STAKEHOLDER BANKS Vs. FINANCIAL VOLATILITY

AN APPLICATION OF THE SHV vs. STV DEBATE

Angelo Leogrande1

Abstract

In this paper we tackle the question of the relationship between Stakeholder Banks and Financial

Volatility.

Our tenet is that banks affect stock market volatility by their governance orientation and by their credit

management model. There exist a nexus between banking governance and credit management models.

Stakeholder Value oriented banking governance and Originate to Hold credit management model

(STV-OTH) tend to coexist, as there is a nexus between Shareholder Value oriented banking

governance and Originate to Distribute credit management model (SHV-OTD), which also tend to be

twins. These two models are juxtaposed in the dialectics of the economics game. The analysis shows

that the presence of Stakeholder Banks is negatively associated with Financial Volatility. This

association can be explained considering the nexus between banking governance orientation and credit

management model (STV-OTH vs. SHV-OTD) and its ability to affect Financial Volatility. The fact

that banks can adopt a STV-OTH model or a SHV-OTD model may have a direct impact on Financial

Volatility. STV-OTH banks have a low impact on stock market volatility due to the fact that credit lent

is used to finance firms, households and stakeholders. STV-OTH banks hold the credit until the

maturity and also borrowers let the debt stay in their portfolios. Instead SHV-OTD banks ingrain credit

into securitization in financial markets creating the conditions for a shareholder maximization suasion

that may raise stock market volatility. In this sense we can say that the SHV-OTD model may heighten

stock market volatility while on the other side STV-OTH is anti-volatile and may stabilize the

economy. A banking system featuring more stakeholder (shareholder) oriented banks is more likely

characterized by a higher degree of credit based on OTH (OTD). This means that while under

stakeholder orientation the banking system is anti-volatile, under shareholder orientation the banking

system is more prone to raise stock market volatility. The relationship between Stakeholder banks

1 Angelo Leogrande holds a Ph.D. from University of Bari “Aldo Moro”

(STV) and OTH – and that between Shareholder banks (SHV) and OTD – highlights the importance of

Stakeholder banks for a more stable economy. Stakeholder banks, due to their OTH credit management

model are more prone to produce the common good of financial stability able to sustain long run

economic growth, also reducing stock market volatility. To build our model we use data from

Bankscope, Bloomberg and the World Bank for 69 countries from 1998 to 2006, and perform a panel

data estimation to verify the presence of some kind of persistence in the relationship between banking

governance and stock market volatility. The dependent variable, evaluating the level of Financial

Volatility, is the coefficient of variation of stock market volatility.

Stakeholder Banks are approximated by the logarithm of the ratio between the sum of the percentage of

total assets of Cooperative Banks and Savings Banks on the sum of the percentage of total assets of

Commercial Banks, Investment Banks, Bank Holdings using Bankscope Database. Beside the variable

accounting for banking governance orientation, other explanatory variables are based on the World

Bank database-Financial Sector. Our results show the existence of a negative association between the

presence of Stakeholder Banks and Financial Volatility.

Keywords: banking, governance, financial crisis, financial volatility, financial instability, financial contagion,

financial regulation, financial development, finance-growth nexus, shadow banking system.

JEL Classification: G00, G01, G14, G21, G22, G23, G24, G34

1. Introduction

In this paper we tackle the question of the relationship between stakeholder banking governance2 and

stock market volatility3. The relationship between banking governance and stock market volatility is

able to explain the ways by which credit is employed in the financial system and lets us infer about the

importance of the nexus between financial markets and banking systems in general (Allen and Gale,

2000). Financial regulation generally separates the banking sector from the financial markets sector 2 It is important to consider that in this paper we have used Cooperative Banks and Savings Banks as a proxy of the

Stakeholder oriented Banks. In effect there are other kind of Stakeholder banks such as Micro-Credit Institutions and

Credit Unions. 3

We have used financial volatility measured by stock market volatility as a proxy of volatility.

(Barth et al., 1998). While banks are in general devoted to gathering savings and granting credit to

firms, households and stakeholders, financial markets are devoted to evaluating the value of firms

approximated by the value of shares. For this reason, traditionally the orientation of banking sectors and

financial markets are different. While in the traditional model the banking sector engages into financing

the real economy, financial markets give external evaluation on the accounting values of balance sheets

expressed in the value of shares.

But the traditional model of banking sector has been put in discussion (Edwards and Mishkin, 1998) by

the introduction of financial innovation applied in banking that at the end drove to the Great Financial

Crisis of 2007.

While, in fact, in the traditional model banks have the ability to develop a relationship banking model

(Boot, 2000) based on originate to hold, in the finance-based model banks develop the ability to be

connected with financial markets often applying an originate to distribute model increasing the

importance of the shadow banking system (Bord and Santons, 2012).

STV-OTH banks hold the credit until maturity developing long run relationships with counterparts and

stakeholders driving to a more sustainable leading model based on the reduction of the conflicts among

counterparts in the economic game (Coco and Ferri, 2011).

SHV-OTD banks use the credit contract as a collateral for securitized and derivative financial contracts

and produce conflict among different kinds of counterparts producing market failure based on

asymmetric information, moral hazard and adverse selection (Berndt and Gupta, 2009; ECB 2008).

Empirically we can observe that the credit management model is associated to a particular banking

governance orientation.

In particular we can say that the presence of the OTH credit model is associated with the presence of

Stakeholder Value banking governance orientation (STV-OTH) while the presence of OTD credit

management model is associated with a Shareholder Value banking governance orientation (SHV-

OTD).

While STV-OTH banks have the ability to apply a relationship banking model enforcing relationships

with stakeholders (Freeman, 1984), SHV-OTD banks have developed more relationships with financial

markets especially through the shadow banking system (Poznar et. al, 2012).

In this sense we can say that STV-OTH banks serve the community and the stakeholders (Hesse and

Cih´ak, 2007; Fonteyne, 2007, Cuevas and Fischer, 2006) while SHV-OTD banks are profit oriented

(Fiordelisi, 2008; Fiordelisi and Molineux, 2010) and are more devoted to use securitization as shown

in Nadauld and Sherlund (2013) focusing on Investment Banks. The STV-OTH model is more

sustainable due to its ability to solve the multiple asymmetric information problems arising among

management and constituencies (Freeman et al., 2010). In particular the stakeholder management

model is able to produce both implicit and explicit information relative to the borrower (Dong and Guo,

2011) and also to other stakeholders variously involved in the life of the bank and the community in

which the bank operates (Charreaux and Desbrières, 2001) . In particular, we should bear in mind the

fact that Stakeholder banks, such as for example Cooperative Banks, are generally able to produce

common goods (Argandoña, 1998) such as Trust that are crucial for the economic development and

growth. Also, Stakeholder banks due to their relationship banking model are able to produce long run

relationships with stakeholders opening to the possibility of a concrete implementation of repeated

game with strong incentives to generate cooperative Nash Equilibria4.

The ability of STH-OTH banks to produce financial stability and financial development is related to

the fact that these economic organizations are founded on market failures institution (North, 1990)

putting together the interest of counterparts in a long run perspective.

On the other side of the we have the SHV-OTD model in which the banks develop relationships with

financial markets and the shadow banking system, possibly generating instability (Shleifer and Vishny,

2009).

SHV-OTD banks are not interested in holding the credit until maturity. SHV-OTD model banks are

interested in increasing their share value under a shortermist view of the market opportunities also

using securitization (Diamond and Rajan, 2009). This means that borrowers are considered not per se

but as a tool to generate more profitable financial market deals through securitization. SHV-OTD banks

are interested in the possibility to use credit contracts to produce derivatives on financial markets

increasing shareholder value. SHV-OTD banks are interested in the creation of profitable relationships

with financial institutions rather than with borrowers and stakeholders holding their stake in the

community developing a “market-based banking” (Pozsar, 2011). SHV-OTD banks are more oriented

to financial markets and non banking financial organizations than to the real economy. For this reason

there are many problems of financial sustainability in the SHV-OTD as has been showed by the Great

Financial Crisis started in 2007, produced by mortgages.

The existence of a nexus between financial markets and banks has been considered as dangerous for the

economy. When banks apply a SHV-OTD model they can have wrong incentives in managing deposits

4 Ferri, Kalmi and Kerola (2013) find that stakeholder banks have a propensity to smoothen their lending cyclicality and

interpret this evidence as suggesting that their presence in the economy can dampen business cycle fluctuations.

creating financial instability and at the end contributing to the financial crisis (Bengtsson, 2013).

Financial instability and financial crisis are related with financial volatility (IMF, 2003).

Evaluating the relationship between banking governance and Financial Volatility is important to

describe how banks can affect financial and macroeconomic variables being a tool in the globalization

age. In particular we find that STV-OTH banks have the ability to stabilize the economy, reducing the

risk of financial crisis, their presence being negatively associated with Financial Volatility.

The rationale of this hypothesis descends from the fact that stakeholder banks – such as cooperative

banks and savings banks – typically follow a business model based on relationship banking that is able

to strengthen relationships with the counterparts, among the others prescribing that these banks hold the

credit until maturity (Degryse and Ongena, 2002). By this credit lending model, banks can improve the

level of monitoring and control on the credit lent analyzing the quality of the borrowers, acquiring both

implicit and explicit information on them (Diamond, 1984). This credit management model may

strengthen the bank-firm nexus and, in general, the relationships between the bank and the various

types of stakeholders attaining a more sustainable banking model. On the other side we have

shareholder oriented banks, i.e. commercial banks, investment banks, bank holding companies,

applying the OtD model in credit and by this way through securitization. It is important to keep in mind

the fact that the difference in the credit model has profound implications not only on the type of credit

contractual arrangements but, in the end, bears deep consequences.

These consequences typically descend from the fact that, under OTD, the credit process hinges

essentially on quantitative (hard) information as, contrary to OTH, this business model is incapable of

making use of qualitative (soft) information on borrowers. As such, OTD credit is less informed than

OTH credit. The implication may be that OTD raises systemic risk. In turn, this can heighten stock

market volatility, to the point of possibly leading to a systemic financial crisis. This builds a possible

link between market volatility and financial crisis.

In the rest of the paper, section 2 is devoted to analyze the STV-OTH vs. SHV-OTD debate in respect

to financial instability. In section 3 we focus more explicitly on the possible link between stakeholder

governance and stock market volatility. The bulk of our analysis is contained in section 4 where we

first outline our empirical analysis and then report and discuss the main results. Section 5 concludes

debating the relevance of our findings for the discussion in the economics/finance literature as well as

for economic policy at large.

2. STV-OTH vs. SHV-OTD: the impact on financial instability

In the economic literature it is clear that there exists a negative relationship between economic growth

and volatility (Mobarak, 2005) and in particular stock market volatility (Arestis et. al, 2001).

Volatility can generate instability and, at the same time, can reduce the possibility of the business cycle

to be oriented in its historical path.

One of the elements that can create disturbances in the process of economic growth is represented by

stock market volatility. Volatility – in particular, stock market volatility – is negatively correlated with

economic growth. There are many reasons behind this correlation. Stock market volatility can be due to

non-ethical financial practices that may destroy the market mechanism due to wrong incentives. Stock

price bubbles, mispricing, the process of building paper by paper, the idea of controlling the economic

process by controlling shares without considering the real life of the firm, all these elements can raise

stock market volatility (Officer, 1973; Schwert, 1989; Hamilton and Lin, 1996).

It is important to evaluate the relationship between stock market volatility and the banking sector trying

to understand whether the presence of a certain type of banks can produce a more volatile stock market.

In effects there are some types of banks that are more prone to generate credit that due to the banking

governance management can produce a greater financial volatility. If banks take a risk oriented

behavior, that can produce financial instability (Laeven and Levine, 2009; Bernanke, 1983; Mason,

1997, 2003a,b; Keeley, 1990). Some kind of banks such as, for example, typical commercial banks,

bank holding companies and investment banks due to their SHV-OTD model can have incentives to

reduce the quality of credit producing financial instability and financial crisis (Purnanandam, 2011).

The credit model all too often used by shareholder oriented banks, i.e., the OTD model, is based on the

idea that credit can be lent to economic subjects even though they do not possess the accounting

conditions to repay the debt (Bernanke, 2010).

In effect, the bank can obtain revenues by using the credit lent as collateral for an insurance contract,

i.e. securitization, having its shareholder value increased on the stock market. This is the practice that

has created the Great Financial Crisis through the subprime mortgages crisis. The shareholder

orientation in banking governance can let the bank have objectives that generate risks, even for the

bank, for the depositors and for the borrowers, and even for the entire market (Gorton, 2008).

The transformation of individual risk into systemic risk has been realized by the presence of SHV-OTD

model, by which riskier credit contracts have been securitized on financial markets (Acharya, 2009).

The counterparty risk in shareholder banking governance has been sublimed into securitization holding

a greater shareholder value to show better balance sheets in stock markets.

On the other side we have STV-OTH banks that have incentives to stay related to their community, to

firms, and to households. The stakeholder orientation of banking governance, generally applied by

cooperative banks and savings banks, is based on the OTH credit model. OtH is a banking credit model

that is able to apply a high level of monitoring and screening for borrowers and by this way banks are

able to reduce the risk of single credit contracts. Stakeholder banks hold on to a relationship banking

model that induces these banks to increase their value without recurring to securization or increasing

market share value. Stakeholder banks realize a model in which all the agents and economic

organizations that are involved in the banks are considered as part of the value of the bank (Etzioni,

1998). The object that these banks try to maximize is in the relationships with stakeholders. STV-OTH

banks have an orientation that is able to generate a more sustainable lending model (Coco and Ferri,

2010).

3. Stakeholder banks and stock market volatility

Stakeholder governance, epitomized at cooperative banks and savings banks, is oriented to a credit

lending model based on the OTH model. In the OTH credit model banks hold the credit in their balance

sheet until maturity. In the OTH model banks have the ability to be efficient in monitoring and

screening acquiring historical data – and particularly soft information that can be elicited only through

long-run personal and bilateral customer relationships – on the economic behavior of borrowers

(Mayer, 1988; Terlizzese, 1988; Von Thadden, 1990; Diamond, 1991; Ongena and Smith, 2001). These

historical data let the banker have information about the complex structure of implicit and explicit

contracts that characterize the economic activity of the borrowers acquiring soft and hard information

(Petersen, 2004; Berger and Udell, 2002). The stakeholder orientation puts the bank in the condition to

evaluate the creditworthiness of single borrowers without considering other methods for increasing

asset values in their balance sheet. This is due to the fact that the stakeholder orientation in banking

governance is generally associated to a not-for profit maximization function, in which all the resources

in the economic game are used to reinforce the relationships between all the agents and organizations

that are related to the banking activity. In relationship banking the bank and the borrower are insider in

the same economic institutional game.

They build relationships based on the same identity economics (Akerlof and Kranton, 2000).

Stakeholder banks, especially cooperative banks, have the ability to develop better monitoring due

to a social commitment working as heteronymous force on the borrowers obligation (Stiglitz, 1990;

Angelini et al., 1998; Banerjee et al., 1994; Chaddad and Cook, 2004).

In this sense stakeholder oriented banks have no incentive to maximize non-asset values in balance

sheets. Stakeholder orientation in banking governance generally is associated to the choice for notfor

profit statutory obligations that let the bank be free from the shareholder value paradigm. The

stakeholder orientation in banking governance5 has a global impact on the legal commitments in all its

dimensions: both those constitutive at the statutory level, and those at the operational level. The

macroeconomic impact of the presence of this kind of banks affects directly financial stability.

Stakeholder banks have the ability to develop relationships with constituencies and, by this way, they

strengthen the bank-firm nexus and, at the same time, the social responsibility of the bank, and its drive

to favor the financial inclusion of the poor and of the discriminated categories.

All these elements let the stakeholder bank be directly involved in the development of communities.

There is an endogenous ability of stakeholder banks to contribute to the development of communities.

The endogeneity is due to the fact that stakeholder banks operate directly with stakeholders in a context

of proximity. In effect, we can say that stakeholder banks are not only able to produce relationship

banking but a proximity relationship banking model. The proximity is fundamental in the relationship

banking of stakeholder oriented banks due to the fact that it’s only in the proximity with the

stakeholders that is possible to give economic meaning to the banking relationships. Proximity gives

the stakeholder banks the possibility to promote a sustainable economic growth and development

(Stein, 2002; Degryse and Ongena, 2005; Cerquiero et al., 2007; Alessandrini et al., 2009).

Stakeholder banks participate in the banking systems due to the fact that they are also banks, but at the

same time they have low connection with stock markets and for this reason their presence may be

negatively related with stock market volatility. Stakeholder banks, due to their ability to generate credit

for firms, households, and constituencies, have lower connections with stock market and insurance

markets and the shadow banking system. The ability of stakeholder banks to apply a relationship

banking model is able to generate multiple benefits for clients in terms of quantity of credit and

services offered (Petersen and Rajan, 1994, 1995). The stakeholder governance orientation lets the

bank be free from the heterodirection of stock and insurance markets. Practices like securitization or

short-termist balance sheet operations are not admitted in the stakeholder value maximization banking

5 The exercise of governance is realized with the presence of a legal commitment, value foundation, moral convictions,

and ethical behavior. All these elements are inevitably related in the economics of governance that affect directly the

cognition of the management and workers, cooperative associate, depositor, borrowers and al the persons and

organizations that have a stake in the bank.

model that is devoted to long run relationships (Diamond, 1984). For all these reasons we can conclude

that there may be a negative impact of stakeholder banks on stock market volatility. Stakeholder banks

use credit to finance firms, entrepreneurs, households, and economic organizations, without using

financial innovation contracts such as for example securitization. STV-OTH banks due to their

relationship banking model have the ability to acquire soft and hard information reducing the risk of

failure (Stein, 2002; Petersen, 2004).

The main difference between STV-OTH and SHV-OTD banks is in the connection with credit.

STV-OTH apply a relationship banking model using both hard and soft information while SHV-OTD

banks apply a model of transactional lending using principally hard information (Berger and Udell.

1995, 2002).

STV-OTH banks use credit to finance borrowers, having the possibility to increase the value of the

bank by increasing the value of stakeholder welfare. This direct nexus between the value of a

stakeholder bank and the value of stakeholder welfare is able to generate incentives for the banks to use

credit in the real economy.

On the opposite, SHV-OTD banks have more relationships with financial markets since this kind of

banks try to increase the value of their shares. SHV-OTD banks acquire generally hard information.

In this way for shareholder oriented banks the banking business is not in giving credit at a certain

interest rate, but it is to give credit at the market interest rate and using the credit to generate increasing

shareholder value.

All the differences between stakeholder and shareholder banks are in the value that banks try to

maximize. STV-OTH banks try to maximize the relationships of proximity with stakeholders (Petersen

and Rajan 2002; Petersen, 2004). SHV-OTD banks try to maximize the value of shares in balance

sheets.

This fundamental difference puts stakeholder banks in the condition of economic agents able to

produce a more sustainable economic development, while, on the other side, shareholder banks are

more oriented to financial markets. For all these reasons, we can hypothesize that the intensity of the

presence of stakeholder banks be negatively correlated with stock market volatility, while that of

shareholder banks be positively associated with stock market volatility.

4. Econometric analysis

4.1 Methodology

To evaluate the relationship between banking systems and stock market volatility we use a complex

and composed database. The dependent variable measuring stock market volatility is the coefficient of

variation of daily stock market prices drawn from the public domain of Bloomberg. Based on the

available national stock market indices, we compute the coefficient of variation over 69 countries for 9

years between 1998 and 20066. The variable evaluating the importance of Stakeholder Banks with

respect to shareholder banks has been built considering the logarithm of the ratio between the sum of

percentage total asset of Cooperative Banks and Savings Banks respectively on the sum of the

percentage level of total asset of Cooperative Banks, Savings Banks Commercial Banks, Investment

Banks, Bank Holding on the sum of percentage total asset of Commercial Banks, Investment Banks,

Bank Holding on the sum of Cooperative Banks, Savings Banks, Commercial Banks, Investment

Banks, Bank Holding. Other variables of control have been built using the World Bank database.

We find that, indeed, there exists a negative relationship between stock market volatility and the

presence of stakeholder oriented banks.

We have used as dependent variable:

.

VOLATILITY38 = equal to the coefficient of variation of stock market index computed using the

Bloomberg database. We have data for 69 countries from 1998 to 2006.

The countries are: Argentina, Australia, Austria, Bangladesh, Belgium , Brazil, Bulgaria, Canada,

Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia,

Finland, France , Germany, Greece, Hong Kong, Hungary, Iceland, India, Ireland, Israel, Italy,

Japan, Kazakhstan, Korea Rep. Of, Kuwait, Latvia, Lithuania, Luxembourg, Malaysia, Malta,

Mauritius, Morocco, Netherlands, New Zealand, Norway, Oman, Pakistan, Panama, Peru,

Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovak, Slovenia,

Spain, Sri Lanka, Switzerland, Taiwan, Thailand, Tunisia, Turkey, Ukraine, United Kingdom,

United States, Venezuela, Zambia.

LSTBONSHB= logarithm of the ratio between the percentage level of total assets of stakeholder

oriented banks and shareholder oriented banks. Stakeholder banks is the sum of the percentage level

of cooperative banks and saving banks total asset. Shareholder bank is the sum of the percentage

total assets of Commercial Banks, Investment Banks, and Bank Holding. ( Bankscope Database).

6

We deliberately closed the sample years at 2006, to avoid the spurious volatility generated by the Great Crisis.

BANK CAPITAL TO ASSET RATIO: Bank capital to assets is the ratio of bank capital and reserves to

total assets. Capital and reserves include funds contributed by owners, retained earnings, general and

special reserves, provisions, and valuation adjustments. Capital includes tier 1 capital (paid-up shares

and common stock), which is a common feature in all countries' banking systems, and total regulatory

capital, which includes several specified types of subordinated debt instruments that need not be repaid

if the funds are required to maintain minimum capital levels (these comprise tier 2 and tier 3 capital).

Total assets include all non financial and financial assets.

BANK LIQUID RESERVES TO BANK ASSETS RATIO: Ratio of bank liquid reserves to bank assets

is the ratio of domestic currency holdings and deposits with the monetary authorities to claims on

other governments, nonfinancial public enterprises, the private sector, and other banking

institutions.

CLAIMS ON OTHER SECTORS OF THE DOMESTIC ECONOMY: Claims on other sectors of the

domestic economy include gross credit from the financial system to households, non profit institutions

serving households, nonfinancial corporations, state and local governments, and social security funds.

CONSUMER PRICE INDEX: Consumer price index reflects changes in the cost to the average

consumer of acquiring a basket of goods and services that may be fixed or changed at specified

intervals, such as yearly. The Laspeyres formula is generally used.

DEPOSIT INTEREST RATE: Deposit interest rate is the rate paid by commercial or similar banks for

demand, time, or savings deposits. The terms and conditions attached to these rates differ by country,

however, limiting their comparability.

GDP DEFLATOR: The GDP implicit deflator is the ratio of GDP in current local currency to GDP in

constant local currency. The base year varies by country.

INFLATION GDP DEFLATOR: Inflation as measured by the annual growth rate of the GDP implicit

deflator shows the rate of price change in the economy as a whole.

MARKET CAPITALIZATION OF LISTED COMPANIES (% of GDP): Market capitalization (also

known as market value) is the share price times the number of shares outstanding. Listed domestic

companies are the domestically incorporated companies listed on the country's stock exchanges at the

end of the year. Listed companies does not include investment companies, mutual funds, or other

collective investment vehicles.

WHOLESALE PRICE INDEX: Wholesale price index refers to a mix of agricultural and industrial

goods at various stages of production and distribution, including import duties. The Laspeyres formula

is generally used.

We have used the model:

VOLATILITYit= αit + β1t(LSTBONSHB) it + β2t (BANKCAPITALTOASSETRATIO) it + β3it (BANK

LIQUID RESERVES TO BANK ASSETS RATIO)it + β4 (CLAIMS ON OTHER SECTORS OF THE

DOMESTIC ECONOMY) it + β5 (CONSUMERPRICEINDEX)it + β6 (GDP DEFLATOR)it + β7

(INFLATION GDP DEFLATOR)it + β8 (MARKET CAPITALIZATION OF LISTED COMPANIES) +

β9(WHOLESALEPRICEINDEX)it + εi

Using this complex database we are able to determine the complex nexus of relationships among

financial volatility the banking system and macro-financial determinants.

In particular we have performed OLS, OLS with robust standard errors, panel data with respectively

random effect, robust random effect, fixed effect, robust fixed effect, between estimator. To test if the

right specification of the model is with fixed or random effect we have performed the Hausman test.

We have found that the right model is the model with random effect. Having focused on random effect

model we have tried to understand if it should better in respect to the OLS. To verify this possibility we

have performed the Breusch-Pagan Test rejecting the null hypothesis of OLS consistency and

considering the random effect as the right model.

Our analysis shows that there exist a negative relationship between the presence of Stakeholder Banks,

approximated by Cooperative Banks and Savings Banks and the presence of Financial Volatility,

approximated by stock market volatility.

4.2 Results

Our results show clearly the presence of a negative association between stakeholder banking

governance and stock market volatility. This negative relationship is present in every kind of estimator

we have performed. In particular it is present in the panel data with random effect model that,

according to the tests we performed, is the right model in our case. In particular the Hausman test let us

accepting the validity of the random effect model. The Breusch-Pagan test confirms the validity of the

random effect model with respect to OLS. The fact that the random effect model is the right model lets

us infer about the fact that the economic phenomena described in this model is independent from

country characteristics. This lets us also infer about a certain persistence of the phenomena in the

context of the country considered. But at the same time the Breusch-Pagan test suggests that the panel

data with random effects is the right strategy to investigate our research question rather than a simple

pooled OLS.

Our results show that there is a negative association between the presence of stakeholder oriented

banks and stock market volatility. The increasing level of stakeholder banks can drive the system

towards a less volatile economy. Our results show that banking governance matters for financial

stability, for economic growth and for financial sustainability. In particular we find that an increasing

level of stakeholder banks can drive the economy toward a more sustainable level reducing the stock

market volatility. Paraphrasing Zingales we could say “banking governance matters!” for economic

sustainability and for economic growth.

4. Conclusions

The break up of the Great Financial Crisis of 2007-09 has stimulated pervasive discussion among the

academics studying economics and finance. The main culprit behind the crisis was a set of weaknesses,

built inside the banking systems of the developed countries, causing the accumulation of systemic risk

then engendering the financial turmoil. Accordingly, the bulk of the new research has devoted itself to

produce a better understanding of the inner functioning of the banking system and the possible links

between those internal mechanisms and the generation of macroeconomic risks. A specific path

investigated by academia has focused on the possibility that different banking business models may

contribute differently to the build up of systemic risk. Namely, the Originate to Distribute (OTH)

banking business model is seen as central to the build up of financial fragility.

In turn, banks do differ also in terms of their governance and ownership structures and the difference in

these structures may determine the extent to which the banks ventured from the old style Originate to

Hold (OTH) business model to the à la mode OTD one. In this, the literature recognizes that

stakeholder oriented banks (STB) were much less involved into the unsafe transformation from OTH to

OTD vis-à-vis shareholder oriented banks (SHB). This was because the SHB banks focus exclusively

on short-term profit maximization while the STB banks, as they cater for a larger set of stakeholders,

either do not maximize profits or, in any event, do not have profit as the only motivation. In addition,

since the search for profits of the OTD banking supposedly amplified the supply of credit for

speculative trading, it is possible that a larger diffusion of the OTD model heightened volatility in the

stock market.

Moving along those lines, this paper aimed at ascertaining whether we can identify any empirical nexus

between the extent of the presence of STB banks in a national banking system and the degree to which

that country will experience volatility of its stock market index. Specifically, we have hypothesized that

a larger presence of STB banks might lower the degree of market volatility. In line with the above, we

have shown some evidence consistent with that conjecture. Namely, the cross-country empirical

analysis suggests that the extent of stock market volatility is negatively (positively) correlated with the

extent of the presence of STB (SHB) banks in the national banking system.

There is little need to underline the importance of these findings for financial studies as well as for the

policy debate on the financial system and its regulation. The results above seem to suggest that a

banking system structures featuring a larger presence of STB banks by delivering less (noisy) volatility

might be better at fostering growth in the real economy. From the vantage point of the policy

discussion, our results imply the need to further assess whether we can envisage regulations that better

take into account the formation of the systemic risk at the foundation of the banking/financial system.

In particular, it appears that banking systems would be made sounder by securing the biodiversity of

banks. It seems that avoiding to twist the balance excessively in favor of SHB could save developed

countries welfare decreasing surges in financial volatility.

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