Banks’ specialization and private information

We document the geographical and sectoral specialization of banks’ lending activities using comprehensive data on the universe of loans to corporate borrowers in Spain. Our analysis highlights how specific sources of specialization are more relevant for evaluating different types of borrowers. Specifically, loans to micro- and small firms exhibit reduced probabilities of default in local markets where banks specialize, whereas loans to medium-sized and large firms experience lower probabilities of default in sectors in which banks specialize. Crucially, we provide the first evidence of a direct link between bank specialization and better quality private information held by banks, by leveraging confidential data on banks’ private risk assessments reported to regulators. We corroborate and benchmark our findings by comparing them to those obtained analyzing relationship lending, a well-established proxy for firm-specific private information.