Transcript Comments on “What Borders are Made of: An Analysis of Banking

Some Comments on
“What Borders are Made of: An
Analysis of Banking Integration Using
European Regional Data”
(M. Affinito and M. Piazza)
Ron Martin
Department of Geography
University of Cambridge, UK
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Aims of the Paper
• To evaluate role of different barriers and
•
‘borders’ to European retail banking
integration
Uses ‘regional approach’ because:
– “If local banks thrive because they solve
economic frictions, then should be a significant
relation between indicators of frictions and
number of local banks”
– Survival of local banks under national
integration suggests they will survive European
financial integration
– Can reveal barriers and frictions missed by
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aggregate national-level analyses
Aims of the Paper
• The study thus, in effect, is seeking to link
•
•
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two (possibly different) issues:
1. A study of relative significance of
different frictions impeding European
banking integration
2. The determinants of regional variations
in banking structure/presence (ie location
of banks)
Assumption seems to be that the second
provides evidence on the first
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Basic Model
Measures of
Local Banking
=
(“Evidence of frictions to
Integration”)
No. of Local Banks
No. of Local Branches
Local Bank/Branch ratio
Local No. of Foreign Banks
f [ Indicators of Local and
National Conditions and Frictions]
=
f (“Factors Hindering Integration”)
Local GDP/capita
Local Average Firm Size
Local Linguistic Minority
National Regulatory Regime
GDP per capita
+ve
Average Firm Size -ve
Linguistic Minority +ve
National fixed effects +ve
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Issues Raised
•
What is the underlying theoretical framework?
•
What is meant by ‘integration’?
– There is no discussion of this
– Obviously includes common currency, common interest
rates, common supervisory/legal arrangements, etc
– But what does it mean with respect to regional banking
structures (locational distribution of banks)?
– Does it mean perfect spatial flow of funds?
– Does it mean demise of local banks and replacement by
nation-wide (and EU-wide) branch system?
– Need for theoretical outcomes to be specified in order to
determine whether and in what sense local bank
structures are evidence of frictions to integration
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Issues Raised
•
What do different theories of financial integration
lead us to expect in terms of the impact on
regional banking?
– Would we see a trend towards a spatial equilibrium in
which regional densities of local banks or branches are
equalised (for example on efficiency grounds)?
– Or would the spatial equilibrium be one in which local
supply equates to local demand (ie uneven regional
distribution of banks/banches)?
– Or would we see (as argued eg. by Dow) trend towards
both consolidation and geographical centralisation (with
‘financial gaps’ - under-supply and rationing of banking
- in peripheral regions)?
– Variety of intermediation theories that might be used to
predict location/relocation of banks under conditions of
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increasing integration (see Porteous, 1995)
•
Issues Raised
Impact of integration takes time, and may change
over time
– Could initially lead to expansion of branches or local
banks (as a result eg. of deregulation) at same time as
consolidation of ownership (as in Italy over past 20
years or so)
– Later might be followed by geographical rationalisation
(selective closures in particular regions and localities)
– This is the UK story. UK moved from regional banking
system to national banking system from 1860s onwards
– Number of branches across the country grew at same
time.
– Past 25 years however, have seen number of branches
decline quite sharply, especially in rural and low income
inner city areas
– This study cover a relatively short time span (since
1998), possibly too short to capture impacts of
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integration
Issues Raised
• How do we measure/capture local
‘frictions’ to integration?
– Model finds that GDP per capita and population exert
major influence on geography of banks. This is not
surprising, and suggests spatial location of banks
largely driven by demand.
– Is a negative relationship between local no. of banks
and local average firm size an indication of asymmetric
information or transaction costs, or simply of buoyant
demand from high numbers or high birth rate of small
firms?
– Really need better measures of local asymmetric
information and decision-making in loan activity
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Issues Raised
• How do we measure/capture local
‘frictions’ to integration? (cont’d)
– A dense branch bank system across regions
could be entirely consistent with a high level of
financial integration, and not necessarily evidence
of frictions.
– May have dense local branch network to serve
local demand but decisions and control
centralised in major financial centres (eg UK – see
also the paper by Alessandrini, Presbitero and
Zazzaro)
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Issues Raised
• Methodological Point
– A perusal of maps of GDP per head, small
firm densities and local banking densities
across EU reveals high degree of spatial
autocorrelation
– This can seriously bias significance levels
of regression parameter estimates
– Geographers would not undertake this
sort of analysis without testing for, and
incorporating, spatial autocorrelation
(spatial contiguity) effects
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Conclusions
•
•
•
Paper present some interesting results on
possible determinants of regional variations in
banking presence (locational decisions of banks)
But tells us much less about the (local basis of)
barriers to European banking integration or how
the geography of banking relates to integration
Need for theoretical discussion of possible
spatial outcomes of integration to guide and
judge empirical work
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