Regional variation in banking services and social exclusion

Abstract

Chakravarty S. P. (2006) Regional variation in banking services and social exclusion, Regional Studies 40, 415–428. The paper examines the argument that the concentration of banking in large urban areas could result in social exclusion. There are those who fear that customers living in peripheral regions will suffer discrimination, and businesses will decline. An alternative view is that the geographical proximity of banks in an age of electronic communication is not needed. These conflicting views are examined in the context of the literature on statistical discrimination. It is concluded that it would be unwise to write off the importance of geography in the location of financial services.

Chakravarty S. P. (2006) La variation régionale des services bancaires et l'exclusion sociale, Regional Studies 40, 415–428. Cet article cherche à examiner l'argument suivant: la concentration du secteur bancaire dans les grandes zones urbaines aurait pour résultat l'exclusion sociale. Certains craignent que les clients qui habitent les zones à la périphérie souffriront de la discrimination et que les entreprises se ralentiront. Un autre point de vue considère que la proximité géographique des banques à l'heure des systèmes de communication électroniques n'est pas nécessaire. Cet article cherche donc à examiner ces points de vue contradictoires à partir de la documentation sur la discrimination statistique. On arrive à la conclusion suivante: il serait imprudent de renoncer à l'importance de la géographie quant à la localisation des services financiers.

Exclusion financière, Exclusion sociale, Fermeture des agences, Opérations bancaires régionales

Chakravarty S. P. (2006) Regionale Abweichung bei Bankdienstleistungen und gesellschaftliche Benachteiligung, Regional Studies 40, 415–428. Dieser Aufsatz untersucht das Argument, daß die Konzentration des Bankwesens in Großstädten gesellschaftliche Benachteiligung zur Folge haben könnte. Es gibt Stimmen, die befürchten, daß Kunden, die in Randgebieten leben, unter Diskriminierung leiden, und Geschäftsunternehmen zurückgehen werden. Eine alternative Ansicht behauptet, daß geographische Nähe im Zeitalter elektronischer Kommunikationen nicht nötig ist. Diese widersprüchlichen Ansichten werden hier im Zusammenhang mit Literatur über statistische Diskrimination untersucht, und man kommt zu dem Schluß, daß es unklug sein würde, die Bedeutung der Geographie beim Standort finanzieller Dienstleistungen abzuschreiben.

Finanzielle Benachteiligung, gesellschaftlicher Benachteiligung, Schließung von Zweigstellen, regionales Bankwesen

Chakravarty S. P. (2006) Variación regional en los servicios bancarios y la exclusión social, Regional Studies 40, 415–428. En este artículo se examina si la concentración de bancos en grandes zonas urbanas puede desembocar en exclusión social. Algunos temen que los clientes que vivan en regiones periféricas acaben padeciendo discriminación y ocurra un declive de los negocios. Otro punto de vista es que no es necesaria la proximidad geográfica de los bancos en la era de la comunicación electrónica. Aquí se analizan estas opiniones contrastadas comparándolas con bibliografía sobre discriminación estadística. Llegamos a la conclusión de que sería imprudente ignorar la importancia de la geografía a la hora de ubicar los servicios financieros.

Exclusión financiera, Exclusión social, Cierre de sucursales, Banca regional

Keywords:

• Financial exclusion
• Social exclusion
• Branch closure
• Regional banking

Acknowledgements

Comments from Yener Altunbas, Santiago Carbo, David Hojman, Ted Gardener, Ross Mackay, Phil Molyneux, Frank Steffen, Jonathan Williams and the participants at a seminar at the University of Liverpool, UK, are gratefully acknowledged, without implicating them in any errors. The authors is grateful to the referees for patience in providing detailed suggestions for improvement of the manuscript. Jessica Bridges-Palmer in the House of Commons library is also thanked to her help.

Notes

1. For example, Cole (1998, p. 959) finds that a ‘potential lender is more likely to extend credit to a firm with which it has a pre-existing relationship as a source of financial services … ’. Petersen (2002) and Stein (2002) find that banks use ‘soft information’ even when loan officers present their case using only quantitative data. Schumpeter (1939, p. 116) puts the argument thus: ‘Even if he confines himself to the most regular of commodity bills and looks with aversion on any paper that displays a suspiciously round figure, the banker must not only know what the transaction is which he is asked to finance and how it is likely to turn out, but he must also know the customer, his business, and even his private habits, and get, by frequently “talking things over with him,” a clear picture of his situation’.

2. The model proposed by Phelps is placed, later in the paper, in the context of contributions to the idea of statistical discrimination by other scholars (e.g. Arrow, 1972, 1973; Stiglitz and Weiss, 1981).

3. They cite Laver (1997) as their source.

4. Pauley is cited by Argent (2002), and the quotation here is taken from Argent (2002, p. 316).

5. The Banking Federation of the European Union ‘estimates that the refinancing advantages enjoyed by AAA banks as compared to AA banks to be equivalent to up to 20 basis points under normal market conditions’ (Gloyens, 2002, p. 55). Contrary to the Commission's view, this advantage is not the reason why the larger private-sector commercial banks have fared comparatively badly in recent years. Even if the municipal banks had to pay more to raise finance in the wholesale money markets, they would have fared better than the large commercial banks (Chakravarty and Williams, 2005).

6. There may be another rationale that is not publicly stated. For example, Molyneux (1989) argues that concentration in banking is likely to develop through the takeover of smaller banks. Since the takeover of smaller banks is a route to the penetration of the German market by multinational banks, privatization of small public-sector banks might make it easier for multinational banks to enter Germany. Of the information that is publicly available, it is not possible to discuss further the thinking behind the Commission's order for removing the public-sector advantage of German municipal banks.

7. A second and more careful look at the survey, as will be shown below, provides a different picture of the role of location.

8. The importance of a local presence is not denied by banks. For example, the HSBC boasts of the importance given to its branches in its promotional material. The bank is alleged to make ‘9 out of 10 business decisions in-branch’ (The Guardian, 2003).

9. Mackay and Molyneux (1996) provide further evidence of regional disparities in bank lending. Martin and Minns (1995) examine the potential for geographical disparities emerging from the nature of pension fund investments.

10. A different point is made by Peck and Tickell (2002), who argue that the neo-liberal ideology that now underpins the consensus amongst the ruling elite in Western Europe and the USA is based on the premise that geography is relevant. However, it is relevant in a perverse way, by integrating local financial institutions into a central architecture: ‘new financial architectures are taking shape, undergirding a type of “global stability” by normalising Anglo-American rationalities and, paradoxically, creating deeper sytemic integration in ways that are seriously procyclical’ (p. 391). This point is further developed by Tickell (1999) and Tickell and Clark (2001).

11. Although information gathered through social contacts (soft information) is used in loan decisions, the formal presentation of the case for lending is made, especially in large hierarchical banks, by hardening this assessment in terms of key statistics and documents (Petersen, 2002; Stein, 2002).

12. For example, suppose that, in general, the ‘standard’ of work required to obtain a particular examination mark is the same at university A as it is at university B. Suppose that one considers two groups of candidates, one from each university. Suppose, further, that each group scores, on average, a mark of N. Suppose further that, on average, a candidate who obtains a score of N at university A is of identical ability in the discipline as a candidate who scores N at university B. However, that does not mean that any two specific individuals obtaining N each are of identical ability. There is an envelope, a variance, around observations of the score in terms of what the score might signify about ability. The variance placed here in the interpretation of marks given by colleagues at the author's own institution is perhaps smaller than the variance that would be placed on marks given at distant institutions by colleagues that the author does not know well. The variance is a measure of the degree of reliability of the examination mark as a predictor of ability. Some econometric evidence indicates that the geographical distance between small business and their bankers is associated with the rate of interest charged for loans (Degryse and Ongena, 2003). Unfortunately, the distance measure in the regression equation has two different decision variables: first the cost of gathering information and, second, the degree of competition. There are fewer banks locally than there are in metropolitan centres. A borrower prepared to travel further can take better advantage of competition between banks. However, the information disadvantage in lending at a distance means that only transparently non-risky projects can be financed that way. In this type of data, distance captures two different effects: one that increases the interest rate and the other that reduces the interest rate, but they cannot be separated.

13. In the present case, the community is a geographical entity, but the original ideas about differentiating between prejudice and other forms of discrimination derive from the literature on racial and gender preferences. The terms ‘bigotry’ and ‘prejudice’ are often used interchangeably in this literature. In the author's view, ‘bigotry’ is best reserved for instances where there is a manifest desire to inflict disadvantage based on group membership.

14. There has been considerable discussion in the literature about the topic (e.g. Munnell et al., 1992, 1996; Becker, 1993).

15. Work was undertaken at the Federal Reserve Bank of Boston (e.g. Munnell et al., 1992), and was made possible by researchers obtaining information that is generally not placed in the public domain by banks.

16. The location is a proxy for unobserved variables. For example, the two locations might be a poor inner-city district and a prosperous suburb, comprising a different distribution of human capital from the distribution that might be found in the inner city.

17. The above conclusions concerning the first-round effect of statistical discrimination – that the lower-scoring applicants from the periphery are more likely to be rewarded than their counterparts from London and the better-scoring applicants from the core are more likely to be rewarded than their counterparts from London – are not altered even if the group averages of the scores are different.

18. A moral argument about proximity is implicit in Bauman's (1993) critique of bureaucracy. Organic relationships based on moral principles governing interactions among people are not impersonal, but increasingly the bureaucratic relationships are becoming so. The bureaucratic tendency to rely on immediately quantifiable measures without a concern for the long-range effects of action reduces human interactions to a mechanical process. This is a process of dehumanization that is entailed in the mechanical model of bureaucratic behaviour that is described by Bauman. In contrast to Bauman, a spirited defence of bureaucracy is provided by Du Gay (2000), who argues that it is possible for different types of ethical conduct to exist in different spheres of life, and the ‘plurality of modern personae’ (p. 59) must be respected. This dispute about the moral foundation of bureaucracy is outside the scope of the present paper.

19. Sinclair (2001) argues that financial exclusion can also come about through a perception amongst groups that they have little chance of getting credit. They will not apply.

20. With some notable exceptions mentioned in the text, most of the survey data reported in the literature are collected to test for the effect of competition and they do not place adequate focus on the information used in lending decisions.

21. Cameron (1968) examines these arguments in an examination of US regional policy.