Entry in Commercial Banking

Abstract

ENTRY occupies a prominent place in economic theory. Yet just as prominent is the almost complete lack of empirical investigation of the subject.' This article attempts to identify empirically the determinants of entry in one industry-commercial banking in the United States-in the hope that it may throw light on the determinants of entry in general. The choice of commercial banking for this study does not rest entirely on the ready availability of the relevant data for this industry. It also affords the chance to investigate another topic lightly treated in the empirical literature-the effects of economic regulation on economic performance. Entry into banking is today closely regulated; the formation of a new bank requires a license, denial of which is non-reviewable, from an appropriate government agency. This article will attempt to measure the extent to which actual entry in banking has been affected by the legal restrictions upon it. The historical development of the legal restrictions on entry in banking can be summarized briefly. The century prior to 1935 may fairly be described as an era of "free banking," though the history books apply the term only to the part of this period up to the National Bank Act of 1863. Such legal restrictions as were placed on the formation of new banks by both Congress and state legislatures in 1863 and thereafter were largely ineffective. The reason for this was that the state and Federal chartering authorities operated independently of one another-neither had any check on the other within a given state. This legal framework encouraged competition between state and