The perverse effect of government credit subsidies on banking risk

Riccardo De Bonis, Matteo Piazza and Roberto Tedeschi
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Matteo Piazza: Banca d'Italia, Economics and International Relations Area
Roberto Tedeschi: Banca d'Italia, Economics and International Relations Area

No 68, Mo.Fi.R. Working Papers from Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences

Abstract: Government intervention in credit markets has been criticized as potentially conducive to distortions in the behaviour of both banks and firms. We argue that credit subsidies may lead to a decline in the level of screening performed by banks. This effect was at work in Italy in the early 1990s when subsidized lending was still important and several intermediaries experienced a deterioration in their loan portfolios. The novelty of the paper is to show that the share of government subsidized credit on a bank's loan portfolio contributes to explaining the overall credit risk of the intermediary.

Keywords: banks; credit risk; government subsidies (search for similar items in EconPapers)
JEL-codes: E44 G21 (search for similar items in EconPapers)
Pages: 30
Date: 2012-05
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:anc:wmofir:68

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