Abstract

This paper empirically investigates the role of bank structural characteristics on firms’ creation in the Italian local credit markets from 2009 to 2020. By departing from the existing research, our analysis takes the perspective of the so-called “biodiversity argument” in banking (Ayadi et al., 2009, 2010). As this viewpoint echoes insights from the ecological sciences, we measure bank diversity by retrieving two “biodiversity” indexes: the Gini-Simpson index and, for robustness, the Shannon index. Our results suggest that the coexistence of different institutional models in the banking landscape benefits the formation of new firms – especially those taking the legal form of limited liability companies, as innovative start-ups. We also find that, at the outbreak of the COVID-19 crisis, bank diversity might have mitigated the adverse effects of the pandemic turmoil. Our policy recommendation is that authorities design regulations to encourage institutional variety in the banking market.

Introduction

A sizable part of the literature investigating the drivers of entrepreneurship (e.g., Parker, 2018; Verheul et al., 2002) focuses on the financing sources for nascent firms and the role played by banks.1 In this respect, an open research debate concerns the relevance of banks’ structural and organizational characteristics. According to some contributions, small banks (local, single-market, typically stakeholder-value institutions), exploiting the knowledge of the local economy and their organizational structures characterized by few management layers, would have an advantage over large (nonlocal, multimarket, shareholder-value institutions) in collecting and using soft information (e.g., Liberti & Mian, 2009; Stein, 2002)2 – and, thus, in forging lending relationships that are crucial for the financing of firms suffering more intense information asymmetries (Berger et al., 2015, 2017; Berger & Udell, 2002; Cole et al., 2004; Mkhaiber & Werner, 2021; Petersen & Rajan, 1994; Scott, 2004).

Other studies claim that the paradigm by which small banks are advantaged in lending to opaque firms is misleading. For instance, Bartoli et al. (2013) assert that “complementarity among transactions and relationship lending technologies is indeed a prevailing phenomenon, compared to specialization in one primary lending technology, and that complementarity is higher for large banks compared to small local banks.” (p. 5477). Black and Strahan (2002) provide evidence that large banks’ superior ability to diversify credit risks across borrowers allows them to reduce agency lending costs and, thus, finance risky and opaque firms at better conditions than smaller banks. Not least, by exploiting the rapid ICT advances, large banks can finance informationally opaque firms by using transaction technologies such as credit scoring, asset-based lending, factoring, fixed-asset lending and leasing (e.g., Berger et al., 2005, 2014; Berger & Udell, 2006; Carter & McNulty, 2005; De Young et al., 2011; Frame et al., 2001; Petersen & Rajan, 2002).

Results

Column 1 of Table 3 shows the pooled Tobit estimation results of our benchmark model (Equation (3)). The estimated coefficient of ZGINI displays a positive sign and appears statistically significant at the conventional level. In terms of numerical interpretation, we find that one standard deviation increase in ZGINI is associated with an increase in the latent outcome variable – the propensity of new firms entering the market – of around 5% (a rise of 0.1112 percentage points over a baseline of 2.15).14 This finding suggests that the coexistence of different institutional bank types in local credit markets may be paramount in facilitating new firms’ formation, thus supporting the biodiversity argument discussed in Section 1. Far from questioning the role of each bank model, our results align with the view that, beyond the strengths and weaknesses of any of these models, institutional variety in the banking landscape matters in financing the real economy. Therefore, to borrow the words of Ferri (2010), a policy implication of our analysis is that “authorities must be aware that any regulation – e.g., levelling the playing field – should not damage the biodiversity of banking (p. 3)”.