Risk Preference and Investments Quality as Determinants of Efficiency in the Italian Banking System

The Italian banking system is characterized by deep efficiency inequality between banks operating in different regions, with northern banks that largely outperform the southern ones. Moreover the ratio of non-performing loans to total loans is significantly higher in the South than elsewhere. In view of these evidences we asked: is the effi ciency gap of the southern banks (and therefore their lower screening and monitoring ability) the primary source of their higher level of bad loans? Or is the poorer quality of the southern bank loans (due to the adverse macroeconomic environment) that causes lower efficiency? The results offer rather concrete evidence in favour of the hypothesis that is a lower managerial efficiency which causes an increase in non-performing loans, whereas the eects of exogenous environmental shocks are negligible. As a second point to investigate, we recognize that banks have different risk aversion which differently affects the choice of input vector and we expressly take into account the capitalization degree (as a buffer against the risk) in estimating the bank cost stochastic frontier.