Cooperative Banks, the Internet and Market Discipline

Abstract

This paper analyzes market discipline mechanisms at Polish cooperative banks within the special context of their internet activity. I demonstrate that despite being less financially sophisticated, cooperative banks’ depositors are able to distinguish appropriately between less and more risky institutions. Additionally, I demonstrate that banks that are more active on the internet face stronger market discipline and their depositors pay special attention to the banks’ equity levels. I observe that there are two reasons for this. First, a bank’s extensive internet activity is a reflection of its greater transparency. Second, adoption of online banking systems and presenting detailed information regarding the deposit offer on a bank’s website increases deposit mobility. The results have important policy implications. These findings demonstrate that a greater emphasis could be placed on stimulating market discipline at cooperative banks, as a large number of cooperative banks hampers their regulatory discipline. To strengthen the market discipline mechanisms, regulators should promote internet activity at cooperative banks and among their depositors, as well as require banks to present detailed financial information on their websites and to adopt online banking systems.