Bank Competition, Lending Relationships and Firm Default Risk. An Investigation of Italian SMEs

Building on the literature relating to bank market structure and on the research analyzing the costs and benefits of concentrated credit relationships, this paper aims to empirically assess whether and to what extent local credit market concentration impacts on SMEs’ default riskiness – making this impact conditional on firms’ lending relationships concentration. Controlling for inertia, unobserved heterogeneity and endogeneity, we find that bank market concentration positively and significantly affects SMEs’ default riskiness only when these firms borrow heavily from their main bank and have few credit relationships with other intermediaries. Furthermore, according to our evidence, the influence of credit market concentration on firms’ default probability is greater as the duration of (concentrated) credit relationships lengthens. Overall, our findings suggest that a detrimental effect of bank market structure on firms’ default probability would emerge when lending relationships are highly concentrated, and this impact would be stronger the longer the duration of bank-firm relations.