In this paper we use a single-equation time series approach to examine the macroeconomic determinants of banks' loan quality in Italy in the past twenty years, as measured by the ratio of new bad loans to the outstanding amount of loans in the previous period. We analyse the quality of loans to households and firms separately on the grounds that macroeconomic variables may affect these two classes of borrowers differently. According to our estimated models: i) the quality of lending to households and firms can be explained by a small number of macroeconomic variables mainly relating to the general state of the economy, the cost of borrowing and the burden of debt; ii) changes in macroeconomic conditions generally affect loan quality with a lag; and iii) the out-of-sample prediction accuracy of the models is quite satisfactory and proved to be robust to the recent financial crisis.

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Economic theory suggests that asymmetric information between incumbents and entrants can generate barriers to entry into credit markets. Incumbents have superior information about their own customers and the overall economic conditions of the local credit market. This implies that entrants are likely to experience higher loan default rates than the incumbents. We test these theoretical predictions using a unique database of 7,275 observations on 729 individual banks' lending in 95 Italian local markets. We find that informational asymmetries play a significant role in explaining entrants' loan default rates. The default rate is significantly higher for those banks that entered local markets without opening a branch, suggesting that having a branch on site may help to reduce the informational disadvantage. We also uncover a positive correlation between banks' loan default rates in individual local markets and the number of banks lending in that market. We argue that these informational barriers can help to explain why entry into many local credit markets by domestic and foreign banks was slow, even after substantial deregulation.

We study technology diffusion in the retail banking industry. Our contribution to the empirical literature is twofold: Firstly, we explore technology diffusion in the financial sector, whose relevance has often been neglected; secondly we focus on credit scoring adoption, a relevant process innovation still under-explored. Estimating a set of duration models, we analyze the patterns of diffusion of this technology among Italian banks. We find that credit scoring is firstly introduced by large banks with broad branch networks, which can fully exploit scale economies. We present robust evidence that banks with large market shares operating in more concentrated markets are early adopters, providing a direct support of the Schumpeterian hypothesis that market power enhances innovation. Copyright Springer 2006credit scoring, innovation, mortgage loans, retail banks, technology diffusion, G21, O31, C41,

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