Differential impact on bank valuation of interstate banking law changes

Abstract

By 1988 forty-seven states and the District of Columbia had enacted legislation liberalizing interstate banking restrictions. This study systematically investigates the market impact of these law changes on bank stock prices. Using an event parameter event study methodology, we assess the differential impact on in-state and out-of-state banks to a given state law change. We also assess the differential impact of law changes upon banks included in, or excluded from, any regional compacts among states. Money center banks are treated as a special class of out-of-state or excluded banks. We find that out-of-state and out-of-region banks, excluding money center banks, have profited most from these law changes and money center banks have been least positively affected both at the time of enactment and at the effective date of the law changes. We attribute these findings to the opening of interstate banking opportunities to other than money center and foreign banks, thus ‘leveling the playing field’.