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.

Utilisation of this data-set allows calculation of a novel indicator for idiosyncratic shocks.

Bank efficiency is measured through a directional distance function non-parametric approach, where bad loans are modelled as a bad output.

Using bank production sets customary in the literature, we find that the crisis was significantly detrimental, in particular for cooperative banks.

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.

The evidence is in line with the bad luck hypothesis, and implies that strict branching regulations had a harmful impact on local banks’ efficiency.