Do spatial dependence and market power matter in the diversification of cooperative banks?

Abstract

This study examines the determinants of cooperative banks' diversification proclivity, with consideration of the spatial dependence effect. The empirical analysis demonstrates that Italian cooperative banks operate as a network with significant spillover effects that should not be ignored. Indeed, local banks compete in the same market segment, and any shift in their diversification strategy has a cascading effect on neighbouring cooperative banks as a result of customer migration. Finally, we observe that an increase in bank market power results in a decline in local bank lending activity.