The role of cooperative banks and smaller institutions for the financing of SMEs and small midcaps in Europe

The "Cooperative Banks & Smaller Institutions" (CBSI) window of the EIB Group Risk Enhancement Mandate (EREM) shall contribute to the EIB group's intention to increase lending to small and mediumssized enterprises (SMEs) and to broaden the range of intermediaries through which it operates, in particular by targeting small cooperative banks and other smaller institutions that have a particular focus on smaller SMEs and start-ups. In this paper, we provide background information on cooperative banks and other smaller institutions in Europe. However, we focus on the cooperative banking segment, for which more information is available. Banks' business models strongly differ by the size of the banks. For example, smaller institutions' share of trading assets (including derivatives held for trading) over total assets is, on average, very small. ECB indicators also show that smaller banks have a higher solvency and asset quality, as well as a lower leverage and loans-to-deposit ratios, when compared to larger banks. These results are all broadly in line with the findings for the more specific group of cooperative banks. Cooperative banks' business model is usually conservative and follows a simpler structure than that of "shareholder banks". Cooperative banks typically concentrate to a large extent on lending-based retail banking. Individual local institutions, although tending to be small, are key intermediaries for SME loans, with a relatively strong focus on smaller SMEs. Cooperative banks' funding policy, but also their capital base, is regarded as being comparably stable. Their main funding source is deposits from customers, who are to a large extent identical with their members/owners. In addition to the membership contribution of their owner-members, usually their almost exclusive source of capital is retained profits...