Examining the Network Effects in Bank Risk: Evidence from Liquidity Creation in Mutual Banks

This study examines the impact of networking effects on the ability of Italian Credit Cooperative Banks (CCBs) to generate liquidity. The dynamics of this vital service that banks provide to the economy is conditioned, for CCBs, by the existence of spatial effects. Literature indicates that CCBs compete for a very similar local and niche market, giving rise to the hypothesis that changes in their credit and funding strategies have network-level effects. We conduct an empirical investigation using a suitable spatial model and controlling for potential endogeneity issues. Our hypothesis regarding the presence of spatial co-movement among CCB clusters is supported by the results. We provide evidence that spatial components exist, but that the geographical contemporaneous and non-contemporaneous terms balance each other out. We believe that the latter dependence is a result of the CCBs’ ability to operate in a particular geographic area and serve similar clients. Our findings have implications for both the managerial decisions of CCBs and the policy actions that should take the reported effects into account.