Credit market structure and bank screening: An indirect test on Italian data

Based on a large panel of Italian SMEs, this paper focuses on the relationship between firms' default probability and the amount of bank debt they obtain, evaluating whether and to what extent this link is affected by the degree of competition characterizing the local credit market where firms operate. Using a dynamic panel estimator, we find that higher bank competition implies a stronger influence of firms' riskiness on bank financing to SMEs. We provide two plausible interpretations of this finding: one resorting to more accurate screening by more competitive banks; the other alleging lower market power of incumbent banks, which may restrict their willingness to finance riskier firms.