No. 170 - Finance and Development: The Case of Southern Italy
We look at the role of the financial sector in the context of the relatively backward regions of Southern Italy. Commercial banks in the South typically have higher operating costs and charge higher interest rates than Northern banks. Econometric analysis of a large set of individual loan contracts suggests that borrowers in the South are considerably riskier than in the rest of Italy; it also indicates however that risk accounts for only half of the 200 basis points average North-South interest differential. The rest is largely accounted for by differences in operating costs. We argue that these findings reflect a situation of informational monopoly by Southern banks on local firms, with external banks forced to resort to rationing practices to avoid attracting the worse borrowers. To support this interpretation, we analyse loan contracts of Southern firms who borrow at the same time from local and external banks and show that geographical proximity is a critical variable in the Italian loan market, especially in the South. We then turn to the issue of allocative efficiency and conclude that, largely because of lack of competition and small size, Southern banks tend to perform their screening function less efficiently than banks in the rest of Italy. We finally show that risk exerts a significantly larger effect on borrowing in the South and that firms showing a higher variance of earnings - often reflecting a higher propensity to undertake innovative projects - are more likely to be liquidity constrained in their investment decisions than elsewhere.
Full text
-
30 June 1992
YouTube
X - Banca d'Italia
Linkedin
RSS
E-mail Alert
