Bezpieczny Bank nr 2 (71) 2018, s. 30-54
DOI: 10.26354/bb.2.2.71.2018

Zoltán Gál, Sandor Zsolt Kovács

Zoltán Gál is senior research fellow, Hungarian Academy of Sciences, Centre for Economic and Regional Studies, Institute for Regional Studies, full professor, Kaposvár University.
Sándor Zsolt Kovács is junior research fellow, Hungarian Academy of Sciences, Centre for Economic and Regional Studies, Institute for Regional Studie.

Corporate Governance and Local Embeddedness of the Hungarian Cooperative Banking Sector

Abstract:
Traditional cooperative banks are considered as locally and socially embedded, lending to local clients from locally collected deposits and financing the local economy.. To offset their disadvantage due to their insufficient size, they exploit the information advantage deriving from their geographical proximity to their clients and the advantages of their peculiar corporate governance deriving from the member-ownership. This paper examines the relevant theories on cooperative finance, while examining the underlying geographical and corporate governance aspects in a less advanced transition economy environment. Governments’ preference towards commercial banking and at the same time their negligence towards the cooperatives in general led to a loose financial regulation of the sector. The limits of cooperatives’ corporate governance and demutualization intensify when loosing social/local embeddedness. Cooperative banks, located in the periphery with insufficient socio-economic conditions to develop closer relationships with borrowers accelerate capital flight from their regions. Commercial cooperatives entering new markets show higher lending activity but have more non-performing loans due to the lost information advantage.

Key words:
cooperative banks,  corporate governance, local embeddedness, cooperative network, Hungary

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