Branching, lending and competition in Italian banking

Abstract

With the liberalization of legal barriers to bank branching in the early 1990s, both market structure and competitive conditions in Italy changed profoundly as banks expanded their branching networks. This paper provides novel empirical evidence on how changes of the branch network structure at the province level affect the performance and lending activity of banks across the period 1993-2011. In particular, we adopt two modes of analysis. The first focuses on the impact of diversification strategies at the province level on performance, lending and funding strategies. While the second one examines how the increase of big banks’ local presence affects single-market bank performance and lending strategies. Our results show that geographical diversification strategies can reduce performance, the adjusted Lerner Index of banks and lending activities, but increase the Lerner Index in deposit markets. Furthermore, we find that the expansion of branches by large-medium sized banks in concentrated markets can reduce the Lerner Index for the deposit market and the amount of loans offered by single-market banks.

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Identifiers

ORCID for Tapas Mishra: orcid.org/0000-0002-6902-2326

ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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