The purpose of this thesis is to examine the relationship between banking activities and regional economic growth both theoretically and empirically. The first paper describes the evolution of the Turkish economy and the financial system at national and provincial levels. The economic and financial indicators are shown over the period between 1975 and 2013. In particular, the research sheds light on the nature of the imbalances in regional economic development across Turkey. By so doing, a background for the thesis is established, as the effect of centralisation in the banking system on regional growth is examined. The study finds that, despite the trend towards decentralisation that takes place in regional economic policies, the banking system adopts centralisation policies.
The second paper aims to assess the impact of banking institutions on regional
growth by integrating a decisional variable associated with the branch banking system in a conventional endogenous growth model. The comparative analysis of the output growth of hierarchical and decentralised structures shows that the former causes capital to flow from poorer to richer regions, thus increasing economic disparities. The model considers the effect of the nature of information on the decision-making mechanisms within institutions. It predicts that, in the case of soft information, decentralised banks, also known as unit banks, benefit regional growth more than branch banks. These first-time predictions encourage policy makers to take the structure of the banking system into consideration when establishing fiscal and monetary policies in order to decrease regional imbalances created by centralised banking. In the third paper, the model’s implications are tested by means of GMM estimations, using a unique data set comprising 39 years of provincial demographic, socio-economic, and financial variables in Turkey. The research empirically shows that banking intermediation has a negative effect on provincial growth. The hierarchical nature of the Turkish banking system does not allow financial intermediaries to fulfil their role in promoting growth. Consolidations and concentration policies should be reconsidered, as such policies are generally in favour of centralisation, which is proven to be ineffective in regional convergence. The findings also
imply that branch managers should be given more decision-making powers in order to better utilise locally generated information when pproving/disapproving the projects, which would ultimately lead to a decrease in regional imbalances.