Under Italy's Sun or in an Economic Shadow - The Effects of Regional Banking Systems on Economic Development in the Italian Mezzogiorno Regions

Abstract

Italy exhibits a very divided economy with an economic powerhouse in its northern regions and an economically less developed South. At the same time, the North of Italy is also characterized by a historically decentralized financial system with small and local banks that fit to the SMEs of the region's industrial sector. By means of correlated random effects-regressions for the 21 Italian NUTS2-regions, we show that this decentralized banking system helps northern Italy in buffering economic shocks from financial crises. The relative number of banks, the size of banks, and their focus on traditional interest rate business increase economic wealth and household incomes while reducing unemployment. We further find that the economically strong North did not enter a race to the bottom to its southern neighbors during and after the sovereign debt crisis and benefits from its more diverse banking system. Meanwhile, the southern regions could also not catch up.