The impact of the 2008 crisis on the efficiency of Italian local banks is analysed relying on a previously unavailable data-set where the banks’ economic environment is measured at a territorially very disaggregated level.
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Utilisation of this data-set allows calculation of a novel indicator for idiosyncratic shocks.
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Bank efficiency is measured through a directional distance function non-parametric approach, where bad loans are modelled as a bad output.
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Using bank production sets customary in the literature, we find that the crisis was significantly detrimental, in particular for cooperative banks.
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The deteriorating relative efficiency of cooperative banks in the crisis attenuates when we include indicators of local economic performance and (especially) territorial diversification in the banks’ production set.
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The evidence is in line with the bad luck hypothesis, and implies that strict branching regulations had a harmful impact on local banks’ efficiency.
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