Community Banks and Lending Technologies: Evidence from the Italian Retail Market

Using data from the Survey on Italian Household Income and Wealth (SHIW) gathered by the Bank of Italy, I test the effect of community banks on the probability of households becoming insolvent during the crisis. I find that a higher presence of community banks in local markets increases bankruptcies. This outcome is mainly driven by households living in small towns, where the competitive pressure from medium–large banks is lower. However, a higher use of transactional lending could mitigate the lower efficiency of community banks in screening and monitoring processes, while relationship lending does not seem to help community banks in loan underwriting procedures.