1. 1 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

2. 2 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 aggregate national-level analyses

3. 3 Aims of the Paper The study thus, in effect, is seeking to link 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

4. 4 Basic Model Measures of = f [ Indicators of Local and Local Banking National Conditions and Frictions] (“Evidence of frictions to = f (“Factors Hindering Integration”) Integration”) No. of Local Banks Local GDP/capita No. of Local Branches Local Average Firm Size Local Bank/Branch ratio Local Linguistic Minority Local No. of Foreign Banks National Regulatory Regime GDP per capita +ve Average Firm Size -ve Linguistic Minority +ve National fixed effects +ve

5. 5 Issues Raised What is the underlying theoretical framework? – There is no discussion of this What is meant by ‘integration’? – 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

6. 6 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 increasing integration (see Porteous, 1995)

7. 7 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 integration

8. 8 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

9. 9 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)

10. 10 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

11. 11 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