The Impact of Foreign Banks' Activity on Retail Lending

Using data at the local market level, we investigate how the increasing presence of foreign banks in Italy affects the interest rate setting on loans and collateral pledged across Italian provinces, considering different borrowers (households and firms) and loan contracts (short-term and mortgage loans); these differences have received little attention in empirical analysis. We show that competition from foreign players is stronger for those market segments where standardized loan contracts are widespread and where asymmetric information is less important: a reduction in both the interest rates and the collateral pledged on mortgages to households is observed, whereas foreign bank activity has no impact on interest rates forbusiness lending and brings about only a slight reduction in collateral posted by firms.asymmetric information is less important: a reduction in both the interest rates and the collateral pledged on mortgages to households is observed, whereas foreign bank activity has no impact on interest rates for business lending and brings about only a slight reduction in collateral posted by firms.