Lending Organization and Credit Supply During the Crisis

A recent strand of the literature shows that the adoption of different lending technologies is associated with heterogeneous credit policies and performance. Using a unique Bank of Italy's survey, specifically designed to capture some organizational features and the lending techniques adopted by Italian banks, this paper analyses the link between organization of the lending process and the dynamics of credit granted to different kinds of firms after the financial crisis, in order to investigate how this heterogeneity affected the credit slowdown in 2009-10 following the Lehman Brothers' collapse. Since low economic growth and tight liquidity may lower both loan demand and supply, disentangling the impact of credit demand from changes in lending policies is crucial to correctly identify the effect of more structural factors, such as organizational characteristics. Evidence suggests that short-term variations in credit demand are positively correlated to firms' credit growth rate, in line with the recent literature on business cycles. Bank performance and riskiness indicators show that sounder institutions, especially among large banks, had more room left to expand their risky assets, while capital ratio seems to be not relevant per se. Focusing on the banking organizational channel, the simple adoption of scoring is irrelevant for the dynamics of credit granted both to small and large firms, while its actual usage as a crucial factor to evaluate customers' creditworthiness negatively affects bank credit growth rate. At the same time, decentralization of decision-making power to loan branch manager (LBM) fosters credit expansion, with a significant effect on both small and large firms. During the crisis period, and differently from previous evidence, the tenure of the LBM negatively affects credit dynamics for all kinds of borrowing firms. This apparently counterintuitive result suggests that the economic downturn could have exacerbated the agency costs and the risk that a LBM and the local economic community might collude at the expenses of the goals of the bank as a whole. Consequently, a faster turnover should be used to reduce asymmetric information between CEOs and local managers and to monitor their behaviour, in order to prevent loss of control over decisions in a more uncertain economic context, even though this might discourage soft information gathering. Anticipating this policy may also have promoted particular caution by long-standing local branch managers, in order to favour good reporting on the real wealth of borrowing firms.