THE EFFECT OF BANK DENSITY ON FINANCIAL DEVELOPMENT AND ECONOMIC PERFORMANCE

Abstract

This paper provides evidence about the link between bank density as a form of financial deepening, and financial development and economic performance. We construct a panel of European countries and develop a dynamic regression model with GDP dynamics up to three lags and a full set of fixed effects to study the effect that the number of bank branches and automated teller machines per capita have on real GDP per capita. Our baseline estimates point out to a weak negative impact of the increased number of bank branches per capita on economic performance by around 0.3 per cent annually. We find similar results from the subsequent IV and GMM estimates as well as when swapping the population basis of the bank density measures with the area. The IV strategy reveals that our both measures are endogenous with the respect to the level of urbanisation and the share of Internet users up to three lags. We further include financial development as a covariate and find weaker negative impact of the number of bank branches and a weak positive impact of the number of automated teller machines by about 0.15 per cent annually. Our estimates with respect to financial development reveal that both bank measures can be considered significant drivers given the positive impact of about 0.8 to 1.2 percentage points obtained for the number of bank branches and about 0.6 to 0.7 percentage points for the number of automated teller machines. We do not find any significant differences between the countries with harmonised regulations and shared currency as a result of the EU and Eurozone membership.