Abstract
This paper studies the impact of geographic banking restrictions on monetary policy transmission. Exploiting the staggered deregulation of U.S. banking from the late 1970s to the early 1990s, we find that interstate deregulation signifi cantly increased the responsiveness of bank lending to monetary shocks. This effect occurred primarily for small and illiquid banks, pointing to a strengthening of the bank lending channel. Changes in bank market structure and loan portfolio composition are unlikely to explain the effect of deregulation. This instead reflects a reduced propensity of small banks affiliated with complex holding companies to insulate borrowers from monetary contractions.
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