How is Bank Performance Affected by Functional Distance?

The aim of this study is to confirm the presence of a relationship between the territory and the bank, verifying empirically the effect of the functional distance (headquarters-branches distance) on bank performance. To support this hypothesis we also test the effects that the bank size, the intensity of labour factor, the bank type (and its lending features) have on bank performance. We aim to shed light on the impact of bank size on the link between distance and performance. The analysis is based on a sample of almost 3,000 Italian banks over the period 2005-2008, and demonstrates the existence of a positive relationship between functional distance, foreign control, institutional type of intermediary and bank performance. In the model the control variables used take into account local market competition, relationship lending features and banking business structure. The robustness checks, conducted excluding the outlier observations and using other variables, confirm the negative effect of the functional distance on bank performance and, consequently, the importance of relationship lending to SMEs. Finally, on the basis of these outcomes, some managerial implications are proposed related to the intermediary size