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The perverse effect of government credit subsidies on banking risk


  • Riccardo De Bonis

    () (Banca d'Italia, Economics and International Relations Area)

  • Matteo Piazza

    (Banca d'Italia, Economics and International Relations Area)

  • Roberto Tedeschi

    (Banca d'Italia, Economics and International Relations Area)


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.

Suggested Citation

  • Riccardo De Bonis & Matteo Piazza & Roberto Tedeschi, 2012. "The perverse effect of government credit subsidies on banking risk," Mo.Fi.R. Working Papers 68, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  • Handle: RePEc:anc:wmofir:68

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    References listed on IDEAS

    1. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
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    3. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, May.
    4. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, June.
    5. Gale, William G., 1990. "Federal lending and the market for credit," Journal of Public Economics, Elsevier, vol. 42(2), pages 177-193, July.
    6. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    7. Jeitschko, Thomas D. & Jeung, Shin Dong, 2005. "Incentives for risk-taking in banking - A unified approach," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 759-777, March.
    8. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
    9. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    10. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    12. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    13. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
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    Cited by:

    1. Riccardo De Bonis & Fabio Farabullini & Miria Rocchelli & Alessandra Salvio, 2012. "A Quantitative Look at the Italian Banking System: Evidence from a New Dataset since 1861," Quaderni di storia economica (Economic History Working Papers) 26, Bank of Italy, Economic Research and International Relations Area.

    More about this item


    banks; credit risk; government subsidies;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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