The Impact of Interstate Bank Branching Deregulations on the U.S. Agricultural Sector: From Better Access to Credit to Higher Farm Sales and Profits

Abstract

In this paper, we show that relaxing credit constraints and increasing access to finance by lifting state-level restrictions on interstate bank expansions from the 1970s through the early 1990s benefited the U.S. agricultural industry by increasing farm sales and profits. In our empirical analysis, we use historical county-level data from 1970 until 1994 for the entire U.S. and a difference-in-differences econometric framework that exploits only within state variation in bank deregulation to distinguish the effect of an increase in bank competition and reduction in credit constraints from potential confounding factors. Further, by including region-by-year fixed effects in our econometric equation, we estimate the impact of banking deregulations by comparing changes (in farm sales and expenditures) in states that lift restrictions on interstate banking to changes in states that do not lift such restrictions in the same (Census) region of the country. Finally, we also show that the empirical results are robust to comparing only counties along state borders, which have very similar climate, soil fertility, and access to transportation. Our estimates indicate that county-level farm sales increase by about 3.9 percent after the state deregulates its banking sector and allows interstate bank expansion. The results also show that county-level agricultural production expenditures in the state rise by 1.9 percent, which is less than the increase in sales, thus leading to higher farm profits. The positive impact on farm sales and expenditures is larger in metropolitan counties than in rural counties. Overall, our work demonstrates that government policies aimed at improving farmers’ access to credit can lead to higher farm sales, both in urban and rural locations.