Incapability or bad luck? Testing the 'bad management' hypothesis in the Italian banking system

Using specific evidences from the Italian banking sector and following a microeconomic approach, in this chapter we test the “bad management” hypothesis first introduced by Berger and Deyoung (1997), which suggests that poor managerial practice causes an increase in problem loans after a lag. The chapter gives a contribution to the existing literature in this field, in that it investigates non performing loans (NPLs) and other soured loans jointly. Our results confirm the “bad management” hypothesis, in that we discover a positive (lagged) relation between the value of past due/overdrawn loans and NPLs which, in a management perspective, indicates the incapability of the credit manager to anticipate or to recover (at least partially) problematic credits.