We present the first empirical study of loan searching strategies and loan granting decisions in a context where banks observe whether applicants have unsuccessfully applied for credit to other lenders in the past. Our identification strategy benefits from the use of granular data on loan applications and exploits the fact that evaluating lenders observe only the rejections received by a borrower up to six months before the current application. We document that past rejections diminish the probability of approval and increase the probability that a loan search is interrupted.

We examine the implications of the sovereign debt tensions on the Italian credit market by estimating the effect of the 10-year BTP-Bund spread on a wide array of bank interest rates, categories of loans and income statement variables. We exploit the heterogeneity between large and small intermediaries to assess to what extent the transmission of sovereign risk differed in relation with different banks’ balance-sheet characteristics and business strategies. Regarding the cost of funding, we find that changes in the BTP-Bund spread have a sizeable effect on the interest rates on term deposits and newly issued bonds but virtually no effect on overnight deposits. Furthermore, the sovereign spread significantly affects the cost of credit for firms and households and exerts a negative effect on loan growth. All these results are magnified when considering alone the five largest banks, which are typically less capitalized, have a larger funding gap and incidence of bad loans and rely more on non-traditional banking activities. Sovereign tensions also affect the main items of banks’ income statement.