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 non-performance in geographical markets where banks specialize, whereas loans to medium and large firms experience lower non-performance in sectors in which banks specialize. Crucially, we provide the first evidence of a direct link between bank specialization and enhanced banks' private information by leveraging confidential data on banks’ private risk assessments reported to regulators. We corroborate our findings by analyzing the relevance of relationship lending, a well-established proxy for firm-specific private information.