Bank’s organizational form and effectiveness of the recovery process

Abstract

Recent empirical findings by Sapienza (2004), Micco and Panizza (2006) and Berger et al. (2008) have pointed to the correlation between bank ownership and lending behavior. We formulate and test hypotheses on the role played by the type of bank ownership (Independent and Dependent) and by the functional distance of the bank in influencing the Loss Given Default Rate (LGDR). This paper refers to data on the Italian Banking System. The empirical results are consistent with our hypotheses on the LGDR and control variables relation. We provide evidence that the LGDR is positively related to the distance between the bank headquarters and the borrower’s location. Besides, the resulting data support the idea that Independent Banks present a low LGDR. Finally, our findings indicate that market power and LGDR are negatively related.