Abstract
Following the literature on the comparative advantage of small versus large banks at lending to small businesses and in light of the worldwide decline in the number of intermediaries that specialise in this type of lending associated with deregulation in the banking industry, we examine the role that specific categories of banks have played in the context of Italy’s regional economic growth. Over the estimation period, 1970–1993, which ends in the year of full implementation of the banking reform that introduced statutory de-specialisation and branching liberalisation, Italy featured not only a substantial presence of small- and medium-sized enterprises (SMEs) in the real sector, as is still the case, but also a large and heterogeneous set of credit institutions with different ownership, size and lending styles. Exploiting these peculiarities we study the role of specific intermediaries and gather indirect evidence concerning the likely effects, ceteris paribus, of the current consolidation processes. The main findings, stemming from panel regressions with fixed effects, are as follows. The overall size of the financial sector has a weak impact on growth, but some intermediaries are better than others: cooperative banks and special credit institutions play a positive role, banks of national interest (basically large private banks) and public law banks (government-owned banks) either do not affect growth or have a negative influence depending on how growth is measured. Cooperative banks were mostly small banks and special credit institutions were all but large conglomerates with standardized credit policies, hence our results lend support to the current worldwide concerns of a reduction in the availability of credit to SMEs resulting from consolidation and regulatory reforms in the banking industry.
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Notes
In this context, a potential entrepreneur who wants to rise investment capital for a project with substantial expected returns and who has superior knowledge about his business than anyone else, might not be able to raise the desired amount of capital because of three problems: (1) adverse selection; (2) moral hazard; (3) ex-post verifiability. In such a context, it can be shown (see Leland and Pyle (1977), Stiglitz (1989), Diamond (1984), van Damme (1994)) that resorting to an intermediary that screens potential borrowers, evaluates their projects and ensures that money is well used, can be preferable to a situation of direct finance. Therefore, putting together the traditional functions of intermediaries, arising from maturity mismatch, with the newer ones, associated with imperfect information, financial institutions can be seen to play at least three critical roles: transformation of savings into investment; screening and monitoring; provision of payment services.
It must be stressed that in many of these models the higher rates of return from better resource allocation due to financial development may discourage saving rates and, in some circumstances, decelerate growth.
These weaknesses concern the following: (1) high correlation between measures of financial development and measures of good government institutions; (2) measures of financial development often do not reflect effective access to finance by firms; (3) channels through which finance works are generally neglected; (4) role of international financial integration are hardly considered; (5) single-minded focus on aggregate economic growth (instead of, e.g., investment and total factor productivity); (6) little attention to what promotes financial development.
According to the authors, the decision to lend and the term of the contract are primarily based on the strength of balance sheet and income statement in the case of financial statement lending, on the quality of the available collateral under asset-based lending, on the financial condition and history of the principal owner, in addition to financial statement ratios, when small business credit scoring is used.
The remaining layers concern the sequential contracting within the bank between loan officer, senior management, stockholders, creditors and regulators.
This can be implemented as long as “some (often unintended) feature of the setup we are studying produces exogenous variation in an otherwise endogenous explanatory variable” (Wooldridge 2002, p. 88).
These four indicators are termed, respectively, LLY, BANK, PRIVATE and PRIVY, and are measured as follows (see King and Levine 1993a, pp. 720–21): LLY=“M3” (or “M2”)/GDP; BANK=deposit money bank domestic assets/(deposit money bank domestic assets+central bank domestic assets); PRIVATE=claims on the nonfinancial private sector/(total domestic credit–credit to money banks); PRIVY=claims on the nonfinancial private sector/GDP.
This is particularly true for monetary aggregates such as M1 and M2, which reflect the ability of the financial system to provide liquidity services, but do not necessarily reflect its ability to allocate credit—a function which is more directly connected to investment and growth. These aspects of financial intermediation are not necessarily related. In particular, high level of monetization can be the result of lack of financial sophistication and low monetization may be associated with very advanced financial structures (see the examples discussed in De Gregorio and Guidotti (1995, p. 438).
Europe-19 indicates EU-15 (i.e. Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom) plus Iceland, Norway and Switzerland (incl. Liechtenstein).
Data refers to 2000. It is worth stressing that the BACH dataset overestimates the equity ratio of small enterprises. Indeed, in a parallel calculation on data from the Survey of Manufacturing Firm by Mediocredito Centrale, we found that in 1997 the equity ratio of Italian small and medium-sized firms was significantly smaller than the one from BACH, averaging 22.9 (small) and 23.9 (medium-sized) with very tiny (around 0.15) standard deviations.
Regarding medium-sized firms, our calculations for three consecutive years (1995–1997) from the SMF-Mediocredito Centrale show an average share of bank debt to total debt of 56.4%.
The survey excludes the micro size and concentrates on a stratified sample of Italian firms with at least 11 and up to 500 employees plus all manufacturing firms with more than 500 employees.
It goes without saying that cooperative banks are not the sole intermediary specialising in small business lending and that in some countries, in many respects, they are closer to larger diversified banks than to small local banks.
Decree 1st September 1993, n. 385.
These limits have been gradually removed. In 1987 short-term banks have been allowed to provide credit up to a maximum of 5 years. Since 1993 the distinction between these two types of intermediaries has been abolished and they can carry out the whole range of banking operations.
For a picture of the Italian financial system see the special report on Italy in Commission of the European Communities, n. 1, 1993.
CBs are limited liabilities companies with special partnership features (e.g. one shareholder one vote), whereas RCBs can be either limited or unlimited companies and, usually, set ceilings on the amount of credit that can be extended to non-members.
This behaviour, however, cannot be ascribed to irrationality of Southern economic agents. The post office has a pervasive network, hence transport and other transaction costs may partially explain this preference.
Since 1990 the opening of new branches has been essentially liberalised. Before then it was impossible to open new branches, and close old ones, without formal permission from the Bank of Italy, which would call banks to apply for new branches occasionally, in connection with the so-called “Piani Sportelli”, and would decide whether or not to accept their applications discretionally. The latest “call for branches” took place in 1978, 1983 and in 1986.
The Herfindal index would be more suitable, but unfortunately it is not available with the same frequency. The correlation ratio between the two measures, however, is usually very high.
In 1994, for instance, the quota of nonperforming loans in the South was 17.0, whilst it was just 6.1 in the North.
See, for instance, Jappelli (1993) and Faini et al. (1992). In this latter work, based on microdata, it is shown that despite the cost of credit from outside banks is systematically and significantly lower, Southern firms accept to borrow at different rates from outside and inside banks. This can be interpreted as evidence of the fact that information is imperfect and asymmetric. In other words, in the South captive relationships between firms and banks are implemented thanks to the market power of the latter, and this leads to a widespread phenomena of rationing and potentially distorted allocation processes.
For the sake of clarity we have not reported all the usual diagnostics (standard errors and R 2). Suffice to note here that standard errors are such that the slope coefficient is always significantly different from zero at the 1% level and that the adjusted R 2 ranges between 0.91 and 0.99 and its average is 0.97.
It is worth noting that this problem has been solved differently by Samolyk (1994), who subtracted the national growth rate from the regional one in order to obtain the dependent variable. This method has pros and cons with respect to ours. On the one hand, it reduces the number of right-hand side variables; on the other hand, unlike our method, it fails to consider additional time effects different from the business cycle.
The bulk of the excluded categories is represented by the “savings banks”.
See Ferri and Mattesini (1995). These authors use as indicator of financial development the ratio of provincial income to bank branches and control for the effect of cooperative banks by including in the regression the fraction of total branches held by this category. Neither spillover effects nor other intermediaries are considered.
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