The role of local institutions in cooperative banks’ efficiency. The case of Italy

Abstract

A large body of literature investigates various sources of bank efficiency. Nonetheless, little empirical evidence is available on the role played by institutional quality. Further, the extant research neglects the relevance of local institutions, which should be particularly important for local banks. To fill this lacuna, this paper investigates the relationship between local institutional quality and the cost-efficiency of Italian cooperative banks. Applying Stochastic Frontier Analysis to data spanning the years from 2006 to 2015, we find that better institutions – and especially control of corruption – are associated with improvements in bank cost efficiency. This evidence suggests important implications for the definition of suitable strategies aimed at controlling corruption and improving law enforcement at the local level, to decrease bank operating costs and mitigate moral hazard problems jeopardising managers’ incentives.