The effects of the credit selection criteria on non-performing loans Evidence on small and large banks in Italy Francesco Campanella, Francesco Gangi, Mario Mustilli and Luana Serino Department of Economics, Università degli Studi della Campania Luigi Vanvitelli, Caserta, Italy Abstract Purpose – This paper aims to deal with the perceptions of banks’ managers about some criteria for assessing creditworthiness related to firms and how these criteria affect non-performing loans (NPLs). The paper wants to respond to the following research question: “Which criteria influence the magnitude of NPLs?” The evidence is based on the improvement of credit quality in the Italian banking system, which the authors study in aggregate and size-specific analyses, creating two subsamples (large and small banks). Design/methodology/approach – The methodology used was a mixed method approach. The values of the variables were quantified according to the information derived from Thomson Reuters (Eikon, Datastream), the financial reporting of the banks and questionnaires directly administered to the bank managers. Findings – This research about loans selection criteria provides useful indications for “The Basel Framework”. The results show that managers of the large banks are improving the approach of allocating the loans; the managers of the small banks are getting worse in the period 2006-2016. Therefore, it should be valuable to build a new standard about qualitative and quantitative criteria to recognize credit risk. In particular, these criteria could be adopted to reduce NPLs, andthey should be different in small banks and large banks. Originality/value – The study is part of empirical research investigating the causes of the significant increase in NPLs in the Italian banking system in 2006-2016. Most research interprets the increase in NPLs in the Italian banking system only as an effect of the crisis in the Italian entrepreneurial system. This research offers a different interpretation of the problem, interpreting the phenomenon as a delay of the banking system in investing in an effective information criterion. Keywords Risk management, Soft information, Banking system, Financial reporting data, Information criteria, Non-performing loans Paper type Research paper Introduction The 2007 financial crisis that developed in the US banking system infected the whole world, producing significant and continues troubles even today in bancocentric countries. Italy is one of these countries that still show difficulties in recovering from the crisis showing high levels of credit risk in the banking system. In 2006-2016 period, World Bank statistics show that the Italian level of non-performing loans (NPLs) on total loans has risen much higher than the European average. The authors gratefully acknowledge the participation of the bank managers who participated in the study. They are also grateful for the valuable comments provided by the editor and anonymous reviewers of this journal. Effects of the credit selection criteria 251 Received 14 January 2019 Revised 10 June 2019 23 September 2019 18 November 2019 Accepted 13 January 2020 Meditari Accountancy Research Vol. 28 No. 2, 2020 pp. 251-275 © Emerald Publishing Limited 2049-372X DOI 10.1108/MEDAR-01-2019-0430 The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2049-372X.htm