Abstract:This paper examines the link between banking and economic development at the regional level in the Philippines and focuses on the role played by rural banks in regional economic activity. We apply cointegration panel data analysis on regional banking and economic data for the period 1993 to 2005. We ranked the sixteen regions in three different groups depending on their average economic development. Our results show that in the long run regional financial development causes regional economic development. But they do not confirm the existence of a consistently positive strong influence of regional financial development on economic development in the Philippines. However, our findings highlight a positive effect of the presence of rural banks, characterized by their expertise in financing micro-entrepreneurs and poor households, on economic development. We also show that this result is stronger for the intermediate developed regions than for the less developed regions, suggesting the existence of a threshold effect. JEL Classification: C23; G21, O16

Abstract:This paper examines the link between banking and economic development at the regional level in the Philippines and focuses on the role played by rural banks in regional economic activity. We apply cointegration panel data analysis on regional banking and economic data for the period 1993 to 2005. We ranked the sixteen regions in three different groups depending on their average economic development. Our results show that in the long run regional financial development causes regional economic development. But they do not confirm the existence of a consistently positive strong influence of regional financial development on economic development in the Philippines. However, our findings highlight a positive effect of the presence of rural banks, characterized by their expertise in financing micro-entrepreneurs and poor households, on economic development. We also show that this result is stronger for the intermediate developed regions than for the less developed regions, suggesting the existence of a threshold effect. JEL Classification: C23; G21, O16

We estimate the benefits of intrastate and interstate geographic diversification for bank risk and return, and assess whether such benefits could be shaped by differences in bank size and disparities in economic conditions within states or across U.S. states. For small banks, only intrastate diversification is beneficial in terms of risk-adjusted returns but for very large institutions both intrastate and intrastate expansions are rewarding. However, in all cases the relationship is hump-shaped for both intrastate and interstate diversification indicating limits for banks of all size. Moreover, while our results indicate that the average 'very large' bank has already reached its optimal diversification level, the average 'small bank' could still benefit in terms of risk-adjusted returns from further geographic diversification. Higher economic disparity as measured by the dispersion in unemployment rates either across counties or states impacts the benefits of diversification. At initially low levels of diversification, moving to other markets with dissimilar economic conditions lowers the added value of diversification but it becomes more beneficial at higher diversification levels.JEL Classification: G21, G28