Risk-Taking in Cooperative Banks: the role of Board Education and Turnover

Research Question/Issue: Do board education and turnover mediate the relationship between the institutional setting and bank risk taking? To answer this question, we use a comprehensive dataset of cooperatives and joint stock banks Italian banks operating during the period 2006-2012 and examine whether these board characteristics affect the risk propensity of cooperative and joint-stock banks. Bank risk is measured by Z-index, profit volatility and Non-Performing Loans to Total Gross Loans ratio. Research Findings/Insights: Findings confirms that cooperatives are less risk taker that joint stock banks, as predicted by both the theoretical and empirical literature, and have lower board turnover and education. Furthermore, we find that while board turnover does not mediate the relationship between the cooperative model and bank risk taking, we do find evidence for board education. Less educated boards are less risk-taker. Theoretical/Academic Implications: This study provides empirical evidence on the impact of board turnover and education on bank risk taking depending on their ownership structure, which is novel in the literature. It also challenges the view that a high level of board education is always a desirable feature of “strong” governance. Practitioner/Policy Implications: The findings have several policy and managerial implications. First, we contribute to the ongoing debate on the request by the cooperative banking industry for more flexible corporate governance standards in light of their higher resilience during the crisis than other banks. Secondly, the study reveals how low board education in cooperative banks is not necessarily a weakness, challenging current standards in corporate governance codes. A lower expertise of the directors could act as a “protection” for cooperative banks that prevent them from engaging in risky and more sophisticated projects whose risks cannot be understood by the management.