Italian LSIs' higher loan defaults linked to riskier client profiles
A Banca d'Italia study reveals that higher default rates on corporate loans by Italian less significant institutions (LSIs) are largely explained by their tendency to serve smaller and riskier firms. The analysis finds that LSIs' pricing is broadly aligned with significant institutions (SIs) for comparable risk profiles.
Riskier clients explain default gap
Since 2017, Italian less significant institutions (LSIs) have consistently shown higher loan default rates compared to significant institutions (SIs), particularly for non-financial corporations.
This study, utilizing loan-level data from AnaCredit (2021-2024) merged with firm-level financial information from Cerved and supervisory reporting, investigates this discrepancy.
The analysis reveals that LSIs are more likely to lend to ex-ante riskier, smaller firms with lower liquidity.
This client profile largely accounts for the observed difference in aggregate loan default rates between LSIs and SIs.
After controlling for these firm and loan characteristics, the remaining default differential is substantially reduced, suggesting that unobserved factors play a lesser role than initially presumed.
The findings also indicate that LSIs' pricing policies are broadly similar to those of SIs when accounting for observable risk factors, implying a consistent approach to credit pricing.
Facilitating credit access
The study further explores LSIs' credit allocation strategies by examining loan applications from the Credit Register's Initial Information Service.
This analysis suggests that LSIs exhibit a greater willingness to approve loan applications compared to SIs, even when controlling for firm characteristics.
This indicates that LSIs may play a crucial role in facilitating access to credit for firms that might otherwise face more limited financing opportunities from larger banks.
The paper positions itself within the existing literature on local and relationship banking, emphasizing the unique institutional framework of the Single Supervisory Mechanism (SSM) which distinguishes between SIs and LSIs.
It highlights the comparative advantage of smaller banks in processing soft information and maintaining close ties with local communities, thereby contributing to a more nuanced understanding of credit market dynamics.
A vital, yet overlooked, market segment
This research provides crucial empirical evidence on the distinct role of less significant institutions in the Italian corporate lending market.
It underscores their importance in supporting smaller, potentially riskier firms, which might otherwise struggle to secure financing.
While their higher default rates are a concern, the study ultimately frames LSIs as a vital component of financial inclusion, rather than simply a source of elevated risk.