No. 644 - Bank consolidation and lending policies to small business: Differences across geographical areas

Using Bank of Italy data on Italian banks in the period 1990-2004, the paper analyses the short and long-run effects of the concentration of the banking industry on the availability of credit to small and medium-sized firms. Our study employs a bank-based approach and investigates the differential effects of banking consolidation in the various geographical areas, in order to capture the influence of the different economic contexts. Our research also considers the different groups of intermediaries involved, as well as the role of "new entry" banks and of those not involved in consolidations (e.g. rivals). We find that banks' specialization in terms of credit policy seems to be affected by M&As. On the one hand, the portion of credit allocated to small businesses decreases in the long run after mergers, which result in a more pronounced size change and a more complex organizational structure; this effect is stronger in the South and in the North East of Italy. On the other hand, in the case of acquisitions, banking groups improve their "expertise" in small business lending. These results hold in all the main geographical areas, except for the southern regions, where - everything being equal - small firms are riskier and banks' takeovers are motivated mainly by the need to allow financial restructuring. However, in this market, the entry of new banks and close relationships between local banks and agglomerations of small firms partly offset the lower specialization on small business financing induced by acquisitions.