The Right to Decide and the Effective Control Over Small Business Lending Decisions: A Look into Loan Officers’ Real Authority

A vast literature has emphasised that small banks are at a comparative advantage in lending to small businesses. In this paper, we show that, in addition to bank size, loan officers’ authority affects banks’ specialisation in small business lending. By using a unique dataset based on a survey of Italian banks, we find that loan officers’ authority has a key role in explaining bank specialisation in small business lending. In particular, banks that delegate more decision‐making power to their loan officers are more willing to lend to small firms than other banks. We use several proxies for measuring loan officers’ authority: their discretion in loan approval and in setting loan interest rates, the amount of money up to which they are allowed to lend autonomously, their turnover, their compensation schemes and the kind of information (soft vs. hard information) used both for screening and monitoring purposes.