Bad Loans and Entry into Local Credit Markets

Marcello Bofondi and Giorgio Gobbi

No 509, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Is deregulation sufficient to grant free entry in local credit markets? Economic theory suggests at least two ways in which asymmetric information between incumbents and entrants can work as an endogenous barrier to entry. First, entrants� pool of applicants contains a larger share of potential customers who are not creditworthy because it includes all those would-be borrowers who were previously rejected by mature banks in the market. Second, since a substantial amount of the information used by banks to screen loan applicants and monitor borrowers is generated through repeated interaction with their customers and the local business community, incumbents� creditworthiness tests are likely to be more accurate. Other things being equal, entrants are therefore expected to experience higher loan default rates than incumbents. Using a unique database of 7,275 observations on 729 individual banks� lending in 95 Italian local markets, we find that both adverse selection and informational disadvantage play a significant role in explaining entrants� loan default rates. We argue that these endogenous barriers can help to explain why in many local credit markets by domestic and foreign banks was slow, even after substantial deregulation.

Keywords: Credit Markets; Barriers to Entry; Winner's Curse; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 G21 L13 (search for similar items in EconPapers)
Date: 2004-07
New Economics Papers: this item is included in nep-com, nep-ent and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 04-0509/tema_509.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_509_04

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().