The work aims to evaluate the effect of inspections in reducing potential distortions in the allocation of credit. To this end, we exploit the fact that the 'wide-ranging' inspections conducted by the Bank of Italy on cooperative credit banks are unexpected by the intermediary and the choice of the inspected banks can be considered random.
This makes it possible to use an estimation model in which the inspected banks are compared with similar non-inspected banks over time.
The inspections lead to an increase in the reclassifications of loans from performing to non-performing. There is also a contraction in credit to weak businesses and a growth in loans to healthy businesses, both to those with and without a previous credit relationship.
This reallocation has important positive effects for the real economy, since it favours the growth of healthy firms and the exit from the market of the weak ones.