Credit Expansion and Banking Crises: The Role of Guarantees

This paper aims at analysing whether banking changes that occurred in Italy in the last fifteen years have mined the soundness of its financial system. We look for potential threats to financial stability as a result of the dynamic behaviour of Italian banks that progressively have been favouring consumer households at the expense of firms in the allocation of credit. The theme of financial instability is closely linked to the question of capital regulation, which is a centrepiece of government intervention because it affects banks’ soundness and risk taking incentives. After reviewing the literature on capital regulation, we first discuss the role of guarantees as a solution to banks’ potential instability in the case of credit default and, secondly, we estimate a bank interest rate model that explicitly includes collateral and personal guarantees as explanatory variables. We show that banks follow different lending policies according to the type of customer. In the case of firms banks seem to efficiently screen and monitor customers and guarantees (real and personal) are both used to reduce moral hazard problems. In the case of consumer households and sole proprietorships banks behave “lazily” by replacing screening and monitoring activities with personal guarantees; instead, collateral is used to separate good from bad customers (i.e., to mitigate adverse selection problems). These results, together with the large proportion of bad loans in case of unsecured loans, may indicate the existence of potential sources of financial instability because (a) personal guarantees are a small share of loans, especially in the case of consumer households, (b) a decline in the value of collateral held by banks in the event of a housing market weakening.Banking Crisis; Household and Firm Credit Growth; Banking Regulation.

Does Employment Protection Legislation Affect Firm Investment? The European Case

This paper aims at analyzing the impact of Employment Protection Legislation (EPL) on frms' investment policies in the presence of financial imperfections. Our results show that investment is positively correlated to measures of internal funds available to firms and negatively to the level of national labour market regulation. Moreover, the latter is stronger wherever financial market imperfections are larger: firms with better access to financial markets are in a position to determine their optimal investment policy, even in the presence of stringent Employment Protection Laws, than those facing financial constraints. Our results support the effort put forward by European institutions in recent years to reform both markets.Employment Protection Legislation, Financial Constraints, Investments.

Firms’ Investment in the Presence of Labor and Financial Market Imperfections

This paper analyses how financial and labor market imperfections jointly influence investment. The contemporaneous presence of imperfections in both markets gives rise to a negative correlation between EPL and investment: firms facing negative shocks see their financial constraints worsen in countries with greater labor market rigidities. Internal funds have an overall positive impact on investment, notwithstanding the presence of labor market rigidities acts as a disincentive to the use internal funds for financing new projects. If capital is sunk and the legal environment favors ex-post profit appropriation by workers, firms use internal funds for ends alternative to fixed investment. Our results support the effort put forward by European institutions to reform both markets.Investment Models, Financing Constraints, Labor Protection Legislation, Panel Data Models

Loans, Interest Rates and Guarantees: Is There a Link?

This paper aims at shedding light on the influence of guarantees on the loan pricing. After reviewing the literature on the role of guarantees in bank lending decisions, we estimate a bank interest rate model that explicitly includes collateral and personal guarantees as explanatory variables. We show that banks follow different lending policies according to the type of customer. In the case of firms banks seem to efficiently screen and monitor customers, and guarantees (real and personal) are used to reduce moral hazard problems. In the case of consumer households and sole proprietorships banks behave “lazily” by replacing screening and monitoring activities with personal guarantees. Collateral, instead, is used to separate good from bad customers (i.e., to mitigate adverse selection problems).Banking Crisis; Determination of Interest Rates, Banks, Asymmetric and Private Information.

The impact of the recent financial crisis on bank loan interest rates and guarantees.

The paper analyzes the role of guarantees on loan interest rates before and during the recent financial crisis in Italian firm financing. The paper improves on existing literature by distinguishing between real and personal guarantees. Further, the paper investigates the potential different role of guarantees in the bank-borrower relationship during the recent financial crisis. This paper draws from individual Italian bank and firm data taken from the Banks’ Supervisory Reports to the Bank of Italy and the Central Credit Register over the period 2006-2009. Our analysis demonstrates that collateral affects the cost of credit of Italian firms by systematically reducing the interest rate of secured loans, while personal guarantees increase it. These effects are amplified during the crisis. Furthermore, guarantees are a more powerful instrument for ex-ante riskier borrowers than for safer borrowers. Indeed, riskier borrowers obtain significantly lower interest rates on secured loans than interest rate they would be charged on unsecured loans.financial crisis, guarantees, lending relationship

Does innovation affect credit access? New empirical evidence from Italian small business lending

In this paper we analyze the access to credit of innovative firms on the price and non-price dimensions of bank lending. Using information from two datasets, we use a propensity score matching procedure to estimate the impact of the innovative nature of firms on: (a) loan interest rates; (b) the probability of having to post collateral; and (c) the probability of overdrawing. Our analysis reveals that banks trade off higher interest rates and lower collateral requirements for firms involved in innovative processes. Further, innovative firms have a lower probability of being credit rationed than their non-innovative peers

The productivity gap among European countries.

This paper aims at analyzing Total Factor Productivity (TFP) in four European countries (France, Germany, Italy and the Netherlands) between 1950 and 2011. It uses the common trend - common cycle approach to decompose series in trends and cycles. We find that the four economies share three common trends and a common cycle. Further, we show that in the case of Italy and the Netherlands trend and cycle innovations have a negative relationship that supports the 'opportunity cost' approach to productivity growth, and that trend innovations are generally larger than cycle innovations. Finally, while we do not explore what drives the three common trends, we show that countries' differences in TFP performance in recent years may be due to the so-called "deep"determinants in growth literature such as the presence of efficient mechanisms of creation and transmission of knowledge, international integration, and ecient markets and institutions

MONETARY AND FISCAL POLICY IN A NONLINEAR MODEL OF PUBLIC DEBT

none3noIn this paper we study the dynamic relationship between the public debt ratio and the real interest rate. Specifically, by means of a macroeconomic model of simultaneous difference equations - one for the debt ratio and the other for the real interest rate - we focus on the role of monetary policy, fiscal policy and risk premium in affecting the stability of the debt ratio and the existence of steady states, if any. We show that, in a dynamic framework, fiscal rules may not be enough to control the pattern of the debt ratio, and the adoption of a monetary policy, in the form of an interest rate rule, is necessary to control the pattern of the debt ratio for assuring its sustainability over time. Notably, the creation or disappearance of steady states, or peri- odic (stable) cycles, can generate scenarios of multistability. While we obtain clear evidence that an active monetary policy has a stabilizing effect on both the real interest rate and the debt ratio, we also find that, in some scenarios, fiscal policy is not sufficient to avoid explosive patterns of the debt ratio.openGermana Giombini; Gian Italo Bischi; Giuseppe TravagliniGiombini, Germana; Bischi, GIAN ITALO; Travaglini, Giusepp

Gender and the Availability of Credit to Privately Held Firms: Evidence from the Surveys of Small Business Finances

We use data from the nationally representative Surveys of Small Business Finances to analyze differences by gender in the ownership of privately held U.S. firms, and to examine the role of gender in the availability of credit. We document a series of empirical regularities regarding male- and female-owned firms. Female-owned firms are smaller, younger, have fewer and shorter banking relationships, and are more likely to be credit constrained. Female owners are younger, less experienced, and not as well educated. Differences in credit outcomes are rendered insignificant in a multivariate setting, where we control for other firm and owner characteristics. Finally, we test the robustness of our findings by means of the propensity score matching method

Collateralization and distance

This paper examines how collateralization in small business lending varies with bank-borrower proximity. Our analysis establishes a robust inverse relationship between distance and collateral: Borrowers located in the vicinity of the bank face higher collateral requirements. The estimated relationship is independent of the allocation of decision-making authority within the lending organization, competitive pressure in the local credit markets, or risk rating of the borrower. Our findings seem consistent with the notion that distance reflects transaction costs associated with the assessment, inspection, and possible repossession of collateral