Banks, Distances and Financing Constraints for Firms

Abstract

While geographical diffusion of banking structures and instruments increased the operational proximity between banks and borrowers, the concentration of bank decisional centres widened the functional distance between banks and local communities. Our findings on Italian data show that increased functional distance makes local borrowers' financing constraints more binding, it being positively associated with the probability of credit rationing, with investment-cash flow sensitivity, with the ratio of credit lines used by borrowers to credit lines available and negatively associated with the scope for overdrawing. These adverse effects are particularly evident for small firms and for firms located in less developed provinces.

Keywords: Local banking systems; Functional distance, Operational proximity, Financing constraints

JEL Classification: G21, G34, R51