Bank lending to small firms: Metamorphosis of a financing model

We use a novel approach to identifying idiosyncratic credit supply shocks across firm size, relaxing the standard assumption of homogeneous credit supply across borrowers from the same bank. We find that after the 2008-2013 great financial crisis Italian banks have notably tightened their corporate lending policies except for large companies. A significant difference in credit supply has arisen between micro-firms and others; the divide is wider for larger banks and for those with weaker balance sheets. We provide evidence that the shocks that hit the banking system during the crisis translated into a persistent change in credit standards, with an important shift in the supply of new loans from smaller to larger firms. This may reflect the greater difficulties on the part of these financial intermediaries in disbursing loans to firms with a significant degree of informational opacity and with high fixed costs compared with the low unit volume of operations.