Ugo Albertazzi

Financial Sector Pro-Cyclicality: Lessons from the Crisis

We analyze the main forces affecting financial system pro-cyclicality (the fact that developments in the financial sector can amplify business cycle fluctuations). We first review some major structural developments in financial markets that may influence pro-cyclicality and that have been overlooked in earlier analyses. We then examine three issues that are center stage in the current debate: capital regulation, accounting standards and managersi?½ incentives. After reviewing the institutional set-up and the key mechanisms at work, we critically examine a series of proposals designed to mitigate pro-cyclicality.

The impact of the sovereign debt crisis on the activity of Italian banks

We examine the implications of the sovereign debt tensions on the Italian credit market by estimating the effect of the 10-year BTP-Bund spread on a wide array of bank interest rates, categories of loans and income statement variables. We exploit the heterogeneity between large and small intermediaries to assess to what extent the transmission of sovereign risk differed in relation with different banks’ balance-sheet characteristics and business strategies. Regarding the cost of funding, we find that changes in the BTP-Bund spread have a sizeable effect on the interest rates on term deposits and newly issued bonds but virtually no effect on overnight deposits. Furthermore, the sovereign spread significantly affects the cost of credit for firms and households and exerts a negative effect on loan growth. All these results are magnified when considering alone the five largest banks, which are typically less capitalized, have a larger funding gap and incidence of bad loans and rely more on non-traditional banking activities. Sovereign tensions also affect the main items of banks’ income statement.

The procyclicality of foreign bank lending: evidence from the global financial crisis

We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs. domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. Based on a number of exercises testing alternative explanations for such procyclicality, we find that it mainly reflects the (functional) distance between a foreign bank’s headquarters and the Italian credit market.

Sharing Information on Lending Decisions: An Empirical Assessment

We present the first empirical study of information spillover and signalling on loan search and its outcomes in a setting where a bank observes whether a loan applicant has already been rejected by other lenders. We do so by taking advantage of the fact that Italyi?½s Central Credit Register discloses such information. The results show that disclosing information on past rejections negatively affects the probability of continuing a loan search. At the same time, the information on former rejections is associated with a higher probability of being funded for borrowers who are not discouraged and continue the search, provided they are not opaque. With the aid of a theoretical model, we show that banks interpret the information on previous rejections as a signal of unobservable quality for the average borrower but not for more opaque borrowers, whose past rejections negatively affect the outcome of later applications. We also show that banks differ in the extent to which they rely on this information, in a way that at least partly reflects the different informational content that this signal carries for them.

An inquiry into the determinants of the profitability of Italian banks

This paper examines the history and the determinants of bank profits in Italy from 2005-15. We first identify a number of key stylized facts by comparing the income statement of Italian lenders with that of banks in other European countries. The comparison suggests that the profitability gap of Italian banks is partly related to a business model characterized by a more conservative positioning along the risk-return frontier. We then use the Bank of Italy’s Quarterly Model of the Italian Economy to provide quantitative estimates of the impact of four factors (the economic activity growth rate, taxation of bank income, dynamics of operating costs and dividend policy) on profits, regulatory capital and bad debt. Our counterfactual simulations suggest that the weak growth of the Italian economy is responsible for a sizeable share of the profitability gap of Italian banks, being by far the main driver of the increase in bad debts in the last decade; nonetheless, the impact of the other factors on their profitability (and capitalization) is far from negligible.

The Bank Lending Channel of Conventional and Unconventional Monetary Policy

Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank’s capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures.