Banking towards development: Evidence from the Spanish banking expansion plan

Abstract

During the period 1965-1987 Spain was an emerging market in full transition from developing to developed status. During the same period the Spanish banking system underwent an unprecedented episode of expansion growing from 5,000 to over 30,000 bank branches. We examine whether the latter process partly caused the former by focusing on the relationship between branch expansion and entrepreneurship in the wholesale and retail trade industries. To address the non-random allocation of bank branches we exploit changes in branching policies that induced a plausibly exogenous time-varying pattern in the relationship between a municipality’s initial financial development and branch expansion. Our estimates, based on a panel data-set of over 2,000 Spanish municipalities, reveal that branch expansion had a strong positive impact on entrepreneurship. This effect was essentially driven by the savings banks, which have stronger regional development objectives than those held by the commercial banks, and which expanded more intensely into municipalities with more precarious financial services.