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The Geography of Banking Power: The Role of Functional Distance

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The Banks and the Italian Economy

Abstract

In this chapter we analyse the new geography of the Italian banking system on the basis of the integration pressures of recent years. The analysis of the evolution of the banking system is focused on the concept of distance. In particular, we not only refer to the traditional distance between bank and customers, that is the operational distance, but also to the distance between decision centres of banks and local systems, that we define as functional distance. The focus of the chapter is on the effect that functional distance (or proximity) has on the performance of banks in terms of credit allocation, efficiency, and profitability. Our regression analysis proves that functional proximity has asymmetric territorial effects on the banks performance. Its beneficial effects are more evident in the less developed southern regions, than in the more advanced Centre-North regions of Italy.

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Notes

  1. 1.

    This chapter was first published as Alessandrini P, Croci M, Zazzaro A (2005) The geography of banking power: the role of functional distance. BNL Quarterly Review 235:129–167. Reprinted with permission.

  2. 2.

    Of course, there were contrary opinions maintaining that these kinds of difficulties would be not at all temporary and they could trigger dangerous vicious circles entrapping peripheral areas in low equilibria of underemployment. See Chick & Dow (1988), Dow (1994) and Martin (1995).

  3. 3.

    For surveys on the integration of European Union banking markets, see Dermine (2002) and Gual (2004). For a survey on the regional effects of consolidation banking industry see Alessandrini, Papi & Zazzaro (2003).

  4. 4.

    See Chiappori, Perez-Castrillo & Verdier (1995), Economides, Hubbard & Palia (1996), Calem & Nakamura (1998), Park and Pennacchi (2004).

  5. 5.

    See Sussman & Zeira (1995) and Dell'Ariccia & Marquez (2004).

  6. 6.

    See Gehrig (1998) and Dell'Ariccia, Friedman, & Marquez (1999).

  7. 7.

    These results are only partially confirmed by Wolken & Rhode (2002) and by Brevoort & Hannan (2004). The former, comparing data from the 1993 and 1998 SSBF surveys, observe that the median distance between firms and their bank remained essentially stable over time and conclude that the increase in the physical distance is a strongly asymmetric phenomenon only concerning some type of loans (particularly, leases and motor vehicle loans). Brevoort & Hannan (2004), using data from The Community Investment Act for the period 1997–2001, find instead that the proximity to customers is still an important element in lending practices, especially for small banks. However, they also document that the importance of lending from out-of-market institutions to small business augmented during the 1990s both in metropolitan and rural areas, particularly in terms of the number of loans.

  8. 8.

    With respect to the Belgian bank analysed by Degryse & Ongena (2005), between 1975 and 1997 the average distance increased by less than 30%.

  9. 9.

    These findings are corroborated by Berger, Miller, Petersen, Rajan, & Stein (2005), which present new evidence of the tendency of younger firm and large banks of borrowing and lending at a greater distance and using less personal modes of conducting the credit relationship.

  10. 10.

    Also, Petersen & Rajan (2002) find the same inverse relation between interest rates and distance. However, they do not refer to the actual distance between the lending office and the firm but to an estimated measure of the potentially reachable distance on the basis of firms' transparency and creditworthiness. Therefore, the interpretation of this evidence they suggest is totally different from that proposed by Degryse & Ongena (2005) pointing at information rather than transportation costs.

  11. 11.

    Brevoort & Hannan (2004), instead, limiting the analysis to local banks, find that the probability of a bank – especially a small bank – lending in a given area reduces with distance from that area, and that this detrimental effect has become stronger over time.

  12. 12.

    See Focarelli & Pozzolo (2001); Buch (2001) and Buch & DeLong (2004).

  13. 13.

    Calcagnini, De Bonis, & Hester (2002), for Italy, and De Juan (2003), for Spain, find that banks with a large number of branches in a market are more likely to open new branches in that market. This occurs because information, expertise and reputation all increase with presence in an area, which reduces the cost of a branch and increases its benefits.

  14. 14.

    See Holmstrom & Milgrom (1991) & Hart (1995).

  15. 15.

    See Palley (1997).

  16. 16.

    See Milgrom & Roberts (1990) and Scharfstein & Stein (2000).

  17. 17.

    See Nakamura (1994); Keeton (1995); Berger & Udell (2002).

  18. 18.

    See Brickley, Linck, & Smith (2003).

  19. 19.

    See Ferri (1997).

  20. 20.

    See Gilbert & Belongia (1988); Keeton (1995; 1996).

  21. 21.

    See Whalen (1995) and Mester (1996).

  22. 22.

    See DeYoung & Nolle (1996); Claessens, Dermigüç-Kunt, & Huizinga (2001); Awdeh (2005).

  23. 23.

    Miller & Parkhe (2002) consider the identities of the home nation of the parent bank and the host nation and find that the X-efficiency of foreign subsidiaries is positively affected by the relative development of banking industries in the home country and host country in which they operate.

  24. 24.

    Although significant, this trend has been less strong than in other European countries, at least over the last few years. On the average, the number of banks decreased by 17% in the euro area countries over the same period 1998–2002 (European Central Bank, 2003).

  25. 25.

    On these aspects, see Calcagnini, De Bonis & Hester (2002).

  26. 26.

    The indexes we have calculated do not take into consideration the fact that some banks are part of the same group. This might lead to an underestimation of concentration for some provinces or regions.

  27. 27.

    Exceptions in the South are provinces in Sardinia, but this is explained by the fact that there are very few banks in the region.

  28. 28.

    Between 1990 and 2000, banks located in three Northern regions, Lombardia, Veneto and Emilia, have realized 167 M&A operations out of 214. See Colombo & Turati (2004).

  29. 29.

    On this point, see Lucchetti, Papi & Zazzaro (2001) and the literature cited in this article.

  30. 30.

    Centre-North regions are: Valle d'Aosta, Piemonte, Lombardy, Liguria, Veneto, Trentino Alto Adige, Friuli V.G., Emilia Romagna, Tuscany, Marche, Umbria and Lazio. Southern (or Mezzogiorno) regions are: Abruzzo, Molise, Campania, Puglia, Basilicata, Calabria, Sicily and Sardinia.

  31. 31.

    See Alessandrini & Zazzaro (1999).

  32. 32.

    It is implicitly assumed that 3 years should be a sufficient period of adjustment necessary to integrate the acquired bank inside its new banking group (among the others, a similar assumption is employed by Focarelli, Panetta & Salleo (2002).

  33. 33.

    As a robustness check, we also calculated the loan (deposit) interest rate as the ratio of interest revenues (paid) in a year t to the average value of total loans (deposits) in year t-1 and t. All estimation results remains qualitatively unaltered.

  34. 34.

    Actually, this indicator also measures the geographical density of a bank branch network. Therefore, high values for this indicator could reflect a situation of overbranching rather than the capacity of the bank of influencing local credit markets.

  35. 35.

    In particular: (1) in the estimates for the ratio of intermediation income and costs to intermediation margin, we included a dummy variable for Centrobanca, which performed –200% below average over the three years; (2) in the estimates for the growth rate of loans to non-financial firms and productive firms, we included dummy variables for Banca Intesa Bci and for Credito Siciliano, which showed respective growth rates above average of 10,000 and 7,500% over the sample period; (3) in the estimates for the indicators of gross non-performing loans/loans to customers and credit allocation, we included a dummy variable for Unicredito Gestione Crediti which performed 270% above average; (4) in the estimates for the indicators ‘deposit interest rate’ and ‘interest spread’, we included a dummy for Findomestic Bank, which showed a deposit interest rate higher than 100% over the three years.

  36. 36.

    May be worth noting that, since we measure market power in terms of branches (see above, note 33), both the non-monotonic effect of market power indicator on rates and its negative impact on the efficiency could be attributed to an inefficient branch network policies that lead banks to a higher-than-optimal number of branches in some provinces.

  37. 37.

    The expression was coined by Padoa Schioppa (1994).

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Acknowledgments

This study is part of the interuniversity research project “Integration problems of the Italian banking system: area distribution, specialisation and competitiveness within an interregional and European framework”, coordinated by Pietro Alessandrini, cofunded by the Ministry for Higher Education and Research (MIUR). We wish to thank Giorgio Calcagnini, Pierluigi Ciocca, Michele Fratianni, Riccardo Lucchetti, Marcello Messori, Giangiacomo Nardozzi, Alberto Niccoli, Luca Papi, Domenico Scalera for discussions on the research topics and suggestions. We are also grateful to participants at the annual conferences of the American Association of American Geographers, Denver, 2005. Finally, we thank Luca Brandi for his assistance in collecting and processing data. As usual, the authors are entirely responsible for any errors.

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Authors and Affiliations

  1. Department of Economics, Money and Finance Research Group, Università Politecnica delle Marche, Ancona, Italy

    Pietro Alessandrini & Alberto Zazzaro

  2. Lloyds TSB, London, UK

    Manuela Croci

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  1. Pietro Alessandrini
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  2. Manuela Croci
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Correspondence to Pietro Alessandrini .

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    Alessandrini, P., Croci, M., Zazzaro, A. (2009). The Geography of Banking Power: The Role of Functional Distance. In: Silipo, D. (eds) The Banks and the Italian Economy. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2112-3_5

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