An industrial organization analysis for the colombian banking system

This paper presents two versions of a spatial competition model forthe banking sector. The first version, describes a framework that fol-lows closely Salop´s spatial competition model. This version is modi-fied in the second part by introducing the loan market and default riskprobabilities for credit. Both theoretical approaches are analyzed em-pirically for the Colombian data,covering the period 1996-2005. Ourresults allow us to construct a deviation of the observed number ofbranches from an optimal number of branches for the banking systemthroughout the period of study. The deviation indicates that in thelast years the number of branches is below the optimum which sug-gest that political measures should focus in increasing the number ofbranches in the country. Additionally, we found empirical evidenceof market separability between the loan and deposit markets, and fi-nally, we were able to determine the signs of the relations betweencredit collateral, payment probability and interest rates.