Abstract

We review how technological advances and changes in regulation may shape the (future)

geographical scope of banking. We first review how both physical distance and the

presence of borders currently affect bank lending conditions (loan pricing and credit

availability) and market presence (branching and servicing). Next we discuss how

technology and regulation have altered this impact and analyse the current state of the

European banking sector. We discuss both theoretical contributions and empirical work

and highlight open questions along the way.

We draw three main lessons from the current theoretical and empirical literature: (1) Bank

lending to small businesses in Europe may be characterized both by (local) spatial pricing

and resilient (regional and/or national) market segmentation; (2) Because of informational

asymmetries in the retail market, bank mergers and acquisitions seem the optimal route of

entering another market, long before cross-border servicing or direct entry are economically

feasible; (3) Current technological and regulatory developments may to a large extent

remain impotent in further dismantling the various residual but mutually reinforcing

frictions in the retail banking markets in Europe. We conclude the paper by offering

pertinent policy recommendations based on these three lessons.

Keywords: geographical scope, banking, lending relationships, technology, and regulation.

JEL: G21, L11, L14.