How banks allocate loans in Italy: a long run perspective

De Bonis, Riccardo and Ferri, Giovanni and Forte, Antonio and Silipo, Damiano Bruno (2021): How banks allocate loans in Italy: a long run perspective.

Abstract

Finance is a salient driver in promoting growth also by supporting changes in the specialization of production. Thus, it is paramount that finance goes to sunrise productive branches embodying more technology and so higher growth potential. Is it so in reality? We address this question by investigating the long-run allocation of bank loans in the bank-dependent Italian economy. We reach three main findings. First, banks lent more to the branches where value added was growing more rapidly, while loans went less to riskier sectors with higher bad loans ratios. Second, the allocation of loans was, however, insensitive to the growth of productivity and did not support the higher technology branches. Third, the allocation of loans to the more technology-oriented branches improved since the early 1990s, when credit markets were liberalized. Overall, in our assessment banks were rather following than leading productive transformations, but managed to avoid large scale misallocation of credit. Hence, we give banks just a pass grade.

• Item Type: MPRA Paper
• Language: English
• Keywords: Allocation of bank loans; Branch productivity and value added; Long-run perspective; Non performing loans.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Acharya, V.V., Eisert, T., Eufinger, C. and C. Hirsch (2019). Whatever It Takes: The Real Effects of Unconventional Monetary Policy. The Review of Financial Studies, 32 (9), 3366–3411.

Amatori, F., Bugamelli, M. and A. Colli (2011), Italian Firms in History: Size, Technology and Enterpreneurship, Banca d’Italia – Quaderni di Storia economica, n. 13, ottobre.

Baffigi, A. (2011), Italian National Accounts, 1861-2011, Banca d’Italia – Quaderni di Storia economica, n. 18, ottobre.

Battilossi S., Gigliobianco A., Marinelli G. (2013) Resource allocation by the banking system. In: Toniolo G. (ed) The Oxford handbook of the Italian economy since unification (Ch. 17). Oxford University Press, Oxford

Bekaert, G., Harvey, C., Lundblad, C. and S. Siegel (2007), “Global Growth Opportunities and Market Integration”, Journal of Finance, 62, pp. 1081-1137.

Bleck A. and X. Liu (2018), Journal of Monetary Economics, volume 94, 24-40.

Caballero, R.J., Hoshi, T., and A.K. Kashyap (2008). Zombie Lending and Depressed Restructuring in Japan. American Economic Review, 98:5, 1943–1977.

Calligaris, S., Del Gatto, M., Hassan, F., Ottaviano, G.I.P. and F. Schivardi (2016). Italy’s Productivity Conundrum. A Study on Resource Misallocation in Italy. European Commission. Discussion paper, n. 030.

Caprio, G., Laeven, L., Levine, R., 2007. Bank valuation and corporate governance. Journal of Financial Intermediation 1 (4), 584-617.

Cingano F. and F. Hassan (2019), International Financial Flows and Misallocation, Bank of Italy, mimeo.

Coccorese, P. and D. B. Silipo (2015). Growth without finance, finance without growth. Empirical Economics 49, 279–304.

De Bonis R., G. Marinelli and F. Vercelli (2018), Playing yo-yo with bank competition: New evidence from 1890 to 2014, Explorations in Economic History, January, 134-151.

De Bonis R., G. Marinelli and F. Vercelli (2020), Bank Lending in the Great Recession and in the Great Depression, paper presented at the meeting of the Italian Economic Association, October.

Dörr, S., Raissi, M., and A. Weber (2017). Credit-Supply Shocks and Firm Productivity in Italy. IMF Working Paper, n.17/67.

Fisman, R. and I. Love (2004a), “Financial Development and Intersectoral Allocation: A New Approach”, Journal of Finance, 59, pp. 2785- 2807.

Fisman, R. and I. Love (2004b), Financial Development and Growth in the Short and the Long Run, NBER Working Papers, no. 10236.

Gupta, N. and K. Yuan (2009), “On the Growth Effects of Stock Market Liberalizations”, Review of Financial Studies, 22, pp. 4715-4752.

Hassan, F., di Mauro, F., and G. P. Ottaviano (2017). Banks credit and productivity growth. European Central Bank working paper series, n. 2008. 08 / February 2017.

King, R.G. and R. Levine (1993). Finance and Growth: Schumpeter Might Be Right, The Quarterly Journal of Economics, August, pp. 717-737.

Laeven, L. (2003), “Does Financial Liberalization Reduce Financing Constraints?”, Financial Management, 32, no. 1, pp. 5-34.

Laeven, L., Levine, R., 2009. Bank governance, regulation, and risk-taking. Journal of Financial Economics 93 (2), 259-275.

Lall, S. (2000), The Technological Structure and Performance of Developing Country Manufactured Exports, 1985-1998, University of Oxford, Queen Elizabeth House – QEH Working Papers, 44.

Manaresi F. and N. Pierri, 2017. "Credit Constraints and Firm Productivity: Evidence from Italy," Mo.Fi.R. Working Papers 137, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences

Rajan, R. and L. Zingales (1998), “Financial Dependence and Growth”, American Economic Review, 88, pp. 559-586.

Roubini, N. and X. Sala-i-Martin (1995), “A Growth Model of Inflation, Tax Evasion and Financial Repression”, Journal of Monetary Economics, 35, pp. 275-301.

Schiantarelli, F., Atiyas, I., Caprio, G., Harris, J. and A. Weiss (1996), “Credit Where It Is Due? A Review of the Macro and Micro Evidence on the Real Effects of Financial Reforms”, in Caprio G., Atiyas I., Hanson J.H. (a cura di), Financial Reform: Theory and Experience, Cambridge, UK: Cambridge University Press, pp. 64-84.

Schivardi F., Sette E. and G. Tabellini (2017), Credit misallocation during the European financial crisis, Bank of Italy Working Papers, n. 1139, September, 2017.

Shikimi, M. (2017). Bank Concentration and Misallocation of Credit: Evidence from Firm Entry and Exit. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3009564.

Visco I. (2020), “Economic Growth and Productivity: Italy and the Role of Knowledge”, PSL Quarterly Review, vol. 73.

Wurgler, J. (2000), “Financial Markets and the Allocation of Capital”, Journal of Financial Economics, 58, pp. 187-214.