No. 264 - Local banking and the financial crisis

This paper analyses whether, from the end of 2005 to mid-2012, local banking influenced the dynamics and the quality of loans to Italian firms. This paper proposes a new definition of local banks, whose main advantage, compared with  the traditional classifications employed in the literature, is that of classifying medium-sized and small banks according to the number and size of the markets in which they operate, regardless of the banks’ institutional category and size. The main outcome, after controlling for the characteristics of demand and the initial situation of the banks’ balance sheets, was that credit supply was influenced by bank size, while being local or non-local was not significant. During the crisis, the loan default rate was substantially higher for medium-sized and small banks, amongst which the deterioration in credit quality was less for local banks than for non-local banks.