How banks allocate loans in Italy: a long run perspective

Finance is a salient driver in promoting growth also by supporting changes in the specialization of production. Thus, it is paramount that finance goes to sunrise productive branches embodying more technology and so higher growth potential. Is it so in reality? We address this question by investigating the long-run allocation of bank loans in the bank-dependent Italian economy. We reach three main findings. First, banks lent more to the branches where value added was growing more rapidly, while loans went less to riskier sectors with higher bad loans ratios. Second, the allocation of loans was, however, insensitive to the growth of productivity and did not support the higher technology branches. Third, the allocation of loans to the more technology-oriented branches improved since the early 1990s, when credit markets were liberalized. Overall, in our assessment banks were rather following than leading productive transformations, but managed to avoid large scale misallocation of credit. Hence, we give banks just a pass grade.