53rd Congress of the European Regional Science Association: "Regional Integration: Europe, the Mediterranean and the World Economy", 27-31 August 2013, Palermo, Italy
This paper is a study about the effect of relationship lending on credit availability for Italian firms, with a special focus on the 2008-09 financial crises. According to the conventional wisdom, the central principle of relationship finance is that that personal interaction between bankers and small borrowers creates information efficiency that allow credit to flow more efficiently and commerce to grow more. The recent financial crisis would have revived the role of relationship lending: a natural implication of information asymmetries in credit markets is that, in a period of high risk aversion and borrowers? opaqueness- as it is in a financial crisis-, the comparative advantage of producing soft information should become far more relevant. Against this background, this paper focuses on the supply side of the Italian credit market by testing the prediction that, during the financial crisis, firms relying more on local banks have been less credit rationed than other firms. To this end, first, we develop an index, based on banks' credit concentration across local credit markets, which helps us to identify local financial intermediaries. Second, we develop a sample of 3.281 firms from 2006 to 2009 for which we have full information on credit rationing from the Survey of Industrial and Service Firms from Bank of Italy (INVIND survey), as well as balance sheet data from the Cerved dataset, and relationship lending information from the Credit Register (CR) dataset. Third, we test empirically if firms financed by local banks experienced a lower credit rationing during the 2008-09 crisis than other firms. The main result of the paper is that firms predominantly funded by local banks have been less rationed during the 2008-09 financial crisis. This result holds when we consider also the firm and bank characteristics, the shape of the bank-firm relationship, and the features of the local credit market where the firm is located. Our findings support the view that local banks may address firms' financial needs in a better way than not local banks because of their comparative advantage at collecting local information. This advantage appears to be relevant in a period of high risk aversion as the recent financial crisis.