Risk-Taking in Cooperative Banks: Do Board Characteristics Matter?

Based on a comprehensive dataset of Italian banks operating during the period 2006-2012 we examine whether board characteristics, specifically board turnover and education, affect the risk propensity of cooperative compared to joint-stock banks. Bank risk is measured by Z-index and profit volatility. Our findings show 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. The study reveals how low board education in cooperative banks, which is considered as weakness in current standards in corporate governance codes, acted as a (involuntary) “protection” for cooperative banks that prevent them from engaging in risky and more sophisticated projects whose risks cannot be understood by the management.