This paper verifies whether the lending policies applied by banks adopting the internal ratings-based (IRB) method for credit risk are more sensitive to the riskiness of borrowers than are banks adopting the standardized approach. We analyse the changes between 2007 and 2017 in the cost and the amount of bank credit granted to Italian firms by banks that adopted the IRB method in the period under examination and by other banks that continued with the standardized approach.
Banks' lending policies are more sensitive to the riskiness of borrowers in the year following the adoption of the IRB method, as they raised interest rates and reduced the amount of credit more for riskier borrowers than for safer ones. High-risk firms partly compensated for the decrease in bank credit by obtaining funds from institutions adopting the standardized approach, but overall their average cost of credit rose.
