Abstract
Linguistic and cultural differences, different legal and supervisory frameworks, and relationship lending have been repeatedly mentioned as barriers to European retail banking integration. We investigate whether these barriers have affected integration within national boundaries, using an index of localism of regional banking systems as a measure of market integration. If local banks are established and flourish because asymmetric information makes entry difficult for non-incumbents (Dell’Ariccia 2001) or regulatory and governance rules prevent entry from outside (Berger et al. 1995), we should find a significant relationship between indicators of these barriers and measures of the localism of banking systems. Our results show that this is indeed the case for asymmetric information, while findings are more blurred for supervisory practices.
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Notes
- 1.
For example, the European Central Bank is now publishing an annual report on the EU banking structure and has co-launched a research network on capital markets and financial integration in Europe (ECB-CFS 2004).
- 2.
From 1999–2003, our sample period, the number of banks in the euro area diminished from 9,802 to 8,538, falling in all countries but Finland. In Italy, for example, the number of banks fell by more than 200 between January 1990 and January 1999 and by more than 100 between that date and January 2003.
- 3.
It is customary to refer to the 15 countries that were already EU members prior to the May 2004 enlargement as EU-15 countries.
- 4.
In a similar vein, Guiso et al. (2004) noted that as Italy “has been unified, from both a political and a regulatory point of view, for the last 140 years […] the level of integration reached within Italy probably represents an upper bound for the level of integration international financial markets can reach.”
- 5.
Berger et al. (2001) note that bank holding companies may have problems in controlling small banks that are located far from their headquarters, consistent with the idea that relationship lending may become more difficult as distance increases. Ferri (1997) shows how turnover of branch managers (typically adopted by large banks and clearly not applying to unit credit institutions) may have been used in Italy as a mechanism to control collusions between them and borrowers, with the side effect of hampering the development of lending relationships in large banks.
- 6.
Given the potential for multicollinearity, we check correlations among variables (e.g. share of employees in agriculture and GDP per capita), and we perform standard tests (e.g. variance inflation factor) to detect any problem with multicollinearity.
- 7.
The inclusion of most of them is self-explanatory. The impact of the share of students is ex-ante debatable. It could indicate a weaker current demand, as typically students do not demand a significant amount of banking products, but also a higher prospective demand if returns to schooling are sizeable. We also add a dummy for the region of the country capital to control for the fact that some banks (typically foreign ones) tend to locate their headquarters there. National and regional differences seem to be properly accounted for by our variables. Residuals for each European region from a log-linear regression do not show any systematic pattern. The comprehensive set of regional variables – X rc – should mitigate the risk of omitted regional variables, although we cannot control for regional effects. However, we lack data on within-country differences in regulatory and legal systems, if any. We believe that this could actually be an issue only in the case of Germany where the federal structure leaves some degree of autonomy to Länder. We repeat our regression excluding Germany without any significant difference in our results.
- 8.
Berger and Udell (2006) suggest that the accepted view that financial structures have to include a substantial market share for small institutions to meet the demand of opaque SMEs could be outdated due to new transaction technologies.
- 9.
We carry out both fractional logit and IV regressions in order to exploit the merits of both methodologies.
- 10.
- 11.
In this case, too, since IV techniques have not been developed, to our knowledge, for the Zero Inflated Poisson model, we adopt a log transformation of data after adding a small positive constant to each count, due to the presence of a great number of zeros.
- 12.
NUTS is the French acronym for Nomenclature of Territorial Units for Statistics. It was defined by Eurostat more than two decades ago to provide a single uniform breakdown of territorial units for the production of regional statistics for the European Union. For details, see europa.eu.int/comm/eurostat/ramon/nuts/introduction_regions_en.html.
- 13.
We do not consider six regions that are usually included in the NUTS2 breakdown but that are geographically separated from the mainland. They are the four French départements d’outre-mer and the two Spanish enclaves in North-Africa (Ceuta and Melilla). We also consider jointly the two autonomous provinces of Trento and Bolzano in Italy that are separately coded in NUTS2.
- 14.
The Monetary Financial Institutions – MFIs – are central banks, resident credit institutions as defined in Community law, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their own account (at least in economic terms), to grant credits and/or make investments in securities. Our dataset is limited to the subset of credit institutions. The List of MFIs can be downloaded from the European Central Bank Web site. October 1998 was a test date as the MFI List started in 1999.
- 15.
The database can be found on the World Bank Web site or in a CD-ROM attached to the book by Barth et al. (2006).
- 16.
Data on branches are missing for Greece, Ireland, and The Netherlands. Our cross-sectional observations are therefore reduced when using the ratio between banks and branches as the dependent variable.
- 17.
The standard deviation in the number of banks within European countries (i.e. across regions in a country) is, on average, greater (61.30) than the standard deviation of national averages across countries (43.85).
- 18.
We deal exclusively with the determinants of the presence of banks from other European countries in each European region of our sample because this is what our regional data allow for (i.e. no banks from the Rest of World are considered). With regard to this exercise, it should be noted that there is some potential for confusion in the terminology. The List of MFIs does not report, as foreign banks, subsidiaries of foreign banks (i.e. national banks controlled by foreign shareholders, either banks or other entities), but only branches of foreign banks. However, in line with standard reporting practices, only headquarters are reported: in other words, if, say, a French bank should decide to open more than one branch in Italy, this would still imply just one record for that French bank in the Italian List of MFIs. This induces a potentially significant bias: however, we included a dummy for the capital city to take into account this effect, and we check how relevant this problem is in Italy, for which we have additional information. It turns out that 72 percent of the foreign banks have only one branch in Italy, and another 18 percent have just two branches.
- 19.
As our index is bounded between 0 and 1, we use a fractional logit regression model (e.g. Papke and Wooldridge 1996) that fits naturally within our setting.
- 20.
Indeed, on the basis of a recent survey by the Committee of European Banking Supervisors (CEBS 2005), supervision is no longer perceived as a major obstacle to cross-border consolidation.
- 21.
That is, the coefficients are negative.
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Acknowledgments
We would like to thank, for help and comments, Riccardo De Bonis, Ron Martin, Marcello Messori, Marcello Pagnini, Miria Rocchelli, Luigi Federico Signorini, and participants at the seminar held at the Research Department of the Bank of Italy (June 2005), at the XIV International “Tor Vergata” Conference on Banking and Finance (Rome, December 2005), and at the conference on “The Changing Geography of Banking” held at the Università Politecnica delle Marche (Ancona, September 2006). The opinions expressed in this contribution do not necessarily reflect those of the Bank of Italy.
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Affinito, M., Piazza, M. (2009). What Are Borders Made of? An Analysis of Barriers to European Banking Integration. In: Zazzaro, A., Fratianni, M., Alessandrini, P. (eds) The Changing Geography of Banking and Finance. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-98078-2_9
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