The Dynamics of Financial Institution Location in Toronto: Who Is Serving the Inner City?

Abstract

Cities are a significant source of economic growth and prosperity, but they may also contribute to social problems. In particular, the dynamics of urban spatial structure may exacerbate such problems as unemployment and poverty in the inner city. In this paper we examine a more recent but related problem, access to financial institutions. We have gathered a unique panel data set for Canadian cities that locates financial institutions by census tract and links this information to census public use micro data from 1981 to 2006. We estimate density gradients for financial institutions in Toronto to show that mainstream financial institutions (particularly banks but also credit unions) have migrated to the suburbs and that this spatial void has been at least partially filled by so-called fringe financial institutions, especially payday lenders. We then use panel regression models consistent with the entry literature in empirical industrial organization to investigate the factors associated with the location of the various types of financial institutions. Among other results, we find that census tracts with low income are less attractive to mainstream institutions over time and more attractive to fringe institutions, which provide more limited and expensive services. Our results imply that the dynamics of the location of financial institutions may present an additional barrier to upward economic mobility for inner city residents.