Multilevel empirics for small banks in local markets

Aiello, Francesco and Bonanno, Graziella (2015): Multilevel empirics for small banks in local markets.

Abstract

Banking is increasingly a-spatial. However, the environment matters for small banks. Indeed, they are embedded in narrowed markets and hence benefit from proximity to their member-customers. By referring to multilevel approach, this article aims at measuring how much the performance of Italian mutual-cooperative banks is determined by both geographical (provincial level) and individual characteristics (small bank level). The effect of local markets explains 28.27% of bank heterogeneity in the empty multilevel model and 33% in the most extended model. Moreover, it is found that bank efficiency increases with market concentration and demand density and decreases with branching in local markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Multilevel model; mutual-cooperative banks; local markets; cost efficiency
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions; D - Microeconomics > D0 - General > D00 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R19 - Other

References

Acharya V.V., Viswanathan S. (2011) “Leverage, Moral Hazard, and Liquidity”, Journal of Finance, 46, 99-138

Aiello F., Pupo V.,Ricotta F. (2014) “Explaining Total Factor Productivity at Firm Level in Italy: Does Location Matter?”, Spatial Economic Analysis, 9 (1),1-20

Aiello F., Pupo V.,Ricotta F. (2015) “Firm Heterogeneity in TFP, sectorial innovation and location. Evidence from Italy”, International Review of Applied Economics 29(5),546-571

Aigner D., Lovell C.A.K., Schmidt P. (1977) “Formulation and Estimation of Stochastic Frontier Production Function Models”, Journal of Econometrics, 6, 21-37

Alessandrini P., Presbitero A.F., Zazzaro A. (2009) “Banks, Distances and Firms’ Financing Constraints”, Review of Finance, 13, 2, 261-307

Andries A.M. (2011) “The Determinants of Bank Efficiency and Productivity Growth in the Central and Eastern European Banking Systems”, Eastern European Economics, 49, 6, 38-59

Baele L., De Jonghe O., Vennet R.V. (2007) “Does the Stock Market Value Bank Diversification?”, Journal of Banking and Finance, 31, 7, 1999-2023

Baldwin R.E., Okubo T. (2006) “Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting”, Journal of Economic Geography, 6,323-346

Barra C., Destefanis S., Lubrano Lavadera G. (2014), The Crisis and the Efficiency of Italian Cooperative Banks, Paper Presented at the 55th Annual Meeting of the Italian Economic Society, 23-25 October 2014, Trento (Italy)

Battaglia F., Farina V., Fiordelisi F., Ricci O. (2010) “The Efficiency of Cooperative Banks: the Impact of Environmental Economic Conditions”, Applied Financial Economics, 20, 17, 1363-1376

Battese G.E., Coelli T.J. (1995) “A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data”, Empirical Economics, 20, 2, 325-332

Berger A.N. (1995) “The Profit-Structure Relationship in Banking-Tests of Market-Power and Efficient-Structure Hypotheses”, Journal of Money, Credit and Banking, 27, 2, 404-431

Berger A.N., Mester L.J. (1997) “Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?”, Journal of Banking and Finance, 21, 7, 895-947

Beugelsdijk S. (2007) “The regional environment and a firm’s innovative performance: a plea for a multilevel inter-actionist approach”, Economic Geography, 83,181-199

Bickel R. (2007) Multilevel Analysis for Applied Research, It’s Just Regression!, The Guilford Press, New York

Bos J.W.B., Kool C.J.M. (2006) “Bank Efficiency: the Role of Bank Strategy and Local Market Conditions”, Journal of Banking and Finance, 30, 1953-74

Carbò Valverde S., Humphrey D.B., Rodriguez F.R. (2003) “Deregulation, Bank Competition and Regional Growth”, Regional Studies, 37, 3, 227-237

Casu B., Molyneux P. (2003) “A Comparative Study of Efficiency in European Banking”, Applied Economics, 35, 17, 1865-1876

Coccorese P. (2009) “Market Power in Local Banking Monopolies”, Journal of Banking and Finance, 33, 1196-2120

Delis M., Papanikolaou N. (2009) “Determinants of Bank Efficiency: Evidence from a Semi-parametric Methodology”, MPRA, Working Paper N. 13893

Demirgüç-Kunt A., Levine R. (2001) Bank-based and Market-based Financial Systems: Cross-Country Comparisons. In Demirgüç-Kunt A., Levine R. (Eds.): Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development. MIT Press, Cambridge

Dietsch M., Lozano-Vivas A. (2000) “How the Environment Determines Banking Efficiency: a Comparison between French and Spanish Industries”, Journal of Banking and Finance, 24, 985-1004

Dongili P., Rossi S.P.S., Zago A. (2008) “Efficienza e competitività delle banche italiane: un confronto con alcuni sistemi bancari europei”. In Cella G., Zago A. (Eds.): Competitività ed efficienza dell’economia italiana: fattori sistemici e valutazioni quantitative. Il Mulino: Bologna

Dosi G., Nelson R. (2010) “Technical Change and Industrial Dynamics as Evolutionary Processes.” In Handbook of the Economics of Innovation, Hall, and N. Rosenberg (Eds). London: North Holland

Drake L. (2001) “Efficiency and Productivity Change in UK Banking”, Applied Financial Economics, 11, 5, 557-571

Fazio G.,Piacentino D. (2010) “A Spatial Multilevel Analysis of Italian SMEs' Productivity” Spatial Economic Analysis, 5(3), 299-316

Fiordelisi F., Mare D.S. (2013) “Probability of Default and Efficiency in Cooperative Banking”, Journal of International Financial Markets, Institutions and Money, 26, 30-45

Fontani A., Vitali L. (2007) “L’efficienza di costo dei gruppi bancari italiani: un’analisi mediante frontiera stocastica”, Department of Economics and Business, Luiss, Rome

Fries S., Taci A., (2005) “Cost Efficiency of Banks in Transition: Evidence from 289 Banks in 15 Post-Communist Countries”, Journal of Banking and Finance, 29, 1, 55-81

Giannola A. (2009) Bank Mergers and Credit Allocation Among Italian Regions. In Silipo D.B. (Ed.): The Banks and the Italian Economy. Springer Phisyca-Verlag: Berlin Heidelberg

Girardone C., Molyneux P., Gardener E.P.M. (2004) “Analysing the Determinants of Bank Efficiency: the Case of Italian Banks”, Applied Economics, 36, 3, 215-227

Goldberg L.G., Rai A. (1996) “The Structure-Performance relationship for European Banking”, Journal of Banking and Finance, 20, 4, 745-771

Goldstein H. 2003. Multilevel Statistical Models, London, Arnold

Gutiérrez E. (2008) “The Reform of Italian Cooperative Banks: Discussion and Proposals”, IMF WP/08/74, IMF Washington

Heck R.H., Thomas S.L. (2000) An introduction to multilevel modelling techniques. Lawrence Erlbaum Associates, Mahwah, New Jersey

Hox J.J. (2002) Multilevel analysis: techniques and applications. Lawrence Erlbaum Associates, Mahwah, New Jersey

Hannan T.H., Prager R.A. (2009) “The Profitability of Small Single-Market Banks in an era of Multi-Market Banking”, Journal of Banking and Finance, 33, 2, 263-271

Hughes J.P., Mester I.J. (2008) “Efficiency in Banking: theory, practice and evidence”, WP 08/01, Federal Reserve Bank of Philadelfia, Philadelfia, USA

Kwok O.-M., Underhill A.T., Berry J.W., Luo W., Elliott T.R., Yoon M. (2008) “Analyzing Longitudinal Data with Multilevel Models: an Example with Individuals Living with Lower Extremity Intra-articular Fractures”, Rehabilitation Psychology, 53, 3, 370-386

Little R.J.A., Rubin D.B. (2002) Statistical Analysis with Missing Data, 2nd ed. Hoboken, NJ: Wiley

Luke A. (2014) Multilevel Modelling. London: Sage

Maddala G.S. (1991) “A Perspective on the Use of Limited-Dependent and Qualitative Variables Models in Accounting Research”, Accounting Review, 66, 788-807

Mass J.M, Hox J.J. (2004) ”Robustness issues in multilevel regression analysis. Statistica Neederlandica 58: 127-137

Maudos J., Pastor J.M., Perez F., Quesada J. (2002) “Cost and Profit Efficiency in European Banks”, Journal of International Financial Markets, Institutions and Money, 12, 1, 33-58

McDonald J. (2009) “Using Least Squares and Tobit in Second Stage DEA Efficiency Analyses”, European Journal of Operational Research, 197, 792-798

Meeusen D., van de Broek J. (1997) “Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error”, International Economic Review, 18, 2, 435-444

Messori M., Tamburini R., Zazzaro A. (2003) Il sistema bancario italiano, Carocci Editore: Rome

Pilloff S.J. (1996) “Performance Changes and Shareholder Wealth Creation: Associated with Mergers of Publicly Traded Banking Institutions, Journal of Money, Credit and Banking, 28, 3, 59-78

Rabe-Hesketh S., Skrondal A. (2008) Multilevel and Longitudinal Modeling Using Stata. Stata Press, 2nd edition

Raspe O.,F. van Oort F. (2011) “Firm Heterogeneity, Productivity, and Spatially Bounded Knowledge Externalities”, Socio-Economic Planning Sciences 45: 38-47

Richter T. (2006) “What is wrong with ANOVA and multiple regression? Analyzing sentence reading times with hierarchical linear models”, Discourse Processes, 41(3): 221-250

Romer P. 1986. “Increasing returns and long-run growth.” Journal of Political Economy 94: 1002-1037

Royston P. (2007) “Multiple Imputation of Missing Values: Further Update of Ice, with an Emphasis on Interval Censoring”, Stata Journal, 7, 445-464

Royston P. (2009) “Multiple Imputation of Missing Values: Further Update of Ice, with an Emphasis on Categorical Variables”, Stata Journal, 9, 466-477

Silipo D.B. (2009) The Banks and the Italian Economy. Springer Phisyca-Verlag: Berlin Heidelberg

Snijders T.A.B.,Bosker R.J. (2008) “Diagnostic checks for multilevel models” in Handbook of multilevel Analysis, Jan de Leeuw (Eds.), New York: Springer

Srholec, M. 2010. “Multilevel Approach to Geography of Innovation.” Regional Studies 44:1207-1220.

Srholec M. (2015) “Understanding the Diversity of Cooperation on Innovation across Countries.” Economics of Innovation and New Technology 24(1-2): 159-182

Turati G. (2008) “La valutazione del grado di concorrenza nell’industria bancaria negli anni Novanta”. In Cella G., Zago A. (Eds.): Competitività ed efficienza dell’economia italiana: fattori sistemici e valutazioni quantitative, Il Mulino: Bologna

Vallascas F., Keasey K. (2012) “Bank Resilience to Systemic Shocks and the Stability of Banking Systems: Small is Beautiful”, Journal of International Money and Finance, 31, 1745-1776

van Oort, F.G., Burger M.J., Knoben J., Raspe O. (2012) “Multilevel Approaches and the Firms Agglomeration Ambiguity in Economic Growth Studies”, Journal of Economic Surveys, 26: 468-491

Wagner W. (2010) “Diversification at Financial Institutions and Systemic Crises”, Journal of Financial Intermediation, 19, 373-386