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Finance and Development : the Case of Southern Italy

Author

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  • Faini, R.
  • Galli, G.
  • Giannini, C.

Abstract

We look at the role of the financial sector in the context of the relatively backward regions of Southern Italy (the so-called Mezzogiorno). Commercial banks in the South typically have higher operating costs and charge higher interest rates than Northern banks. Econometric analysis on a large set of individual loan contracts suggests that borrowers in the South are considerably riskier than those elsewhere in Italy. It also indicates, however, that risk accounts for only half of the 200 basis points average North-South interest differential. The rest is largely accounted for by differences in operating costs. We argue that these findings reflect a situation in which Southern banks have a monopoly of information concerning local firms, with outside banks forced to resort to rationing practices to avoid attracting the worse borrowers. To support this interpretation, we analyse loan contracts of Southern firms who borrow at the same time from local and external banks. We also show that geographical proximity tends to raise interest rates in the South. We then turn to the issue of allocative efficiency and argue that Southern banks tend to perform their screening function less efficiently than banks in the rest of Italy. We finally show that in the South, risk exerts a significantly larger effect on borrowing and that Southern firms whose earnings are more variable are more likely to be liquidity constrained in their investment decision.
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Suggested Citation

  • Faini, R. & Galli, G. & Giannini, C., 1992. "Finance and Development : the Case of Southern Italy," Papers 170, Banca Italia - Servizio di Studi.
  • Handle: RePEc:fth:banita:170
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    Cited by:

    1. Marco Crocco & Anderson Cavalcante & Cláudio Barra, 2003. "Money and Space: the behaviour of liquidity preference of banks and public in a peripheral country," Textos para Discussão Cedeplar-UFMG td196, Cedeplar, Universidade Federal de Minas Gerais.
    2. Aiello, Francesco & Scoppa, Vincenzo, 2008. "Convergence and Regional Productivity Divide in Italy: Evidence from Panel Data," MPRA Paper 17343, University Library of Munich, Germany.
    3. Fabio Schiantarelli & Alessandro Sembenelli, 1995. "Form of Ownership and Financial Constraints: Panel Data Evidence from Leverage and Investment Equations," Boston College Working Papers in Economics 286., Boston College Department of Economics.
    4. Fabio Schiantarelli & Alessandro Sembenelli, 2000. "Form of Ownership and Financial Constraints:Panel Data Evidence From Flow of Funds and Investment Equations," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(2), pages 175-192, June.
    5. Alexander Cobham, "undated". "The Financing and Technology Decisions of SMEs: II. Technology and Policy," QEH Working Papers qehwps25, Queen Elizabeth House, University of Oxford.
    6. Hans-Werner Sinn & Frank Westermann, 2000. "Two Mezzogiornos," CESifo Working Paper Series 378, CESifo Group Munich.
    7. Donato Masciandaro, 1999. "Money Laundering: the Economics of Regulation," European Journal of Law and Economics, Springer, vol. 7(3), pages 225-240, May.
    8. Wendy Carlin & Peter Richthofen, 1995. "Finance, economic development and the transition: the East German case," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(2), pages 169-195, June.
    9. Jaramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1993. "The effect of financial liberalization on allocation of credit : panel data evidence for Ecuador," Policy Research Working Paper Series 1092, The World Bank.
    10. repec:rdg:wpaper:em-dp2006-31 is not listed on IDEAS
    11. Bartzokas, Anthony, 2001. "Financial Markets and Technological Change: Patterns of Technological and Financial Decisions by Manufacturing Firms in Southern Europe," UNU-INTECH Discussion Paper Series 4, United Nations University - INTECH.
    12. Mara Nogueira & Marco Crocco & Ana Tereza Lanna Figueiredo, 2008. "Estratégias Bancárias Diferenciadas No Território: O Caso De Minas Gerais," Anais do XIII Seminário sobre a Economia Mineira [Proceedings of the 13th Seminar on the Economy of Minas Gerais],in: Anais do XIII Seminário sobre a Economia Mineira [Proceedings of the 13th Seminar on the Economy of Minas Gerais] Cedeplar, Universidade Federal de Minas Gerais.
    13. Stefano Usai & Marco Vannini, 2005. "Banking structure and regional economic growth: lessons from Italy," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 39(4), pages 691-714, December.
    14. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
    15. Juan Fernandez de Guevara & Joaquin Maudos, 2009. "Regional Financial Development and Bank Competition: Effects on Firms' Growth," Regional Studies, Taylor & Francis Journals, vol. 43(2), pages 211-228.
    16. Salvatore D'Acunto & Sergio Destefanis & Marco Musella, 2004. "Exports, Supply Constraints and Growth: An Investigation using Regional Data," International Review of Applied Economics, Taylor & Francis Journals, vol. 18(2), pages 167-189.
    17. Marco Crocco & Anderson Cavalcante & Cláudio Barra & Vanessa da Costa Val, 2003. "Desenvolvimento econômico, preferência pela liquidez e acesso bancário: um estudo de caso [Economic development, liquidity preference and access to bank services: a case study]," Textos para Discussão Cedeplar-UFMG td192, Cedeplar, Universidade Federal de Minas Gerais.
    18. V. Cerasi & B. CHIZZOLINI & M. IVALDI, 1998. "Branching and Competitiveness across Regions in the Italian Banking Industry," Departmental Working Papers 1998-03, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    19. Cellini, Roberto & Cuccia, Tiziana, 2018. "Do behaviours in cultural markets affect economic resilience? An analysis of the Italian regions," MPRA Paper 83904, University Library of Munich, Germany.
    20. Patrick Honohan, 1994. "Integration of Financial Markets in Europe: Implications for the Irish Banking System," Papers WP050, Economic and Social Research Institute (ESRI).
    21. Michele Bernasconi & Anna Marenzi & Laura Pagani, 2005. "Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(6), pages 741-773, November.
    22. Sergio Destefanis & Vania Sena, 2009. "Public capital, productivity and trade balances: some evidence for the Italian regions," Empirical Economics, Springer, vol. 37(3), pages 533-554, December.

    More about this item

    Keywords

    financial market ; interest rate ; economic models;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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