The Impact of Bank Branching Deregulations on the U.S. Agricultural Sector

Abstract

We demonstrate how states that lifted restrictions on interstate bank expansions, thereby improving access to cheaper credit, experienced increased farm sales and net farm income. In our empirical analysis, we use nationwide county‐level data from 1970 through 2001 and a difference‐in‐differences econometric framework, exploiting only within‐state variation in banking deregulation, to distinguish the effect of an increase in bank competition from potential confounding factors. By including region‐by‐year fixed effects in our econometric equation, we compare changes in farm sales and expenditures in states that lift restrictions on interstate banking to changes in states that do not lift such restrictions within the same census region. Our estimates indicate that county‐level farm sales increase by about 3.4% and county‐level net farm income rises by $1.57 million (in 1982 dollars) after a state deregulates its banking sector by allowing interstate bank expansion. We also find evidence that farm expenditures, in particular expenditures on feed, fuel, machine and equipment rental, as well as interest payments, grew as a result of the banking deregulation. The positive impacts on farm sales, net income, and interest payments are larger in metropolitan counties than in rural counties, consistent with the notion that interstate bank entry following deregulation was concentrated in larger metropolitan markets, leading to a greater reduction in the cost of credit in those areas.