Modeling the effects of Geographical Expansion Strategies on the Italian Minor Banks’ Efficiency

In the last decades, banking re-organization process has progressively increased centralized hierarchical organizational structures. In several cases, the restructuring activity has involved a geographic expansion of the financial organizations to other municipalities within the home province or into other provinces, any of which may be considerable distances away. Minor banks could have incentive to grow through geographically expansion in the attempt to increase their market power and margins. The aim of the paper is to assess the effect of the geographic expansion on minor banks’ efficiency by using appropriate distance measures. Moreover, to evaluate the relevance of the different organizational banking models on bank efficiency, we also control for product diversification and size. Based on an unbalanced panel of Italian banks over the period 2006-2009, we estimate stochastic cost frontier functions for either the minor banks or the whole banking system. Results suggest that geographical dimension measured by the distance between local branches and the headquarter significantly affects cost efficiency, either for the full sample or minor banks with a more incisive impact for the latter ones.