David and Goliath: small banks in an era of consolidation. Evidence from Italy

Consolidation in the banking industry has caused concern about the survival of small banks. However, empirical evidence shows that often small banks are performing better than larger banks in terms of loan growth and profitability. This paper addresses the main question of “how David can be successful in a Goliath’s world” analysing two broad sets of issues, tested on a sample of Italian small banks. We first address the question of whether peculiarities of small banks, e.g their ability to lever on relationship lending, are good explanatory variables of their loan growth. Second, we investigate the relationship between loan growth and profitability and credit risk to point out which small banks can continue to be a viable competitor of larger bank.