The Spatial Structure of Financial Development in Brazil

Abstract

Using a GMM estimator for a spatial panel model with an endogenous spatial lag and spatial moving average errors we investigate the spatial structure of the financial system in Brazil. The results point to a negative spatial association between the Brazilian municipalities' financial system, in the way that a municipality with a more developed financial system tends to be surrounded by municipalities with less developed financial systems.

La structure spatiale du développement financier au Brésil

Rèsumè En utilisant un estimateur GMM pour un modèle à panneau spatial, avec un décalage spatial endogène et des erreurs à moyenne mobile spatiale, nous examinons la structure spatiale du système financier au Brésil. Les résultats semblent indiquer l'existence d'une association spatiale négative entre les municipalités brésiliennes sur le plan de leur système financier, dans le cadre de laquelle une municipalité dotée d'un système financier plus évolué a tendance à être entourée de municipalités possédant des systèmes financiers moins évolués.

La estructura espacial del desarrollo financiero en Brasil

Extracto Utilizando un estimador GMM (Método General de Momentos) para un modelo de panel espacial con un lapso espacial endógeno y errores de promedios móviles espaciales, investigamos la estructura espacial del sistema financiero en Brasil. Los resultados apuntan hacia una asociación espacial negativa entre el sistema financiero de las municipalidades brasileñas, de forma que una municipalidad con un sistema financiero más desarrollado tiende a estar rodeada de municipalidades con sistemas financieros menos desarrollados.

Keywords:

• Financial development
• spatial structure
• bank strategy
• Brazil

JEL classification :

• O16
• R12
• G21

Acknowledgements

The authors wish to thank Luc Anselin (ASU), Daniel Arribas (University of Zaragoza) and the two anonymous referees for their useful comments.

Notes

1. Roberts & Fishkind (1979) and Moore & Hill (1982) are authors who first attempted to identify factors that could lead to credit rationing in regional markets. Recently, neo-Keynesian authors, as Faini et al. (1993) and Samolyk (1994), have explored the argument of asymmetric information in regional credit markets.

2. The term ‘functional distance’ means the distance between hierarchical levels of a bank organization. According to Alessandrini et al. (2009, p. 5), ‘by functional distance we refer to the distance between a local branch, where information is collected and lending relationships are established, and its headquarter, where lending policies and ultimate decisions are typically taken. From a theoretical point of view, the importance of functional distance for the lending policies of local branches has its roots in (i) the asymmetric distribution of information and the costs of communication within an organisation, and (ii) the economic, social and cultural differences across communities’.

3. ‘Operational distance’ refers to the proximity between the borrower and its lending office. The relevance of operational distance for the supply of credit in a specific region can be captured by the concept of relational proximity as explained by Porteous (1995). According to this concept, proximity is crucial to the reduction of costs involved either in transmitting information or in travelling to close the distance.

4. For a further understanding of the use of such a concept in Keynesian economics, see Davidson (1982/1983, 1995), Dow (1996) and Crocco (1999, 2003).

5. This also means, as noticed by Klagge & Martin (2005), that the peripheral reserve base ‘is diminished as funds leak out in payment for centre goods and securities’.

6. For a further reading in this regard see Dow & Rodríguez-Fuentes (1997), Rodríguez-Fuentes & Dow (2003) and Rodriguez-Fuentes (2006). The authors acknowledge an anonymous referee for this point.

7. As noted by Parr & Budd (2000), the concept of central-place can be applied to those economic activities (services and manufacturing) that have a locational orientation to the market, as in the case of financial services. The supply points of the services or manufacturing, according to this theory, is ‘centrally located with regard to their respective market areas; hence the designation of supply points as “central places”’ (p. 594). Here we rely more on Christäller's contribution due to its emphasis on the hierarchical differentiation of centres.

8. Since urbanization economies tend to increase with the size of the urban concentration, financial system firms tend to be attracted to a big-city or metropolitan region.

9. Transport costs also assume an importance for the financial system because of the need for face-to-face contact. See also Parr & Budd (2000) in this regard.

10. The authors acknowledge a second anonymous referee for this intuition.

11. In this passage, Dow is discussing the evolution of the banking system according to the framework suggested by Chick (1992).

12. National Bank for Economic and Social Development (BNDES) is a state-owned development bank which is, historically, the main source of financial support for long-term investment in Brazil.

13. The index is a modified version of the location quotient, commonly found in the regional economics literature.

14. In order to have an exploratory analysis compatible with the regressions, all LISA statistics were based on an eight nearest neighbours weighting matrix.

15. For more on the regional imbalances in wages in Brazil, see Amaral et al. (2007).