Bank Mergers and Credit Allocation Among Italian Regions

The chapter considers the process of credit allocation in a two regions (North and South) – two banks system. The case of independent banks, and the operating of the interbank loan market is confronted with the case in which one bank (the Northern one) incorporates the other giving birth to an unified internal capital market. Two different situations are analysed: in the first, the systemic risk in the Southern Region is higher than in the Northern one. In the second case there is no difference in risk but only a structural difference represented by the number of firms for each class of risk being greater in the Northern Region than in the Southern one. It is shown that in both cases the amount of loans to Southern firms decreases after incorporation.