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Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy

Author

Listed:
  • Luca Casolaro

    (Bank of Italy, Economic Research Department)

  • Leonardo Gambacorta

    (Bank of Italy, Economic Research Department)

  • Luigi Guiso

    (Universit� di Sassari, Ente Einaudi e Cepr)

Abstract
Regulation and contract enforcement may be important determinants of the development of the household loan market, as much as they are of the supply of corporate loans on which the literature has focused. This paper draws on the Italian experience to provide evidence that formal and informal institutions and banking regulation are crucial determinants of availability and cost of the household credit. Historically the Italian household credit market has been very small by international standards and its degree of development differs considerably across local markets. It has grown very fast over the last decade. This paper argues that the traditional small size reflects the joint operation of more limited legal and informal enforcement and tight financial regulation. Differences within Italy in the efficiency of the courts, in social trust and in exposure to regulation explain the geographical differences, while massive deregulation of market entry during the 1990s spurred supply and led to fast lending growth. This evidence, together with marked differences in the quality of legal enforcement, endowment of social capital and tightness of financial regulation across countries, implies that the forces found in Italy are likely to be a major explanation for the international differences in the size of the household loan market.

Suggested Citation

  • Luca Casolaro & Leonardo Gambacorta & Luigi Guiso, 2005. "Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy," Temi di discussione (Economic working papers) 560, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_560_05
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    References listed on IDEAS

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    Cited by:

    1. Tullio Jappelli & Immacolata Marino & Mario Padula, 2014. "Households' Saving and Debt in Italy," Politica economica, Società editrice il Mulino, issue 2-3, pages 175-202.
    2. Matteo Bugamelli & Alfonso Rosolia, 2006. "Productivity and foreign competition," Temi di discussione (Economic working papers) 578, Bank of Italy, Economic Research and International Relations Area.
    3. Columba, Francesco & Leonardo, Gambacorta & Paolo Emilio, Mistrulli, 2008. "Firms as monitor of other firms: mutual guarantee institutions and SME finance," MPRA Paper 14032, University Library of Munich, Germany.
    4. Roberto Felici & Elisabetta Manzoli & Raffaella Pico, 2012. "Crisis and Italian households: a microeconomic analysis of mortgage contracts," Questioni di Economia e Finanza (Occasional Papers) 125, Bank of Italy, Economic Research and International Relations Area.
    5. Fernando Alvarez & Francesco Lippi, 2009. "Financial Innovation and the Transactions Demand for Cash," Econometrica, Econometric Society, vol. 77(2), pages 363-402, March.
    6. Michele Benvenuti & Luca Casolaro & Emanuele Ciani, 2022. "Informal loans, liquidity constraints and local credit supply: evidence from Italy," Review of Economics of the Household, Springer, vol. 20(4), pages 1429-1461, December.
    7. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2013. "Credit within the Firm," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(1), pages 211-247.
    8. Alena Bicakova, 2007. "Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 29-66, March.
    9. Andrea Brandolini & Luigi Cannari & Giovanni D’Alessio & Ivan Faiella, 2006. "Household Wealth Distribution in Italy in the 1990s," Chapters, in: Edward N. Wolff (ed.), International Perspectives on Household Wealth, chapter 7, Edward Elgar Publishing.
    10. Grant, Charles & Padula, Mario, 2013. "Using bounds to investigate household debt repayment behaviour," Research in Economics, Elsevier, vol. 67(4), pages 336-354.
    11. Serena Trucchi, 2011. "How credit markets affect homeownership: an explanation based on differences between Italian regions," CeRP Working Papers 122, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    12. Mario Padula & Charles Grant, 2007. "Bounds on repayment behavior: evidence for the consumer credit market," Working Papers 2007_26, Department of Economics, University of Venice "Ca' Foscari".
    13. Columba, Francesco & Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2010. "Mutual guarantee institutions and small business finance," Journal of Financial Stability, Elsevier, vol. 6(1), pages 45-54, April.
    14. Giorgio Brunello & Claudio Lupi & Patrizia Ordine, 2005. "Labor Taxes in Local Labor Markets: Evidence from Italian Regions," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(1), pages 29-54, September.
    15. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers.
    16. Ugo Albertazzi & Ginette Eramo & Leonardo Gambacorta & Carmelo Salleo, 2011. "Securitization is not that evil after all," BIS Working Papers 341, Bank for International Settlements.
    17. Seghezza, Elena & Morelli, Pierluigi, 2020. "Why the money multiplier has remained persistently so low in the post-crisis United States?," Economic Modelling, Elsevier, vol. 92(C), pages 309-317.
    18. Michele Benvenuti & Luca Casolaro & Emanuele Ciani, 2017. "Informal loans, liquidity constraints and local credit supply: evidence from Italy," Temi di discussione (Economic working papers) 1099, Bank of Italy, Economic Research and International Relations Area.
    19. Adrian Pagan, 2007. "Weak instruments (in Russian)," Quantile, Quantile, issue 2, pages 71-81, March.
    20. E. Pastrapa & C. Apostolopoulos, 2015. "Estimating Determinants of Borrowing: Evidence from Greece," Journal of Family and Economic Issues, Springer, vol. 36(2), pages 210-223, June.
    21. Elsa Fornero & Chiara Monticone & Serena Trucchi, 2011. "The effect of financial literacy on mortgage choices," CeRP Working Papers 121, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    22. Massimo Coletta & Riccardo De Bonis & Stefano Piermattei, 2019. "Household Debt in OECD Countries: The Role of Supply-Side and Demand-Side Factors," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 143(3), pages 1185-1217, June.
    23. Charles Grant & Mario Padula, 2006. "Informal Credit Markets, Judicial Costs and Consumer Credit: Evidence from Firm Level Data," CSEF Working Papers 155, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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    More about this item

    Keywords

    consumer loans; financial liberalization; financial contracts enforcement;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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