Financial deepening and infrastructure: an investigation on the relevance of bank branches

Abstract

The role of financial development in growth is a common theme in the Economics literature. However, the relevance of infrastructure in financial deepening and growth is an issue less addressed. This study aims to analyze the importance of bank branches in credit demand at the municipal level. We apply an industrial organization model to estimate the probability of bank branch entry in unbanked or highly concentrated markets. We then use the expected number of branches to determine the impact of infrastructure on credit and other related variables. The Brazilian banking sector has undergone a number of recent innovations. The surge of new technologies such as banking correspondents and Internet banking may have affected the role of branches in municipalities. To better evaluate the impact of these changes, we analyze the development of this relationship in the period between 2003 and 2012.