Four Essays on Spatial Dependence Effects of Local Banks

In this study I consider the effects of the inclusion of spatial dependence in the empirical model measuring the small-cooperative banks' risk performance. If there exists cross sectional dependence, spatial analysis deals with co-movement among geographical units, allowing the evaluation of spillover effects and ameliorating econometric models. I provide several contributions to the literature. First, I support the hypothesis that the inclusion of spatial terms improves the small bank soundness models. Second, since I control for the banks' market power, I expand the literature on the relationship between bank risk and market competitive pressure. Third, I find empirical evidence that the bank size does not affect the financial standing of the small banks. Finally, as I proxy bank soundness with the Z-Score index, I indirectly test the impacts on small firms of the relationship lending, a classic tool adopted by the small banks to assess the creditworthiness of small firms. My results strongly support the hypothesis that risk-performance bank models are enhanced with spatial variables and that relationship lending makes small firm loan demand low price-elastic.