Organized crime and banks: assessing the effects of anti-mafia police actions on lending

This study examines how dismantling Mafia-connected firms affects banks’ lending practices. Using a unique dataset of 667 such firms and loan-level data from the European Central Bank, our analysis shows that anti-Mafia operations precede an increase in bank loans to businesses that operate in areas that are directly affected by these actions. Specifically, overall loan volumes increase by approximately 0.8 percent, which translates to an increase of €1.38 billion in bank loans to these firms. The effect increases to 1.2 percent in areas that have experienced extensive Mafia activities, amounting to €2.76 billion in bank loans, and to 2.1 percent in areas that were once dominated by Mafia-connected firms that were engaged in rent extraction, amounting to €3.62 billion in bank loans. Borrowing costs rise concurrently, driven by heightened perceptions of risk following exposure of Mafia infiltration. Cross-sectional analyses indicate that banks’ responses vary significantly because non-local and foreign banks and banks with no prior exposure to Mafia-affiliated firms face increased challenges related to their lack of local knowledge. Removal of Mafia-connected firms also correlates with improved productivity in affected municipalities, underscoring financial institutions’ dynamic responses to the eradication of organized crime and the potential for economic revitalization in post-Mafia environments. JEL Classification: E52, E58, G11