This paper investigates the dynamics of the territorial divide in credit quality in the period from 2006-19. Using data on individual bank-firm credit relationships, the analysis assesses to what extent the gap is due to: a) the characteristics of the firms and banks operating in the two areas, b) differences in the economic cycle and c) other factors external to the credit market.
The annual deterioration rate of loans to firms in the period was around 7 per cent in the South, 1.8 percentage points higher than in the rest of the country. About 0.5 points of the gap is explained by the characteristics of the borrowing firms and 0.2 points by the mix of the lending banks, while a further 0.6 points is due to the different trends in economic activity. The residual gap vanishes when variables related to the external context are included in the model, such as organized crime, the inefficiency of the judicial system and the lack of social capital.
