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Geographical and Cultural Proximity in Retail Banking

Author

Listed:
  • Santiago Carbo-Valverde
  • Héctor Pérez Saiz
  • Hongyu Xiao

Abstract

This paper measures how both geographical and cultural proximity of bank branches affect household credit choice and pricing. We examine both types of proximity jointly to separately identify the importance of soft information versus alternative mechanisms. Using a detailed household-level database for Canada, we find that both geographical and cultural proximity increase consumer credit by reducing the cost of obtaining soft information. Furthermore, soft information obtained via the two types of proximity can be either substitutes for or complements to each other, with complementarity being more likely for products that require high levels of ex-ante screening. Overall, our results suggest that ongoing branch consolidation, happening in many countries, may lead to lower financial inclusion, especially in culturally diverse neighbourhoods.

Suggested Citation

  • Santiago Carbo-Valverde & Héctor Pérez Saiz & Hongyu Xiao, 2023. "Geographical and Cultural Proximity in Retail Banking," Staff Working Papers 23-2, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit and credit aggregates; Financial institutions; Financial services;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand
    • Z10 - Other Special Topics - - Cultural Economics - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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