1. 1 Discussion of the paper: “Banking Activities and Local Output Growth: Does Distance from Center Matter ?” by Suheyla Ozyildirim and Zeynep Onder Riccardo De Bonis, Bank of Italy Ancona, 22-23 September 2006

2. 2 Outline of my discussion 1. Motivation of the paper 2. Synthesis of the main results 3. Suggestions and issues for discussion

3. 3 1. Motivation of the paper The paper considers interesting theoretical and policy questions which are at the core of the current debate: Do local loans contribute to local economic growth ? Dependent variable: growth of per capita GDP. How to measure banking product ? 2 alternative independent variables: loans per capita or the ratio of loans to GDP. Does the distance between the local provinces and the national financial centre (Istanbul) matter ? This is an important question also for other countries where economic dualism persists. Policy issue: how to promote local economic growth if distance from the financial centre affects economic growth ?

4. 4 2. Synthesis of the main results The authors present 4 regressions where the banking product is measured by the loans per capita and 4 regressions where they use the ratio of loans to GDP. To measure the impact of distance, the authors use an interaction variable: distance measure*loans/population or loans/GDP. Three ways to measure distance are used: distance from Istanbul; distance from Istanbul per branch; eastern dummy variable.

5. 5 Summary of Ozyildirim and Onder's regressions

6. 6 2. Synthesis of the main results (continued) Results of the first 4 regressions (table 4 - independent variable: loans per capita) are uncertain. Loans per capita have a positive and statistically significant effect on GDP growth if the distance measure (the interaction variable) is not included in the regressions or if the distance per branch is used, but the latter is not statistically significant. Loans per capita lose their effect on GDP growth if the distance measure (the interaction variable) is included in the regressions both as distance from Istanbul and eastern dummy variable. Both these distance measures are positive and statistically significant.

7. 7 2. Synthesis of the main results (continued) Results of the other 4 regressions (table 5 - independent variable: loans/GDP ) are clearer. The ratio of loans to GDP mainly has a positive and statistically significant effect on GDP growth, controlling for the distance measure (the interaction variable). The distance measures are always statistically significant with a negative sign: “the farther the province is from Istanbul, the less is the impact of banking activities on local growth”.

8. 8 2. Synthesis of the main results (continued) General conclusion: local bank loans contribute to local growth but the impact of banking intermediation declines when a province is located far from the financial centre. (but this conclusion is true only for table 5 results)

9. 9 3. Suggestions and issues for discussion I)The dependent variable is the growth of per capita GDP: a regression where the independent variable is the flow of loans (instead of the stocks) would be useful. II) Control variables (public expenditure, inflation rate, urbanization rate, schooling) are used in the regressions, but their impact is not analysed in detail. III)The authors should try to reconcile the results of table 4 with those of table 5. If the preference is for the use of the loans to GDP ratio (table 5), this should be better clarified.

10. 10 3. Suggestions and issues for discussion (continued) IV) If distance has a negative impact on economic growth which are the causes ? Is it a market failure, i.e. private banks were not able to grant credit correctly because of information problems and agency costs ? Or is it a government failure, i.e. the two major State banks badly allocated subsidized credit ? Descriptive statistics on the relative weight of private and State owned banks in the poorest regions would be useful (something is said in the paper conclusions). Of course these might also be new control variables. Are the ownership of banks and their efficiency in the allocation of credit the key elements ?

11. 11 3. Suggestions and issues for discussion (continued) V) The authors have three policy proposals: a) “Regulators should require banks to change their organizational structure from centralized system”. Comment: is a good instrument of banking supervision ? (Remember Barth, Caprio and Levine, 2006) b) “… to increase incentives for the development of microfinance sector …”. Comment: is the experience of many poor Asian countries applicable to Turkey ? c) “delegate some responsibility to local managers in granting credits in order to facilitate local development”. Comment: interesting, but sufficient to solve market failures?

12. 12 3. Suggestions and issues for discussion (continued) VI) Is there any role for the turnover of managers in distant provinces? Does a high turnover prevent the diffusion of relationship banking ? Is high turnover the right way to reduce the risk of collusion ?

13. 13 3. Suggestions and issues for discussion (continued) VII) Is banking intermediation the central factor to solve economic dualism or are other public or private variables more important ?