Spatial dependence in small cooperative bank risk behavior and its effects on bank competitiveness and SMEs

Abstract

In this article we consider the effects of the inclusion of spatial dependence in the empirical model measuring small cooperative banks' risk performance.In the presence of cross-sectional dependence, spatial analysis deals with co-movement among geographical units, allowing for the evaluation of spillover effects and improving econometric models. The article makes several contributions to the literature. First, we support the hypothesis that the inclusion of spatial terms improves small bank soundness models. Second, with the Z Score used as a proxy for bank soundness, we indirectly test the impacts of relationship lending on small firms, which is a classic tool adopted by small banks to assess the creditworthiness of small firms. Third, since we control for banks' market power, we expand the literature on the relationship between bank risk and market competitive pressure. Finally, we find empirical evidence that bank size does affect the financial standing of small banks.

Increase in Profit Based on Internal Capital and Business Volume in Cooperatives in Indonesia

“…The expectation of revenue is more significant than the costs incurred by the Company, which, in essence, to avoid losses and desired profits. In addition, the amount of income generated is also expected to be able to convince cooperatives to obtain loan funds from other parties (Algeri et al, 2021).…”