This paper investigates the presence of spatial dependence in the non–performing loans (NPL) ratio of small Italian cooperative banks, which represent a model of local banking. Because these banks operate in a delimited area, the strategies they adopt to recover NPL can produce spatial spillover effects on the ability of neighboring banks to recover credit. Our empirical estimations provide strong evidence for both spatial and spatial–temporal variables driving impaired loans in local banks.
Specifically, the results indicate different effects of the spatial terms, showing a direct positive effect of the contemporaneous spatial lag variable and a negative effect of the space–time autoregressive coefficient. Whereas the former effects can be ascribed to changes in the macroeconomic cycle, the latter confirms the insight that the recovery capacities of local banks can be harmed by neighboring banks’ credit recovery policies. In addition, the estimates regarding bank market power indicate clear evidence in support of the competition–stability hypothesis.
Carmelo Algeri is a Research Fellow in the Department of Management at the University of Bologna, where he is working on the project ‘Local banks and the future: opportunities and threats related to the green and digital transition and the implementation of the RRP’. After successfully defending his dissertation, the University of Messina awarded him a PhD in Economics, Management, and Statistics. His primary research interests are in spatial econometrics and banking and finance. He has published in the Journal of Applied Stochastic Models in Business and Industry and Papers in Regional Science, Economic Notes, and the International Journal of Banking, Accounting, and Finance.
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