Judicial Reform and Banks Credit Risk Exposure*

Abstract The aim of this paper is to examine the impact of the Judicial System Reform, which was introduced in Italy in 2012, on the efficiency of the judicial system and the exposure of banks to credit risk in terms of Non‐performing loans. To this end, we apply a difference‐in‐differences approach, using a dataset that covers annual judicial proceedings from 2010 to 2017, supplemented by bank balance sheet data. Our findings indicate that the reform had a detrimental effect on both judicial efficiency and the NPL ratio. The negative impact is especially pronounced in courts that were previously more efficient, suggesting that the court mergers may have resulted in diseconomies of scale.