Working Paper: NBER ID: w12501
Authors: Luigi Guiso; Paola Sapienza; Luigi Zingales
Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations.
Keywords: banking regulation; deregulation; credit access; economic performance
JEL Codes: E0; G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Restrictions on bank competition due to the 1936 banking law (G28) | Higher cost of credit (G21) |
| Restrictions on bank competition due to the 1936 banking law (G28) | Lower access to credit (G21) |
| Deregulation (L51) | Reduced interest rate spreads (E43) |
| Deregulation (L51) | Increased access to credit (G21) |
| Deregulation (L51) | Increased proportion of bad loans (G21) |
| Higher competition during regulation period (L59) | Greater access to credit (G21) |
| Greater access to credit (G21) | Increased firm formation and growth (L26) |
| Deregulation (L51) | Increase in the number of households gaining access to credit (G51) |
| Deregulation (L51) | Reduction in borrowing costs (G32) |
| Restrictions on bank competition (G28) | Hinder credit supply and economic growth (E51) |
| Deregulation (L51) | Enhance credit availability and foster economic development (O16) |