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This study examines how changes in geographical distance between firms and their main banks affect the reorganization of borrowing portfolios, using Teikoku Databank (TDB) panel data for 2008–2021 (approximately 18.8 million firm-year observations). Distance shocks, arising primarily from bank branch consolidations, serve as the key explanatory variable. Three main findings emerge. First, firms experiencing an increase in distance to their main bank are significantly more likely to initiate new banking relationships (odds ratio ≈ 18) and to upgrade the ranking of existing sub-relationship banks (≈25 percentage point increase), revealing gradual portfolio adjustments that precede a complete main bank switch (Ono et al., 2023). Second, small firms adjust primarily through new bank entry, while large firms reallocate within existing portfolios; rural firms are more sensitive to distance shocks than metropolitan firms. Third, contrary to the hypothesis that digitalization would mitigate distance constraints for megabanks during COVID-19, the distance effect was attenuated for regional banks and relatively intensified for megabanks—interpreted as a lock-in effect of zero-interest, zero-collateral emergency lending channeled predominantly through regional banks.