicts of interest may be dampened by the fact that the same person is both a borrower and a depositor.

Furthermore, a large part of lending must be realized with members. In any case, Cuevas and Fischer (2006) note that it is important for the survival of the

cooperative financial institution to ensure that the board of directors is not controlled by borrowers. Nonetheless, despite the relevance of the net borrower-net lender conflict, these authors argue that it is not as significant as theory may suggest. Furthermore, Coco and Ferri (2010) argue that the membership itself makes the borrower more sensitive to the interests of the borrowers’ community because the network of relationships goes beyond a pure lending relationship, i.e., members may be linked by a commercial, family, etc., relationship. This makes opportunistic behavior less likely and facilitates screening and monitoring among members/borrowers.

The downside of the cooperative banking model is that managers are much more difficult to be held accountable on a set of objectives that is much larger and more diverse. Moreover, these objectives are not always as easily quantifiable as those of shareholder banks (Coco & Ferri, 2010). Furthermore, Cuevas and Fischer (2006) argue that the agency conflict between members and managers is relevant in cooperative financial institutions because, for example, if management control is weak, managers are able to extract rent through increased wasteful expenses when the competitiveness in markets falls. Cuevas and Fischer (2006) suggest that the conflict between members and managers is the main source of cooperative financial institution failure. Therefore, these authors emphasize that control of expense preferences should be a central theme in the supervision of cooperative financial institutions. Moreover, Cuevas and Fischer (2006) argue that cooperative financial institutions cannot exploit the alignment of incentives that occurs when managers become co-owners because management participation in their ownership is not possible. However, Coco and Ferri (2010) argue that cooperative banks are better able to pursue long-term objectives because their directors do not change as often as they do in shareholder banks.

Ferri and Leogrande (2015) argue that the differences between STV banks and SHV banks in the ability to develop relationships also affect their credit management models. Banks that apply STV management models develop relationships with stakeholders, such as borrowers, and typically gather soft information on borrowers that is valuable in evaluating their creditworthiness.

Ferri and Leogrande (2015) argue that banks that maximize STV typically use Originate-to-Hold (OTH) credit management models. The OTH model implies that these banks fund credit from deposits and get revenue from the interest rate spread holding credit contracts until maturity.

In contrast, SHV banks often favor the use of explicit contracts that are based on statistical analyses of risk. They have reduced opportunities to develop relationships with communities and multi-stakeholders. Therefore, Ferri and Leogrande (2015) suggest that these banks may develop an Originate-to-Distribute (OTD) credit management model. The OTD model implies that banks make profit by selling credit contracts to other parties. Through securitization, this can generate higher returns than the OTD model. Therefore, these banks not

only create credit from deposits but also by selling credit. Coco and Ferri (2010) argue that the invention of the OTD credit management model led to the loss of responsible behavior on the part of banks because banks knew before granting loans that they would sell the loans.