This paper evaluates how Italian banks form expectations regarding the credit risk of the businesses they finance. Our analysis focuses on changes in credit access conditions for businesses brought about by new information about their insolvency risk, using individual data on the probability of default reported by banks that adopt internal models for credit risk estimation.
We show that the availability of new information on firms' probability of default leads banks to revise their expectations more significantly than would be suggested by the theory of rational expectations. This revision is associated with changes in the amounts and interest rates of new loans.
