Probability of default and efficiency in cooperative banking

Cooperative banks are small credit institutions, and they are more likely than commercial banks to default in periods of financial stability. Focusing on Italy (one of the largest cooperative banking markets), we analyze the contribution of efficiency to the estimation of the probability of default of cooperative banks. We estimate several measures of bank efficiency, and we run a discrete-time survival model to determine whether different managerial abilities play different roles in predicting bank failures. We show that higher efficiency levels (both in cost minimization and revenue and profit maximization) have a positive and statistically significant link with the probability of survival of cooperative banks. We also find that capital adequacy reduces the probability of default, supporting the view that higher capital buffers provide additional loss absorbency and reduce moral hazard problems.