Branching Out: The Role of Selection in Bank Branch Entry and Economic Growth

Abstract

Banks expand their branching networks in areas that subsequently exhibit economic growth. But in which direction does causality run? I exploit variation in completion across planned bank branches to disentangle selection and treatment effects of branch entry on local growth. Areas where a bank planned to open a branch, but did not, exhibit higher growth than similar areas (reflecting a selection effect). However, locations where a bank opened a branch only slightly outgrow locations where a bank planned to open a branch but did not (treatment effect). Both effects are limited to the immediate geographic vicinity of proposed branches. These findings contrast with previous studies reporting positive treatment effects of branch entry and instead emphasize banks' skill in selecting locations poised for growth.

Keywords: Bank branches, economic growth, satellite data, financial development