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.

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.

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

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

I confidi come strumento per l’accesso al credito delle PMI

L’Italia, al pari del resto del mondo, ha affrontato nel corso degli ultimi dieci anni una crisi economica e finanziaria di enorme portata. In Italia la crisi finanziaria si è sovrapposta, aggravandola, a quella reale. In particolare, alla generalizzata contrazione nell’erogazione e al peggioramento delle condizioni di accesso al credito si è osservata una maggiore selettività dei clienti da parte delle banche. La crisi bancaria ha causato una drastica riduzione del credito soprattutto verso le PMI che, in misura relativamente maggiore rispetto ad imprese di maggiori dimensioni, dipendono dalla possibilità di accedere ai prestiti bancari. In questo quadro, che solo recentemente vede l’economia italiana avviata verso un sentiero di ripresa, un ruolo importante nell’accesso ai finanziamenti bancari è stato svolto dagli organismi di garanzia collettiva meglio noti come Confidi

Credit rationing and firm size

This paper examines the likelihood of credit rationing faced by firms of different size. Contrary to common thought, several recent contributions on this topic argue that, when rationing credit, size alone is not a sufficient condition for discriminating between firms. We show that this result can be predicted using a framework based on the Stiglitz-Weiss model. In particular, in an environment of asymmetric information, we highlight how the likelihood of credit rationing depends upon the shape of the distribution function of project returns, especially its asymmetry and Kurtosis. Our empirical results do not support the hypothesis that small firms face more credit rationing than larger firms

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

Bank Loan Deterioration: Is It All Fault of the Crisis?

Despite the recent academic focus on the effects of the crisis on bank loan quality, a fully satisfying analysis of their causes is still missing, likely because of a lack of detailed information on bank-borrower relationships and the way loan decisions are taken within banks. Thanks to the availability of a large dataset provided us by a regional Italian bank for the three calendar years 2010-2012, we are able to describe changes occurred in the bank loan quality of 3,103 firms, primarily small- and medium-sized firms. Besides a generalized deterioration of the loan quality due to the crisis, our findings show that the loan quality (as measured by each loan rating) is largely influenced by how information is processed and used at the different hierarchical levels within the bank at the time of loan decisions. More specifically, the deterioration of loan quality increases as the loan approval decision is made at higher levels of the lending-decision hierarchy, while it decreases with the firm age, size and the proximity of firms to the bank. The latter result supports the primacy of relationship-lending technology relative to transaction-based lending technology

Does too much liquidity generate instability?

AbstractCorporate demand for cash is related to a number of firm-specific characteristics, like the presence of transaction costs, information asymmetry in credit markets, uncertainty and risk aversion. The purpose of this paper is to build a dynamic model that describes the potential chaotic effects of the accumulation of cash by firms over a prolonged period of time. By exploring the theoretical connections between firm financial policies and investment decisions, we show that too much liquidity might generate economic instability. When firm increases the share of cash devoted to risky investment, and reduces the share of cash distributed to shareholders as dividends, the fixed point of the system changes from being stable to being unstable. Moreover, the impact of such a policy on the stability of the system is larger the greater the investment risk. The chaotic behavior is mainly observable in the dynamics of cash, which in turn may affect all investment decisions