Deregulation, bank competition and regional growth

Cross-country studies suggest that countries with greater financial sector competition have higher rates of economic growth. However, it is difficult to 'hold constant' different legal and cultural environments in these analyses, leading some to suggest that this relationship is due less to competition than to differing legal and cultural conditions which favour economic growth. As these differences are small within a country, an interregional analysis may reflect better the relationship between financial market competition and growth. We study five large regions in Spain over 1986-98. Using different indicators of market competition, we analyse changes in regional competition and growth. Granger-causality tests show that differences in competition are not associated with improved regional growth. Although deregulation raised deposit rates and lowered loan rates, these benefits have not markedly influenced regional growth. The positive relationship shown between competitive markets and growth in cross-country studies may instead be due to some unspecified third factor that influences both.