Bank Branching Deregulation Research Articles

Financial distress, bank branching deregulation, and customer-supplier relationships

The paper exploits the deregulation of interstate bank branching laws to examine whether improved access to bank credit for customer firms affects the probability of their suppliers' financial distress. The study provides robust evidence that suppliers' financial distress risk is lower when the states of their major customer firms experience bank branching deregulation. Furthermore, the study shows that customers establish new bank relationships and improve liquidity conditions, while suppliers offer less trade credit to customers, reduce leverage, and increase capital expenditures following customer state's bank branching deregulation. The effect of customers' improved access to credit on suppliers' distress risk is more pronounced for supplier firms with stronger customer-supplier relationships, for financially constrained suppliers, and for suppliers whose customers are financially unconstrained. Overall, the findings highlight the importance of customers' access to credit on the financial distress risk of their suppliers.

The impact of social trust on loan grants and default risk: Evidence from China’s regional commercial banks during branching policy changes

We investigate the impact of social trust on loan grants and default risk among regional commercial banks in China by using exogenous shocks stemming from the unique regulatory reforms of bank branch deregulation and re-regulation. We find that social trust has different impacts during the two periods. In particular, banks located in regions with higher levels of social trust exhibit a more pronounced increase (decrease) in loan grants following deregulation (re-regulation). We also find a stronger positive relationship between social trust and default risk after deregulation and re-regulation. Our results highlight the relevance of changes in banking regulation for the impact of social trust on loan grants and default risk. They also provide valuable insights for banking regulators and bank managers in evaluating the outcomes of banking regulation reforms.

Bank branching deregulation and the credit risk of the regional banking sector: Evidence from city commercial banks in China

From 2006 to 2011, with the change in regulatory policies, most regions of China relaxed restrictions on the intercity branching of city commercial banks, which led to a significant increase in the number of nonlocal branches of city commercial banks. We assess the impact of this bank branching deregulation on the credit risk of the regional banking sector across 286 prefecture-level cities in China. We find that deregulation has increased the credit risk of the regional banking sector in host cities by intensifying competition and encouraging risk-taking behaviors such as “lowering lending criteria” and “attracting deposits with higher interest”. Moreover, this effect becomes more pronounced in regions with a higher initial level of the loan-to-deposit ratio and regions with a higher initial level of competition in the banking sector.

Bank deregulation and corporate environmental performance

In this study, we provide one of the first pieces of evidence about how bank deregulation affects corporate environmental performance. We use a unique dataset that contains rich information on firms’ toxic emissions and exploit the bank branching deregulation policy in China. We find that bank deregulation significantly improves firms’ environmental performance, as measured by lower emission intensity of chemical oxygen demand (COD). We further demonstrate that these firms’ production efficiency increases and the ratio of tangible assets to total assets decreases, which suggests that upgrading technology and asset mix are the main channels. To improve the efficiency of the banking system, many developing countries are undergoing or moving toward bank deregulation. By focusing on corporate environmental performance, we document an important but unanticipated result of bank deregulation, and the results also provide policy implications for the burgeoning reform in green finance.

One Market to Rule Them All: How Financial Integration Influenced Inequality in the European Union

Abstract Financial integration is seen as a major driver of economic growth and wealth. Its effects on income inequality have been analyzed for the bank branch deregulation in the USA and foreign bank entry in India. Another prominent example of financial integration and liberalization, so far, has been ignored: the introduction and progression of the European Single Market. By using a difference-in-difference design, we investigate the effects of the Single Banking License introduced in 1993 on economic growth and several inequality measures. This directive abolished any cross-country restrictions on banks in EU Member States and allowed them to freely branch into other Member States. This constitutes a fundamental change in the competitive environment of financial markets. We show that the European Single Financial Market positively influenced economic growth across a variety of subsamples of EU Member States. The effects on income inequality indicate that inequality across states was reduced. Additional regressions with the unemployment rate and top and bottom 20% income shares support this finding and show a reduction of unemployment in previously less developed countries accompanied by an increase in the bottom income shares across all Member States. (JEL codes: D63, E44, G21 and O11).

Bank deregulation and stock price crash risk

This paper examines the influence of bank branch deregulation on corporate borrowers' stock price crash risk. Using a large sample of U.S. public firms over the period 1962–2001, we provide robust evidence that intrastate branch reform contributes to the reduction of firms' stock price crash risk. Further analysis shows that the negative relation between bank branch deregulation and crash risk is more pronounced among firms that are more dependent on external finance and lending relationships, as well as firms that have weaker corporate governance and greater financial constraints. Our findings are consistent with the notion that bank branch reform improves bank monitoring efficiency, thereby reducing borrowing firms' bad news formation and hoarding, and hence their stock price crash risk. Overall, our empirical evidence suggests that, as a reform aimed at removing restrictions on bank branch expansion, bank deregulation also helps protect shareholders' wealth.

Credit Availability and Voluntary Disclosures: Evidence from Interstate Bank Branching Deregulation

This study examines whether the increased availability of bank loans affects borrowers’ voluntary disclosures. Exploiting the staggered deregulation of interstate bank branching across states in the U.S., I find that bank-dependent firms decrease their voluntary disclosures following bank branching deregulation. This overall effect is muted for firms with higher information asymmetry in the public capital markets and higher litigation risk. Furthermore, the decline in voluntary disclosures is more pronounced among borrowers with higher proprietary information costs and stronger lending relationships with their lenders. Further analysis reveals that bank-dependent firms that stop issuing earnings guidance after branching deregulation experience decreased liquidity in the equity market. Overall, this paper sheds light on how regulatory changes in the banking sector have externalities on borrowers’ disclosure decisions.

Bank Deregulation and Stock Price Crash Risk

This paper examines the relation between bank branch deregulation and corporate borrowers’ stock price crash risk. Using a large sample of U.S. public firms over the period 1962-2001, we provide robust evidence that intrastate branch reform reduces firms’ stock price crash risk. Our finding is consistent with the notion that branch reform improves banks’ monitoring efficiency, thus allowing them to better constrain borrowing firms’ bad-news-hoarding behavior. Further analysis shows that the negative relation between bank branch deregulation and stock price crash risk is more pronounced among firms that are more dependent on external finance and lending relationships. Overall, our results suggest that, as a reform aimed at removing restrictions on bank branch expansion, bank deregulation also helps protect shareholders’ wealth.

Bank Competition and Corporate Environmental Performance

In this study, we provide one of the first evidence on the effects of bank deregulation on corporate environmental performance. We use a unique dataset that contains rich information on firms’ toxic emissions and exploit bank branching deregulation in China. We find that compared with firms with lower exposure, firms more exposed to this deregulation improve their environmental performance, as measured by lower chemical oxygen demand (COD) emission intensity after deregulation. We further demonstrate that these firms’ production efficiency increases and the ratio of tangible assets to total assets decreases, which suggests that upgrading technology and asset mix are the main channels. To improve the efficiency of the banking system, many developing countries are undergoing or moving toward liberalizing it. By focusing on firm environmental performance, we document an important but unanticipated consequence of bank deregulation, and the result also provide policy implications for the burgeoning reform in green finance.

Credit towards graduation: The impact of US bank deregulation on human capital accumulation

Credit markets affect the real economy. It is important to identify unintended consequences of financial policies. This paper studies the impact of bank branching deregulation on high school graduation. The use of National Longitudinal Survey of Youth 1979 geocoded data focuses the results on three deregulations: Ohio in 1979, Connecticut in 1980, and Alabama in 1981. Discontinuities in treatment assignment at borders between deregulated states and regulated states identify the effect of banking deregulation on high school graduation. Using a regression discontinuity type set up called differences-in-discontinuities, results indicate significant increases in the likelihood of high school graduation for treated individuals. Analysis provides evidence of heterogeneous effects of bank branching deregulation based on skill level and income level.

CREDIT CONSTRAINTS AND LABOR SUPPLY: EVIDENCE FROM BANK BRANCHING DEREGULATION

This paper examines labor supply adjustment‐both at the intensive and extensive margins‐following financial market development. Specifically, we exploit the staggered passage of bank branching deregulation in the United State to study the impact of relaxing credit constraints on labor supply decisions. We find strong evidence that improvements in how credit markets function decrease weekly hours worked, and that the effect is most significant for the lower‐middle (marginal) income group. Furthermore, we observe heterogeneous responses across demo graphic groups (race and income). In contrast, we find little to no evidence that deregulation has a significant impact on the extensive margin of participation.

Deregulation and the Securitization Boom

We provide novel evidence that bank branching deregulation increased securitization in the lead up to the financial crisis. The exogenous state-specific removal of interstate branching restrictions increases the probability that 1) a bank operates an originate to distribute model by 7%, and 2) a loan is securitized by 5.6%. These effects are more pronounced among large banks. We find that the increase in securitization stems from deregulation increasing the cost of deposits as the equilibrium number of bank branches rises across markets. The findings highlight a hitherto neglected factor behind the rapid expansion in securitization before the financial crisis.

The effects of credit on high school graduation: Evidence from U.S. bank branching deregulation

Credit markets affect the real economy in multiple ways. This paper utilizes variation in the timing of bank branching deregulation of 39 states between 1970 and 1994 as an exogenous proxy of credit availability to analyze the link between credit markets and educational outcomes. Using CPS data to estimate reduced form models, results indicate a one percentage point increase in the likelihood of graduating high school after bank branching deregulation. Results also suggest heterogeneity of effects over race. The main findings are robust to placebo tests using false deregulation dates.

One Market to Rule Them All - How Financial Integration Influenced Inequality in the European Union

Financial integration is seen as a major driver of economic growth and wealth. Its effects on income inequality have been analyzed for the bank branch deregulation in the U.S. and foreign bank entry in India. Another prominent example of financial integration and liberalization, so far, has been ignored: the introduction and progression of the European Single Market. By using a difference-in-difference design, we investigate the effects of the Single Banking License introduced in 1993 on economic growth and several inequality measures. This directive abolished any cross-country restrictions on banks in EU member states and allowed them to freely branch into other member states. This constitutes a fundamental change in the competitive environment of financial markets. We show that the European Single Financial Market positively influenced economic growth across a variety of subsamples of EU member states. The effects on income inequality indicate that inequality across states was reduced. Additional regressions with the unemployment rate and top and bottom 20% income shares support this finding and show a reduction of unemployment in previously less developed countries accompanied by an increase in the bottom income shares across all member states.

Banks and Labor as Stakeholders: Impact on Economic Performance

Traditionally, the impacts of the rights of financial institutions and workers on corporate performance have been analyzed independently. Yet theory clearly indicates that it is the combination of (changes in) relative powers of different stakeholders that affects a firm overall performance. Using U.S. state level and state-industry level data, we investigate how output growth is affected by bank branch deregulation, and change in equity rights and employment protection occurring over the period 1972-1994. We find that financial liberalization positively and greater workers’ rights ambiguously impact overall state growth. In terms of channels, while the effect of financial liberalization does not differ across industries that vary in external financing dependency, employment protection promotes those industries that are more knowledge (skilled-labor and intangibles)-intensive. The results hold controlling for changes in shareholders’ rights, which itself is not significant. They suggest that financial liberalization operates mostly through an efficiency channel (re-allocating resources better), while employment protection creates better incentives and encourages more sector-specific, human capital investments. Overall, the results show that the strength of stakeholders’ protection affects performance through efficiency channels and provide support for a stakeholders’ view of corporate governance. JEL Classification Numbers: G18, G30, G38, J08, J80, J83

Bank Branching Deregulation and High School Graduation: A Regression Discontinuity Approach

Graduating high school improves wellbeing. It is important to understand how policy affects high school graduation. This paper studies the impact of bank branching deregulation on high school graduation. The use of National Longitudinal Survey of Youth 1979 geocoded data focuses the results on three deregulations: Ohio in 1979, Connecticut in 1980, and Alabama in 1981. Discontinuities in treatment assignment at borders between deregulated states and regulated states identify the effect of banking deregulation on high school graduation. Results indicate significant increases in the likelihood of high school graduation for treated individuals. Analysis provides evidence of heterogeneous effects of bank branching deregulation based on skill level and income level.

Valuations in Corporate Takeovers and Financial Constraints on Private Targets

I examine acquisitions of private firms by public acquirers to better understand the effects of financial constraints on the division of economic gains in takeovers. Empirical tests exploit interstate bank branching deregulation, which relaxes financial constraints on private firms and can strengthen their bargaining position in an acquisition. Using a proxy for the degree to which targets depend on acquirers for financing, I find that private targets depend less on acquirers as a result of interstate bank branching deregulation. Relaxing financial constraints on private targets leads to an increase in target valuation multiples and a decrease in acquirer wealth gains.

Bank Branching Deregulation and High School Graduation

This paper utilizes variation in timing of deregulation to investigate the relationship between bank branching deregulation and educational outcomes for individuals in 39 states over the period 1977 - 1999. In order to investigate the labor market channel, this paper focuses on the relationship between deregulation and high school graduation, as opposed to recent studies focusing on the relationship between deregulation and college attendance via the credit market channel. Results indicate increases in the likelihood of graduating high school after deregulation. Results also suggest heterogeneity in effects due to race and age at deregulation. Finally, models testing the relationship between bank deregulation and post-secondary education outcomes generate similar results to findings from previous studies.

Rich regions, poor regions and bank branch deregulation in Spain

ABSTRACTRich regions, poor regions and bank branch deregulation in Spain. Regional Studies. The links between financial deregulation and economic performance are evaluated in a European context. Specifically, the study analyses the relaxation of bank branching restrictions in Spain, which triggered a remarkable interregional expansion of savings banks that coincided with an unprecedented period of sustained economic expansion. Although related questions have been widely investigated for the United States, experiences in Europe have received far less research attention. An additional contribution of the paper lies in its use of quantile regression, which enables the investigation of the possibility of economic effects taking into account the degree of regional development. The potential endogeneity of some of the regressors is also explicitly considered. Results do not support the case for a positive effect of bank branch deregulation in Spain. Out-of-region entry, in particular, does not seem to have had any specific positive effect on regional development, and this result is quite homogeneous across provinces regardless of their relative wealth.

Bank Capital Pressures, Loan Substitutability, and Nonfinancial Employment

We exploit the cross-state, cross-time variation in bank tangible capital ratios-brought about by bank branch deregulation on a state-by-state basis-to identify the effects of bank capital pressures on employment and firm dynamics during two waves of changes in bank capital regulation. We show that stronger capital pressures temporarily slowed down growth in employment in industries that depend on external finance, retarding growth in the average size of firms rather than in the number of firms. Such effects were particularly strong for smaller firms that may not have had access to national capital and bank loan markets. Our findings indicate that a tightening of capital requirements may have significant real effects, in part because of the lack of substitutes for bank loans.