Diana Lima graduated in Economics from the University of Minho, Portugal in 2003. She was awarded with a master degree in Economics in 2009 from the Faculty of Economics of University of Porto, Portugal. In 2004, she joined the Bank of Portugal, where she worked for the Mutual Agricultural Credit Guarantee Fund. Diana is currently pursuing her PhD at the University of Surrey, United Kingdom, and her research interests focus on banking supervision institutional arrangements and, in particular, how they should interact with monetary policy.
The analysis of solvency conditions of co-operative banks is scarce, compared with the number of studies dedicated to commercial banks. However, the lack of empirical studies contrasts with the importance of co-operative banks as part of the banking systems. Having these facts into consideration, this paper aims to contribute to fill in this gap in the literature, by studying, in particular, the insolvency risk factors of Portuguese co-operative banks. There is scarce knowledge about the default risk of Portuguese co-operative banks, since situations of financial distress are usually dealt within their own organization. The dataset was provided by the Central Bank of Portugal exclusively for this project and comprises a quarterly panel of 148 co-operative banks and the time period ranges from March 31, 1999 to December 31, 2006.
The objectives of the paper are twofold. First, the paper aims to measure the effect of bank specific financial indicators on the probability of failure of co-operative banks. A default prediction model (logit) is estimated for this purpose. The estimation results suggest that risk indicators related to asset quality, liquidity and earnings are significant predictors of failure among Portuguese co-operative banks. In addition, local economic conditions, measured by GDP per region, are also good indicators of failure likelihood.
The second goal is to identify the risk factors determining the Portuguese co-operative banks’ solvency conditions (measured by the equity to assets ratio) by the estimation of a fixed effects model. The regression analysis suggests that the solvency conditions are mainly determined by the quality of credit portfolio and quality of management. Moreover, the results show that local economic conditions have an impact on the solvency ratio. For example, the increase of unemployment rates in a certain region affects negatively the solvency ratios of co-operative banks operating in that region. More interestingly, the gross value added in agriculture by region has a positive impact (although very small) in the solvency conditions of Portuguese co-operative banks.