Characteristics of the recovery process for small financial intermediaries: the case of Italian cooperative banks

Studies available on credit risk modeling for local banks primarily takes into account the probability of default of borrowers (PD) and exposure at default (EAD), while there are very few studies on debt recovery in connection with loss given default (LGD). The characteristics of the customers and the peculiarities of the relationship between customers and local banks make these intermediaries out of the ordinary respect to the overall financial system. These differences could be identified not only in the better customer-monitoring capability, but also in their debt-recovery capacity: in fact, due to their close relationship with the local market and the area in which their borrowers work or live, they have higher strength in controlling debtors. This paper takes into account Italian Cooperative Banks, hereinafter BCC, and compares the effectiveness of their debt recovery process and the system-wide average between 2000 and 2006. The data has been collected by banks' financial statements and Bank of Italy data. After highlighting the greater capacity of BCC to implement effective recovery processes, the paper focuses on the link between their characteristics and the LGD, identifying the distinctive profiles of the BCCs capable of implementing more efficient recovery processes.