Do microeconomic and macroeconomic factors influence Italian bank credit risk in different local markets? Evidence from cooperative and non-cooperative banks

This paper investigates the role of microeconomic and macroeconomic factors on Italian bank risk taking, paying particular attention on the differences between cooperative and non-cooperative banks. The non-performing loan ratio is used as dimension of bank risk taking. The data refer to a large sample of financial institutions covering the 2001−2014 period. We then assess whether the impact of microeconomic and macroeconomic factors is shaped by the market structure and investigate the effects of the 2008 financial crisis on banks’ risk taking. Our empirical findings have several of policy implications and can be summarised as follows: i) capitalisation, volume of credits, volume of costs and intermediation costs are the key microeconomic factors explaining credit quality; b) among the main macroeconomic factors, branch density, deposit density and specialisation have a significant effect on the variable of interest; c) the financial crisis determined an increase in banks’ credit rationing. Our results suggest that regulators, in changing banks’ incentives, can be effective in improving the quality of credits, therefore enhancing the stability of the financial system. Capital requirements, often considered as a proxy that captures the effects of Basel agreements, have been found to increase credit quality.