Bank Lending Rates and Financial Structure in Italy: A Case Study

Bank Lending Rates and Financial Structure in Italy:
A Case Study by Carlo Cottarelli, Giovanni Ferri, and Andrea Generale

This paper contributes to the empirical literature on the behavior
of lending rates by focusing on the Italian bank loan market. The Italian
case is particularly relevant for two reasons. First, bank lending still
represents the bulk of total financial flows to the private sector.
Second, the stickiness of Italian lending rates has long been recognized
as a serious impediment to the transmission of monetary policy.

More specifically, the paper provides an econometric measure of
the degree of lending rate stickiness in Italy and compares it with the
measures obtained for a sample of 30 industrial and developing countries.
Then, the paper analyzes the structural factors affecting the stickiness of
lending rates, pointing at the effects of constraints on competition within
the financial market. The analysis is based not only on cross-country
comparisons, but also on microeconomic data on lending rates charged by
63 Italian banks acting in different financial environments within Italy.
The paper shows that differences in the degree of lending rate stickiness
among Italian banks are mainly due to the different degree of concentration
of the local loan markets in which banks operate: banks operating in less
concentrated, more competitive markets adjust their lending rates faster.

Next, the paper discusses the implications for lending rates of the
liberalization of Italian financial markets that characterized the early
1990s. It argues that this liberalization should lead to a reduction of
lending rate stickiness and to a faster transmission of monetary policy.
Indeed, there is already evidence that the degree of stickiness, while still
high, has substantially declined.

Finally, the paper argues that the stickiness of Italian lending rates
is also due to a form of discount rate addiction typical of countries in
which the discount rate is used as monetary policy signal. De-emphasizing
the discount rate is likely to increase the response of banks to money
market changes but would deprive the central bank of a powerful instrument
to spur banks' reactions, whenever needed.