This study uses banks' balance sheet and income statement data for an unbalanced panel of 403 Italian CBs over the period 2006 -2013, obtained from the Bilbank-Italian Banking Association database. The analysis also incorporates data on environmental variables that could affect bank efficiency. Information on the number of firms that went bankrupt over the total number of registered ones (DEFAULT_RATE) at the province level 1 are provided by Istituto Tagliacarne. Data on population, capital, patents, labour force and urban typology are obtained by the Italian Bureau of Statistics -ISTAT. The number of branches for each bank at the municipal level as well as data on deposits and loans at a provincial detail are taken from the Bank of Italy reports.

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Using bank-level data on 491 Italian banks over the period 2006-2012, we investigate the impact of functional and geographic diversification on bank performance during 2008’s financial and 2010’s sovereign debt crises. Both scenarios negatively affect bank profitability while discordant effects emerge in case of the Z-Score analysis. Italian banks’ risk stays unaffected by the 2008’s episode, while the sovereign debt crisis increases such risk. Results differ for the sample of mutual and not-mutual banks being the different banking groups characterised by different size and business models

Using a proprietary database of lending decisions (N = 9,898) for small and medium‐sized enterprises (SMEs), the paper investigates how banks cope with the adverse selection dilemma. Based on an intertemporal framework, we qualify incorrect and correct lending decisions of banks and investigate the power of lending technologies to predict errors and correct choices. Findings suggest that adverse selection can be better controlled by a durable bank–firm relationship, as well as by an atomistic loan decision process, at the local level. By contrast, a loan decision‐making process based exclusively on hard financial information about SMEs may lead to adverse selection errors.